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There are some similarities in how Medicare pays ASCs and hospital outpatient departments for the procedures they perform. However, the methods used by CMS to calculate the payment rates in each system, as well as the mechanisms used to revise the Medicare payment rates, differ. In 1980, legislation was enacted that enabled ASCs to bill Medicare for certain surgical procedures provided to Medicare beneficiaries. Under the ASC payment system, Medicare pays a predetermined, and generally all- inclusive, amount per procedure to the facility. The approximately 2,500 surgical procedures that ASCs may bill for under Medicare are assigned to one of nine payment groups that contain procedures with similar costs, but not necessarily clinical similarities. All procedures assigned to one payment group are paid at the same rate. Under the Medicare payment system, when more than one procedure is performed at the same time, the ASC receives a payment for each of the procedures. However, the procedure that has the highest payment rate receives 100 percent of the applicable payment, and each additional procedure receives 50 percent of the applicable payment. The Medicare payment for a procedure performed at an ASC is intended to cover the direct costs for a procedure, such as nursing and technician services, drugs, medical and surgical supplies and equipment, anesthesia materials, and diagnostic services (including imaging services), and the indirect costs associated with the procedure, including use of the facility and related administrative services. The ASC payment for a procedure does not include payment for implantable devices or prosthetics related to the procedure; ASCs may bill separately for those items. In addition, the payment to the ASC does not include payment for professional services associated with the procedure; the physician who performs the procedure and the anesthesiologist or anesthetist bill Medicare directly for their services. Finally, the ASC payment does not include payment for certain other services that are not directly related to performing the procedure and do not occur during the time that the procedure takes place, such as some laboratory, X-ray, and other diagnostic tests. Because these additional services are not ASC procedures, they may be performed by another provider. In those cases, Medicare makes payments to those providers for the additional services. For example, a laboratory service needed to evaluate a tissue sample removed during an ASC procedure is not included in the ASC payment. The provider that evaluated the tissue sample would bill and receive payment from Medicare for that service. Because ASCs receive one inclusive payment for the procedure performed and its associated services, such as drugs, they generally include on their Medicare claim only the procedure performed. In 1997, legislation was enacted that required the implementation of a prospective payment system for hospital outpatient departments; the OPPS was implemented in August 2000. Although ASCs perform only procedures, hospital outpatient departments provide a much broader array of services, including diagnostic services, such as X-rays and laboratory tests, and emergency room and clinic visits. Each of the approximately 5,500 services, including procedures, that hospital outpatient departments perform is assigned to one of over 800 APC groups with other services with clinical and cost similarities for payment under the OPPS. All services assigned to one APC group are paid the same rate. Similar to ASCs, when hospitals perform multiple procedures at the same time, they receive 100 percent of the applicable payment for the procedure that has the highest payment rate, and 50 percent of the applicable payment for each additional procedure, subject to certain exceptions. Like payments to ASCs, payment for a procedure under the OPPS is intended to cover the costs of the use of the facility, nursing and technician services, most drugs, medical and surgical supplies and equipment, anesthesia materials, and administrative costs. Medicare payment to a hospital for a procedure does not include professional services for physicians or other nonphysician practitioners. These services are paid for separately by Medicare. However, there are some differences between ASC and OPPS payments for procedures. Under the OPPS, hospital outpatient departments generally may not bill separately for implantable devices related to the procedure, but they may bill separately for additional services that are directly related to the procedure, such as certain drugs and diagnostic services, including X-rays. Hospital outpatient departments also may bill separately for additional services that are not directly related to the procedure and do not occur during the procedure, such as laboratory services to evaluate a tissue sample. Because they provide a broader array of services, and because CMS has encouraged hospitals to report all services provided during a procedure on their Medicare claims for rate-setting purposes, hospital claims may provide more detail about the services delivered during a procedure than ASC claims do. CMS set the initial 1982 ASC payment rates based on cost and charge data from 40 ASCs. At that time, there were about 125 ASCs in operation. Procedures were placed into four payment groups, and all procedures in a group were paid the same rate. When the ASC payment system was first established, federal law required CMS to review the payment rates periodically. In 1986, CMS conducted an ASC survey to gather cost and charge data. In 1990, using these data, CMS revised the payment rates and increased the number of payment groups to eight. A ninth payment group was established in 1991. These groups are still in use, although some procedures have been added to or deleted from the ASC-approved list. Although payments have not been revised using ASC cost data since 1990, the payment rates have been periodically updated for inflation. In 1994, Congress required that CMS conduct a survey of ASC costs no later than January 1, 1995, and thereafter every 5 years, to revise ASC payment rates. CMS conducted a survey in 1994 to collect ASC cost data. In 1998, CMS proposed revising ASC payment rates based on the 1994 survey data and assigned procedures performed at ASCs into payment groups that were comparable to the payment groups it was developing for the same procedures under the OPPS. However, CMS did not implement the proposal, and, as a result, the ASC payment system was not revised using the 1994 data. In 2003, MMA eliminated the requirement to conduct ASC surveys every 5 years and required CMS to implement a revised ASC payment system no later than January 1, 2008. During the course of our work, in August 2006, CMS published a proposed rule that would revise the ASC payment system effective January 1, 2008. In this proposed rule, CMS bases the revised ASC payment rates on the OPPS APC groups. However, the payment rates would be lower for ASCs. The initial OPPS payment rates, implemented in August 2000, were based on hospitals' 1996 costs. To determine the OPPS payment rates, CMS first calculates each hospital's cost for each service by multiplying the charge for that service by a cost-to-charge ratio computed from the hospital's most recently reported data. After calculating the cost of each service for each hospital, the services are grouped by their APC assignment, and a median cost for each APC group is calculated from the median costs of all services assigned to it. Using the median cost, CMS assigns each APC group a weight based on its median cost relative to the median cost of all other APCs. To obtain a payment rate for each APC group, CMS multiplies the relative weight by a factor that converts it to a dollar amount. Beginning in 2002, as required by law, the APC group payment rates have been revised annually based on the latest charge and cost data. In addition, the payment rates for services paid under the OPPS receive an annual inflation update. We found many similarities in the additional services provided by ASCs and hospital outpatient departments with the top 20 procedures. Of the additional services billed with a procedure, few resulted in an additional payment in one setting but not the other. Hospitals were paid for some of the related additional services they billed with the procedures. In the ASC setting, other providers billed Medicare for these services and received payment for them. In our analysis of Medicare claims, we found many similarities in the additional services billed in the ASC or hospital outpatient department setting with the top 20 procedures. The similar additional services are illustrated in the following four categories of services: additional procedures, laboratory services, radiology services, and anesthesia services. First, one or more additional procedures was billed with a procedure performed in either the ASC or hospital outpatient department setting for 14 of the top 20 procedures. The proportion of time each additional procedure was billed in each setting was similar. For example, when a hammertoe repair procedure was performed, our analysis indicated that another procedure to correct a bunion was billed 11 percent of the time in the ASC setting, and in the hospital outpatient setting, the procedure to correct a bunion was billed 13 percent of the time. Similarly, when a diagnostic colonoscopy was performed, an upper gastrointestinal (GI) endoscopy was billed 11 percent of the time in the ASC setting, and in the hospital setting, the upper GI endoscopy was billed 12 percent of the time. For 11 of these 14 procedures, the proportion of time each additional procedure was billed differed by less than 10 percentage points between the two settings. For the 3 remaining procedures, the percentage of time that an additional procedure was billed did not vary by more than 25 percentage points between the two settings. See appendix III for a complete list of the additional procedures billed and the proportion of time they were billed in each setting. Second, laboratory services were billed with 10 of the top 20 procedures in the hospital outpatient department setting and 7 of the top 20 procedures in the ASC setting. While these services were almost always billed by the hospital in the outpatient setting, they were typically not billed by the ASCs. These laboratory services were present in our analysis in the ASC setting because they were performed and billed by another Medicare part B provider. Third, four different radiology services were billed with 8 of the top 20 procedures. Radiology services were billed with 5 procedures in the ASC setting and with 8 procedures in the hospital outpatient department setting. The radiology services generally were included on the hospital outpatient department bills but rarely were included on the ASC bills. Similar to laboratory services, hospital outpatient departments billed for radiology services that they performed in addition to the procedures. When radiology services were billed with procedures in the ASC setting, these services generally were performed and billed by another part B provider. Fourth, anesthesia services were billed with 17 of the top 20 procedures in either the ASC or hospital outpatient settings and with 14 procedures in both settings. In virtually every case in the ASC setting, and most cases in the hospital outpatient department setting, these services were billed by another part B provider. According to our analysis, ASCs did not generally include any services other than the procedures they performed on their bills. However, in the hospital outpatient setting, some additional services were included on the hospitals' bills. We believe this is a result of the structure of the two payment systems. As ASCs generally receive payment from Medicare only for procedures, they typically include only those procedures on their bills. In contrast, hospital outpatient departments' bills often include many of the individual items or services they provide as a part of a procedure because CMS has encouraged them to do so, whether the items or services are included in the OPPS payment or paid separately. With the exception of additional procedures, there were few separate payments that could be made for additional services provided with the top 20 procedures because most of the services in our analysis were included in the Medicare payment to the ASC or hospital. Under both the Medicare ASC and OPPS payment systems, when more than one procedure is performed at the same time, the facility receives 100 percent of the applicable payment for the procedure that has the highest payment rate and 50 percent of the applicable payment for each additional procedure. As this policy is applicable to both settings, for those instances in our analysis when an additional procedure was performed with one of the top 20 procedures in either setting, the ASC or hospital outpatient department received 100 percent of the payment for the procedure with the highest payment rate and 50 percent of the payment for each lesser paid procedure. Individual drugs were billed by hospital outpatient departments for most of the top 20 procedures, although they were not present on the claims from ASCs, likely because ASCs generally cannot receive separate Medicare payments for individual drugs. However, none of the individual drugs billed by the hospital outpatient departments in our analysis resulted in an additional payment to the hospitals. In each case, the cost of the particular drug was included in the Medicare payment for the procedure. In the case of the laboratory services billed with procedures in the ASC and hospital outpatient department settings, those services were not costs included in the payment for the procedure in either setting and were paid separately in each case. For both settings, the payment was made to the provider that performed the service. In the case of the hospital outpatient department setting, the payment was generally made to the hospital, while, for procedures performed at ASCs, payment was made to another provider who performed the service. Of the four radiology services in our analysis, three were similar to the laboratory services in that they are not included in the cost of the procedure and are separately paid services under Medicare. Therefore, when hospitals provided these services, they received payment for them. In the ASC setting, these services were typically billed by a provider other than the ASC, and the provider received payment for them. The fourth radiology service is included in the payment for the procedure with which it was associated. Therefore, no separate payment was made to either ASCs or hospital outpatient departments. With regard to anesthesia services, most services were billed by and paid to a provider other than an ASC or hospital. As a group, the costs of procedures performed in ASCs have a relatively consistent relationship with the costs of the APC groups to which they would be assigned under the OPPS. That is, the APC groups accurately reflect the relative costs of procedures performed in ASCs. We found that the ASC-to-APC cost ratios were more tightly distributed around their median cost ratio than the OPPS-to-APC cost ratios were around their median cost ratio. Specifically, 45 percent of all procedures in our analysis fell within 0.10 points of the ASC-to-APC median cost ratio, and 33 percent of procedures fell within 0.10 points of the OPPS-to-APC median cost ratio. However, the costs of procedures in ASCs are substantially lower than costs for the same procedures in the hospital outpatient setting. The APC groups reflect the relative costs of procedures provided by ASCs as well as they reflect the relative costs of procedures provided in the hospital outpatient department setting. In our analysis, we listed the procedures performed at ASCs and calculated the ratio of the cost of each procedure to the cost of the APC group to which it would have been assigned, referred to as the ASC-to-APC cost ratio. We then calculated similar cost ratios for the same procedures exclusively within the OPPS. To determine an OPPS-to-APC cost ratio, we divided individual procedures' median costs, as calculated by CMS for the OPPS, by the median cost of their APC group. Our analysis of the cost ratios showed that the ASC-to-APC cost ratios were more tightly distributed around their median than were the OPPS-to-APC cost ratios; that is, there were more of them closer to the median. Specifically, 45 percent of procedures performed in ASCs fell within a 0.10 point range of the ASC-to-APC median cost ratio, and 33 percent of those procedures fell within a 0.10 point range of the OPPS-to-APC median cost ratio in the hospital outpatient department setting (see figs. 1 and 2). Therefore, there is less variation in the ASC setting between individual procedures' costs and the costs of their assigned APC groups than there is in the hospital outpatient department setting. From this outcome, we determined that the OPPS APC groups could be used to pay for procedures in ASCs. The median costs of procedures performed in ASCs were generally lower than the median costs of their corresponding APC group under the OPPS. Among all procedures in our analysis, the median ASC-to-APC cost ratio was 0.39. The ASC-to-APC cost ratios ranged from 0.02 to 3.34. When weighted by Medicare volume based on 2004 claims data, the median ASC- to-APC cost ratio was 0.84. We determined that the median OPPS-to-APC cost ratio was 1.04. This analysis shows that when compared to the median cost of the same APC group, procedures performed in ASCs had substantially lower costs than when those same procedures were performed in hospital outpatient departments. Generally, there are many similarities between the additional services provided in ASCs and hospital outpatient departments with one of the top 20 procedures, and few resulted in an additional Medicare payment to ASCs or hospital outpatient departments. Although costs for individual procedures vary, in general, the median costs for procedures are lower in ASCs, relative to the median costs of their APC groups, than the median costs for the same procedures in the hospital outpatient department setting. The APC groups in the OPPS reflect the relative costs of procedures performed in ASCs in the same way that they reflect the relative costs of the same procedures when they are performed in hospital outpatient departments. Therefore, the APC groups could be applied to procedures performed in ASCs, and the OPPS could be used as the basis for an ASC payment system, eliminating the need for ASC surveys and providing for an annual revision of the ASC payment groups. We recommend that the Administrator of CMS implement a payment system for procedures performed in ASCs based on the OPPS. The Administrator should take into account the lower relative costs of procedures performed in ASCs compared to hospital outpatient departments in determining ASC payment rates. We received written comments on a draft of this report from CMS (see app. IV). We also received oral comments from external reviewers representing two ASC industry organizations, AAASC and FASA. In commenting on a draft of this report, CMS stated that our recommendation is consistent with its August 2006 proposed revisions to the ASC payment system. Industry representatives who reviewed a draft of this report did not agree or disagree with our recommendation for executive action. They did, however, provide several comments on the draft report. The industry representatives noted that we did not analyze the survey results to examine differences in per-procedure costs among single-specialty and multi-specialty ASCs. Regarding this comment, we initially considered developing our survey sample stratified by ASC specialty type. However, because accurate data identifying ASCs' specialties do not exist, we were unable to stratify our survey sample by specialty type. The industry representatives asked us to provide more explanation in our scope and methodology regarding our development of a relative weight scale for Medicare ASC-approved procedures to capture the general variation in resources associated with performing different procedures. We expanded the discussion of how we developed the relative weight scale in our methodology section. Reviewers also made technical comments, which we incorporated where appropriate. We are sending a copy of this report to the Administrator of CMS and appropriate congressional committees. The report is available at no charge on GAO's Web site at http://www.gao.gov. We will also make copies available to others on request. If you or your staff members have any questions about this report, please contact me at (202) 512-7119 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 significant contributions to this report are listed in appendix V. The Medicare payment rates for ambulatory surgical centers (ASC), along with those of other facilities, are adjusted to account for the variation in labor costs across the country. To calculate payment rates for individual ASCs, the Centers for Medicare & Medicaid Services (CMS) calculates the share of total costs that are labor-related and then adjusts ASCs' labor- related share of costs based on a wage index calculated for specific geographic areas across the country. The wage index reflects how the average wage for health care personnel in each geographic area compares to the national average health care personnel wage. The geographic areas are intended to represent the separate labor markets in which health care facilities compete for employees. In setting the initial ASC payment rates for 1982, CMS determined from the first survey of ASCs that one-third of their costs were labor-related. The labor-related costs included employee salaries and fringe benefits, contractual personnel, and owners' compensation for duties performed for the facility. To determine the payment rates for each individual ASC, CMS multiplied one-third of the payment rate for each procedure--the labor- related portion--by the local area wage index. Each ASC received the base payment rate for two-thirds of the payment rate--the nonlabor-related portion--for each procedure. The sum of the labor-related and nonlabor- related portions equaled each ASC's payment rate for each procedure. In 1990, when CMS revised the payment system based on a 1986 ASC survey, CMS found ASCs' average labor-related share of costs to be 34.45 percent and used this percentage as the labor-related portion of the payment rate. In a 1998 proposed rule, CMS noted that ASCs' share of labor-related costs as calculated from the 1994 ASC cost survey had increased to an average of 37.66 percent, slightly higher than the percentage calculated from the 1986 survey. However, CMS did not implement the 1998 proposal. Currently, the labor-related proportion of costs from CMS's 1986 survey, 34.45 percent, is used for calculating ASC payment rates. Using 2004 cost data we received from 290 ASCs that responded to our survey request for information, we determined that the mean labor-related proportion of costs was 50 percent, and the range of the labor-related costs for the middle 50 percent of our ASC facilities was 43 percent to 57 percent of total costs. To compare the delivery of procedures between ASCs and hospital outpatient departments, we analyzed Medicare claims data from 2003. To compare the relative costs of procedures performed in ASCs and hospital outpatient departments, we collected cost and procedure data from 2004 from a sample of Medicare-participating ASCs. We also interviewed officials at CMS and representatives from ASC industry organizations, specifically, the American Association of Ambulatory Surgery Centers (AAASC) and FASA, physician specialty societies, and nine ASCs. To compare the delivery of additional services provided with procedures performed in ASCs and hospital outpatient departments, we identified all additional services frequently billed in each setting when one of the top 20 procedures with the highest Medicare ASC claims volume is performed. These procedures represented approximately 75 percent of all Medicare ASC claims in 2003. Using Medicare claims data for 2003, we identified beneficiaries receiving one of the top 20 procedures in either an ASC or hospital outpatient department, then identified any other claims for those beneficiaries from ASCs, hospital outpatient departments, durable medical equipment suppliers, and other Medicare part B providers. We identified claims for the beneficiaries on the day the procedure was performed and the day after. We created a list that included all additional services that were billed at least 10 percent of the time with each of the top 20 procedures when they were performed in ASCs. We created a similar list of additional services for each of the top 20 procedures when they were performed in hospital outpatient departments. We then compared the lists for each of the top 20 procedures between the two settings to determine whether there were similarities in the additional services that were billed to Medicare. To compare the Medicare payments for procedures performed in ASCs and hospital outpatient departments, we identified whether any additional services included in our analysis resulted in an additional payment. We used Medicare claims data from the National Claims History (NCH) files. These data, which are used by the Medicare program to make payments to health care providers, are closely monitored by both CMS and the Medicare contractors that process, review, and pay claims for Medicare services. The data are subject to various internal controls, including checks and edits performed by the contractors before claims are submitted to CMS for payment approval. Although we did not review these internal controls, we did assess the reliability of the NCH data. First, we reviewed all existing information about the data, including the data dictionary and file layouts. We also interviewed experts at CMS who regularly use the data for evaluation and analysis. We found the data to be sufficiently reliable for the purposes of this report. To compare the relative costs of procedures performed in ASCs and hospital outpatient departments, we first compiled information on ASCs' costs and procedures performed. Because there were no recent existing data on ASC costs, we surveyed 600 ASCs, randomly selected from all ASCs, to obtain their 2004 cost and procedure data. We received response data from 397 ASC facilities. We assessed the reliability of these data through several means. We identified incomplete and inconsistent survey responses within individual surveys and placed follow-up calls to respondents to complete or verify their responses. To ensure that survey response data were accurately transferred to electronic files for our analytic purposes, two analysts independently entered all survey responses. Any discrepancies between the two sets of entered responses were resolved. We performed electronic testing for errors in accuracy and completeness, including an analysis of costs per procedure. As a result of our data reliability testing, we determined that data from 290 responding facilities were sufficiently reliable for our purposes. Our nonresponse analysis showed that there was no geographic bias among the facilities responding to our survey. The responding facilities performed more Medicare services than the average for all ASCs in our sample. To allocate ASCs' total costs among the individual procedures they perform, we developed a method to allocate the portion of an ASC's costs accounted for by each procedure. We constructed a relative weight scale for Medicare ASC-approved procedures that captures the general variation in resources associated with performing different procedures. The resources we used were the clinical staff time, surgical supplies, and surgical equipment used during the procedures. We used cost and quantity data on these resources from information CMS had collected for the purpose of setting the practice expense component of physician payment rates. For procedures for which CMS had no data on the resources used, we used information we collected from medical specialty societies and physicians who work for CMS. We summed the costs of the resources for each procedure and created a relative weight scale by dividing the total cost of each procedure by the average cost across all of the procedures. We assessed the reliability of these data through several means. We compared electronic CMS data with the original document sources for a large sample of records, performed electronic testing for errors in accuracy and completeness, and reviewed data for reasonableness. Based on these efforts, we determined that data were sufficiently reliable for our purposes. To calculate per-procedure costs with the data from the surveyed ASC facilities, we first deducted costs that Medicare considers unallowable, such as advertising and entertainment costs. (See fig. 3 for our per- procedure cost calculation methodology.) We also deducted costs for services that Medicare pays for separately, such as physician and nonphysician practitioner services. We then separated each facility's total costs into its direct and indirect costs. We defined direct costs as those associated with the clinical staff, equipment, and supplies used during the procedure. Indirect costs included all remaining costs, such as support and administrative staff, building expenses, and outside services purchased. To allocate each facility's direct costs across the procedures it performed, we applied our relative weight scale. We allocated indirect costs equally across all procedures performed by the facility. For each procedure performed by a responding ASC facility, we summed its allocated direct and indirect costs to determine a total cost for the procedure. To obtain a per-procedure cost across all ASCs, we arrayed the calculated costs for all ASCs performing that procedure and identified the median cost. To compare per-procedure costs for ASCs and hospital outpatient departments, we first obtained from CMS the list of ambulatory payment classification (APC) groups used for the outpatient prospective payment system (OPPS) and the procedures assigned to each APC group. We also obtained from CMS the OPPS median cost of each procedure and the median cost of each APC group. We then calculated a ratio between each procedure's ASC median cost, as determined by the survey, and the median cost of each procedure's corresponding APC group under the OPPS, referred to as the ASC-to-APC cost ratio. We also calculated a ratio between each ASC procedure's median cost under the OPPS and the median cost of the procedure's APC group, using the data obtained from CMS, referred to as the OPPS-to-APC cost ratio. To evaluate the difference in procedure costs between the two settings, we compared the ASC-to- APC and OPPS-to-APC cost ratios. To assess how well the relative costs of procedures in the OPPS, defined by their assignment to APC groups, reflect the relative costs of procedures in the ASC setting, we evaluated the distribution of the ASC-to-APC and OPPS-to-APC cost ratios. To calculate the percentage of labor-related costs among our sample ASCs, for each ASC, we divided total labor costs by total costs, after deducting costs not covered by Medicare's facility payment. We then determined the range of the percentage of labor-related costs among all of our ASCs and between the 25th percentile and the 75th percentile, as well as the mean and median percentage of labor-related costs. We performed our work from April 2004 through October 2006 in accordance with generally accepted government auditing standards. Appendix III: Additional Procedures Billed with the Top 20 ASC Procedures, 2003 (percentage) N/A (percentage) In addition to the contact named above, key contributors to this report were Nancy A. Edwards, Assistant Director; Kevin Dietz; Beth Cameron Feldpush; Marc Feuerberg; and Nora Hoban.

Medicare pays for surgical procedures performed at ambulatory surgical centers (ASC) and hospital outpatient departments through different payment systems. Although they perform a similar set of procedures, no comparison of ASC and hospital outpatient per-procedure costs has been conducted. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 directed GAO to compare the relative costs of procedures furnished in ASCs to the relative costs of those procedures furnished in hospital outpatient departments, in particular, how accurately the payment groups used in the hospital outpatient prospective payment system (OPPS) reflect the relative costs of procedures performed in ASCs. To do this, GAO collected data from ASCs through a survey. GAO also obtained hospital outpatient data from the Centers for Medicare & Medicaid Services (CMS). GAO determined that the payment groups in the OPPS, known as ambulatory payment classification (APC) groups, accurately reflect the relative cost of procedures performed in ASCs. GAO calculated the ratio between each procedure's ASC median cost, as determined by GAO's survey, and the median cost of each procedure's corresponding APC group under the OPPS, referred to as the ASC-to-APC cost ratio. GAO also compared the OPPS median costs of those same procedures with the median costs of their APC groups, referred to as the OPPS-to-APC cost ratio. GAO's analysis of the ASC-to-APC and OPPS-to-APC cost ratios showed that 45 percent of all procedures in the analysis fell within a 0.10 point range of the ASC-to-APC median cost ratio, and 33 percent of procedures fell within a 0.10 point range of the OPPS-to-APC median cost ratio. These similar patterns of distribution around the median show that the APC groups reflect the relative costs of procedures provided by ASCs as well as they reflect the relative costs of procedures provided in hospital outpatient departments and can be used as the basis for the ASC payment system. GAO's analysis also identified differences in the cost of procedures in the two settings. The median cost ratio among all ASC procedures was 0.39 and when weighted by Medicare claims volume was 0.84. The median cost ratio for OPPS procedures was 1.04. Thus, the cost of procedures in ASCs is substantially lower than the corresponding cost in hospital outpatient departments.

IRS's mission is to provide America's taxpayers top-quality service by helping them to understand and meet their tax responsibilities and to enforce the law with integrity and fairness to all. During fiscal year 2015, IRS collected more than $3.3 trillion; processed more than 243 million tax returns and other forms; and issued more than $403 billion in tax refunds. IRS employs about 90,000 people in its Washington, D.C., headquarters and at more than 550 offices in all 50 states, U.S. territories, and some U.S. embassies and consulates. Each filing season IRS provides assistance to tens of millions of taxpayers over the phone, through written correspondence, online, and face-to-face. The scale of these operations alone presents challenges. In carrying out its mission, IRS relies extensively on computerized information systems, which it must effectively secure to protect sensitive financial and taxpayer data for the collection of taxes, processing of tax returns, and enforcement of federal tax laws. Accordingly, it is critical for IRS to effectively implement information security controls and an agency- wide information security program in accordance with federal law and guidance. Cyber incidents can adversely affect national security, damage public health and safety, and compromise sensitive information. Regarding IRS specifically, two recent incidents illustrate the impact on taxpayer and other sensitive information: In June 2015, the Commissioner of the IRS testified that unauthorized third parties had gained access to taxpayer information from its Get Transcript application. According to officials, criminals used taxpayer- specific data acquired from non-department sources to gain unauthorized access to information on approximately 100,000 tax accounts. These data included Social Security information, dates of birth, and street addresses. In an August 2015 update, IRS reported this number to be about 114,000, and that an additional 220,000 accounts had been inappropriately accessed. In a February 2016 update, the agency reported that an additional 390,000 accounts had been accessed. Thus, about 724,000 accounts were reportedly affected. The online Get Transcript service has been unavailable since May 2015. In March 2016, IRS stated that as part of its ongoing security review, it had temporarily suspended the Identity Protection Personal Identification Number (IP PIN) service on IRS.gov. The IP PIN is a single-use identification number provided to taxpayers who are victims of identity theft (IDT) to help prevent future IDT refund fraud. The service on IRS's website allowed taxpayers to retrieve their IP PINs online by passing IRS's authentication checks. These checks confirm taxpayer identity by asking for personal, financial and tax-related information. The IRS stated that it was conducting further review of the IP PIN service and is looking at further strengthening the security features before resuming service. As of April 7, the online service was still suspended. The Commissioner of Internal Revenue has overall responsibility for ensuring the confidentiality, integrity, and availability of the information and systems that support the agency and its operations. Within IRS, the senior agency official responsible for information security is the Associate CIO, who heads the IRS Information Technology Cybersecurity organization. As we reported in March 2016, IRS has implemented numerous controls over key financial and tax processing systems; however, it had not always effectively implemented access and other controls, including elements of its information security program. Access controls are intended to prevent, limit, and detect unauthorized access to computing resources, programs, information, and facilities. These controls include identification and authentication, authorization, cryptography, audit and monitoring, and physical security controls, among others. In our most recent review we found that IRS had improved access controls, but some weaknesses remain. Identifying and authenticating users--such as through user account-password combinations--provides the basis for establishing accountability and controlling access to a system. IRS established policies for identification and authentication, including requiring multifactor authentication for local and network access accounts and establishing password complexity and expiration requirements. It also improved identification and authentication controls by, for example, expanding the use of an automated mechanism to centrally manage, apply, and verify password requirements. However, weaknesses in identification and authentication controls remained. For example, the agency used easily guessable passwords on servers supporting key systems. Authorization controls limit what actions users are able to perform after being allowed into a system and should be based on the concept of "least privilege," granting users the least amount of rights and privileges necessary to perform their duties. While IRS established policies for authorizing access to its systems, it continued to permit excessive access in some cases. For example, users were granted rights and permissions in excess of what they needed to perform their duties, including for an application used to process electronic tax payment information and a database on a human resources system. Cryptography controls protect sensitive data and computer programs by rendering data unintelligible to unauthorized users and protecting the integrity of transmitted or stored data. IRS policies require the use of encryption and it continued to expand its use of encryption to protect sensitive data. However, key systems we reviewed had not been configured to encrypt sensitive user authentication data. Audit and monitoring is the regular collection, review, and analysis of events on systems and networks in order to detect, respond to, and investigate unusual activity. IRS established policies and procedures for auditing and monitoring its systems and continued to enhance its capability by, for example, implementing an automated mechanism to log user activity on its access request and approval system. But it had not established logging for two key applications used to support the transfer of financial data and access and manage taxpayer accounts; nor was the agency consistently maintaining key system and application audit plans. Physical security controls, such as physical access cards, limit access to an organization's overall facility and areas housing sensitive IT components. IRS established policies for physically protecting its computer resources and physical security controls at its enterprise computer centers, such as a dedicated guard force at each of its computer centers. However, the agency had yet to address weaknesses in its review of access lists for both employees and visitors to sensitive areas. IRS also had weaknesses in configuration management controls, which are intended to prevent unauthorized changes to information system resources (e.g., software and hardware) and provide assurance that systems are configured and operating securely. Specifically, while IRS developed policies for managing the configuration of its information technology (IT) systems and improved some configuration management controls, it did not, for example, ensure security patch updates were applied in a timely manner to databases supporting 2 key systems we reviewed, including a patch that had been available since August 2012. To its credit, IRS had established contingency plans for the systems we reviewed, which help ensure that when unexpected events occur, critical operations can continue without interruption or can be promptly resumed, and that information resources are protected. Specifically, IRS had established policies for developing contingency plans for its information systems and for testing those plans, as well as for implementing and enforcing backup procedures. Moreover, the agency had documented and tested contingency plans for its systems and improved continuity of operations controls for several systems. Nevertheless, the control weaknesses can be attributed in part to IRS's inconsistent implementation of elements of its agency-wide information security program. The agency established a comprehensive framework for its program, including assessing risk for its systems, developing system security plans, and providing employees with security awareness and specialized training. However, IRS had not updated key mainframe policies and procedures to address issues such as comprehensively auditing and monitoring access. In addition, the agency had not fully addressed previously identified deficiencies or ensured that its corrective actions were effective. During our most recent review, IRS told us it had addressed 28 of our prior recommendations; however, we determined that 9 of these had not been effectively implemented. The collective effect of the deficiencies in information security from prior years that continued to exist in fiscal year 2015, along with the new deficiencies we identified, are serious enough to merit the attention of those charged with governance of IRS and therefore represented a significant deficiency in IRS's internal control over financial reporting systems as of September 30, 2015. To assist IRS in fully implementing its agency-wide information security program, we made two new recommendations to more effectively implement security-related policies and plans. In addition, to assist IRS in strengthening security controls over the financial and tax processing systems we reviewed, we made 43 technical recommendations in a separate report with limited distribution to address 26 new weaknesses in access controls and configuration management. Implementing these recommendations--in addition to the 49 outstanding recommendations from previous audits--will help IRS improve its controls for identifying and authenticating users, limiting users' access to the minimum necessary to perform their job-related functions, protecting sensitive data when they are stored or in transit, auditing and monitoring system activities, and physically securing its IT facilities and resources. Table 1 below provides the number of our prior recommendations to IRS that were not implemented at the beginning of our fiscal year 2015 audit, how many were resolved by the end of the audit, new recommendations, and the total number of outstanding recommendations at the conclusion of the audit. In commenting on drafts of our reports presenting the results of our fiscal year 2015 audit, the IRS Commissioner stated that while the agency agreed with our new recommendations, it will review them to ensure that its actions include sustainable fixes that implement appropriate security controls balanced against IT and human capital resource limitations. In addition, IRS can take steps to improve its response to data breaches. Specifically, in December 2013 we reported on the extent to which data breach policies at eight agencies, including IRS, adhered to requirements and guidance set forth by the Office of Management and Budget and the National Institute of Standards and Technology. While the agencies in our review generally had policies and procedures in place that reflected the major elements of an effective data breach response program, implementation of these policies and procedures was not consistent. With respect to IRS, we determined that its policies and procedures generally reflected key practices, although the agency did not require considering the number of affected individuals as a factor when determining if affected individuals should be notified of a suspected breach. In addition, IRS did not document lessons learned from periodic analyses of its breach response efforts. We recommended that IRS correct these weaknesses, but the agency has yet to fully address them. The importance of protecting taxpayer information is further highlighted by the billions of dollars that have been lost to IDT refund fraud, which continues to be an evolving threat. IRS develops estimates of the extent of IDT refund fraud to help direct its efforts to identify and prevent the crime. While its estimates have inherent uncertainty, IRS estimated that it prevented or recovered $22.5 billion in fraudulent IDT refunds in filing season 2014 (see figure 1). However, IRS also estimated, where data were available, that it paid $3.1 billion in fraudulent IDT refunds. Because of the difficulties in knowing the amount of undetectable fraud, the actual amount could differ from these estimates. IRS has taken steps to address IDT refund fraud; however, it remains a persistent and continually changing threat. IRS recognized the challenge of IDT refund fraud in its fiscal year 2014-2017 strategic plan and increased resources dedicated to combating IDT and other types of refund fraud. In fiscal year 2015, IRS reported that it staffed more than 4,000 full-time equivalents and spent about $470 million on all refund fraud and IDT activities. As described above, IRS received an additional $290 million for fiscal year 2016 to improve customer service, IDT identification and prevention, and cybersecurity efforts and the agency plans to use $16.1 million of this funding to help prevent IDT refund fraud, among other things. The administration requested an additional $90 million and an additional 491 full-time equivalents for fiscal year 2017 to help prevent IDT refund fraud and reduce other improper payments. IRS estimates that this $90 million investment in IDT refund fraud and other improper payment prevention would help it protect $612 million in revenue in fiscal year 2017, as well as protect revenue in future years. IRS has taken action to improve customer service related to IDT refund fraud. For example, between the 2011 and 2015 filing seasons, IRS experienced a 430 percent increase in the number of telephone calls to its Identity Theft Toll Free Line--as of March 19, 2016, IRS had received over 1.1 million calls to this line. Moreover, 77 percent of callers seeking assistance on this telephone line received it compared to 54 percent during the same period last year. Average wait times during the same period have also decreased--taxpayers are waiting an average of 14 minutes to talk to an assistor, a decrease from 27 minutes last year. IRS also works with third parties, such as tax preparation industry participants, states, and financial institutions to try to detect and prevent IDT refund fraud. In March 2015, the IRS Commissioner convened a Security Summit with industry and states to improve information sharing and authentication. IRS officials said that 40 state departments of revenue and 20 tax industry participants have officially signed a partnership agreement to enact recommendations developed and agreed to by summit participants. IRS plans to invest a portion of the $16.1 million it received in fiscal year 2016 into identity theft prevention and refund fraud mitigation actions from the Security Summit. These efforts include developing an Information Sharing and Analysis Center where IRS, states, and industry can share information to combat IDT refund fraud. Even though IRS has prioritized combating IDT refund fraud, fraudsters adapt their schemes to identify weaknesses in IDT defenses, such as gaining access to taxpayers' tax return transcripts through IRS's online Get Transcript service. According to IRS officials, with access to tax transcripts, fraudsters can create historically consistent returns that are hard to distinguish from a return filed by a legitimate taxpayer, potentially making it more difficult for IRS to identify and detect IDT refund fraud. Without additional action by IRS and Congress, the risk of issuing fraudulent IDT refunds could grow. We previously made recommendations to IRS to help it better combat IDT refund fraud: Authentication. In January 2015, we reported that IRS's authentication tools have limitations and recommended that IRS assess the costs, benefits and risks of its authentication tools. For example, individuals can obtain an e-file PIN by providing their name, Social Security number, date of birth, address, and filing status for IRS's e-file PIN application. Identity thieves can easily find this information, allowing them to bypass some, if not all, of IRS's automatic checks, according to our analysis and interviews with tax software and return preparer associations and companies. After filing an IDT return using an e-file PIN, the fraudulent return would proceed through IRS's normal return processing. In November 2015, IRS officials told us that the agency had developed guidance for its Identity Assurance Office to assess costs, benefits, and risk, and that its analysis will inform decision-making on authentication-related issues. IRS also noted that the methods of analysis for the authentication tools will vary depending on the different costs and other factors for authenticating taxpayers in different channels, such as online, phone, or in-person. In February 2016, IRS officials told us that the Identity Assurance Office plans to complete a strategic plan for taxpayer authentication across the agency in September 2016. While IRS is taking steps, it will still be vulnerable until it completes and uses the results of its analysis of costs, benefits, and risk to inform decision-making. Form W-2, Wage and Tax Statement (W-2) Pre-refund Matching. In August 2014 we reported that the wage information that employers report on Form W-2 is not available to IRS until after it issues most refunds, and that if IRS had access to W-2 data earlier, it could match such information to taxpayers' returns and identify discrepancies before issuing billions of dollars of fraudulent IDT refunds. We recommended that IRS assess the costs and benefits of accelerating W-2 deadlines. In response to our recommendation, IRS provided us with a report in September 2015 discussing (1) adjustments to IRS systems and work processes needed to use accelerated W-2 information, (2) the potential impacts on internal and external stakeholders, and (3) other changes needed to match W-2 data to tax returns prior to issuing refunds, such as delaying refunds until W-2 data are available. In December 2015, the Consolidated Appropriations Act of 2016 amended the tax code to accelerate W-2 filing deadlines to January 31. IRS's report will help IRS determine how to best implement pre- refund W-2 matching, given the new January 31st deadline for filing W-2s. Additionally, we suggested that Congress should consider providing the Secretary of the Treasury with the regulatory authority to lower the threshold for electronic filing of W-2s, which could make more W-2 information available to IRS earlier. External Leads. IRS partners with financial institutions and other external parties to obtain information about emerging IDT refund trends and fraudulent returns that have passed through IRS detection systems. In August 2014, we reported that IRS provides limited feedback to external parties on IDT external leads they submit and offers external parties limited general information on IDT refund fraud trends and recommended that IRS provide actionable feedback to all lead generating third parties. In November 2015, IRS reported that it had developed a database to track leads submitted by financial institutions and the results of those leads. IRS also stated that it had held two sessions with financial institutions to provide feedback on external leads provided to IRS. In December 2015, IRS officials stated that the agency sent a customer satisfaction survey asking financial institutions for feedback on the external leads process and was considering other ways to provide feedback to financial institutions. In April 2016, IRS officials stated they plan to analyze preliminary survey results by mid-April 2016. Additionally, IRS officials reported that the agency shared information with financial institutions in March 2016 and plans to do so on a quarterly basis, with the next information sharing session scheduled in June 2016. IRS and industry partners have characterized that returns processing and refund issuance during this filing season has been generally smooth. Through April 1, 2016, IRS had processed about 95 million returns and issued 76 million refunds totaling about $215 billion. While IRS experienced a major system failure in February that halted returns processing for about a day, the agency reported that it had minimal effect on overall processing of returns and refunds. In addition to filing returns, many taxpayers often call IRS for assistance. IRS's telephone service has generally improved in 2016 over last year. From January 1 through March 19, 2016 IRS received about 35.4 million calls to its automated and live assistor telephone lines, about a 2 percent decrease compared to the same period last year. Of the 13.4 million calls seeking live assistance, IRS had answered 9.1 million calls--a 75 percent increase over the 5.2 million calls answered during the same period last year. IRS anticipated that 65 percent of callers seeking live assistance would receive it this filing season, which runs through April 18, and 47 percent of callers would receive live assistance through the entire 2016 fiscal year. As of March 19, 2016, 75 percent of callers had received live assistance, an increase from 38 percent during the same period last year. Further, the average wait time to speak to an assistor also decreased from 24 to 9 minutes. As we reported in March 2016, however, IRS's telephone level of service for the full fiscal year has yet to reach the levels it had achieved in earlier years. IRS attributed this year's service improvement to a number of factors. Of the additional $290 million IRS received in December 2015, it allocated $178.4 million (61.5 percent) for taxpayer services to make measurable improvements in its telephone level of service. With the funds, IRS hired 1,000 assistors who began answering taxpayer calls in March, in addition to the approximately 2,000 seasonal assistors it had hired in fall 2015. To help answer taxpayer calls before March, IRS officials told us that they detailed 275 staff from one of its compliance functions to answer telephone calls. IRS officials said they believe this step was necessary because the additional funding came too late in the year to hire and train assistors to fully cover the filing season. IRS also plans to use about 600 full-time equivalents of overtime for assistors to answer telephone calls and respond to correspondence in fiscal year 2016, compared to fewer than 60 full-time equivalents of overtime used in fiscal year 2015. In December 2014, we recommended that IRS systematically and periodically compare its telephone service to the best in business to identify gaps between actual and desired performance. IRS disagreed with this recommendation, noting that it is difficult to identify comparable organizations. We do not agree with IRS's position; many organizations run call centers that would provide ample opportunities to benchmark IRS's performance. In fall 2015, Department of the Treasury (Treasury) and IRS officials said they had no plans to develop a comprehensive customer service strategy or specific goals for telephone service tied to the best in the business and customer expectations. Without such a strategy, Treasury and IRS can neither measure nor effectively communicate to Congress the types and levels of customer service taxpayers should expect and the resources needed to reach those levels. Therefore, in December 2015 we suggested that Congress consider requiring that Treasury work with IRS to develop a comprehensive customer service strategy. In April 2016, IRS officials told us that the agency established a team to consider our prior work in developing this strategy or benchmarking its telephone service. In summary, while IRS has made progress in implementing information security controls, it needs to continue to address weaknesses in access controls and configuration management and consistently implement all elements of its information security program. The risks IRS and the public are exposed to have been illustrated by recent incidents involving public- facing applications, highlighting the importance of securing systems that contain sensitive taxpayer and financial data. In addition, fully implementing key elements of a breach response program will help ensure that when breaches of sensitive data do occur, their impact on affected individuals will be minimized. Weaknesses in information security can also increase the risk posed by identity theft refund fraud. IRS needs to establish an approach for addressing identity theft refund fraud that is informed by assessing the cost, benefits, and risks of IRS's various authentication options and improving the reliability of fraud estimates. While this year's tax filing season has generally gone smoothly and IRS has improved customer service, it still needs to develop a comprehensive approach to customer service that will meet the needs of taxpayers while ensuring that their sensitive information is adequately protected. Chairman Hatch, Ranking Member Wyden, and Members of the Committee, this concludes my statement. I look forward to answering any questions that you may have at this time. If you have any questions regarding this statement, please contact Gregory C. Wilshusen at (202) 512-6244 or [email protected], Nancy Kingsbury at (202) 512-2928 or [email protected], or James R. McTigue, Jr. at (202) 512-9110 or [email protected] or Jessica K. Lucas-Judy at (202) 512-9110 or [email protected]. Other key contributors to this statement include Jeffrey Knott, Neil A. Pinney, and Joanna M. Stamatiades (assistant directors); Dawn E. Bidne; Mark Canter; James Cook; Shannon J. Finnegan; Lee McCracken; Justin Palk; J. Daniel Paulk; Erin Saunders Rath; and Daniel Swartz. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

In collecting taxes, processing returns, and providing taxpayer service, IRS relies extensively on computerized systems. Thus it is critical that sensitive taxpayer and other data are protected. Recent data breaches at IRS highlight the vulnerability of taxpayer information. In addition, identity theft refund fraud is an evolving threat to honest taxpayers and tax administration. This crime occurs when a thief files a fraudulent return using a legitimate taxpayer's identity and claims a refund. In 2015, GAO added identity theft refund fraud to its high-risk area on the enforcement of tax laws and expanded its government-wide high-risk area on federal information security to include the protection of personally identifiable information. This statement discusses (1) IRS information security controls over financial and tax processing systems, (2) IRS actions to address identity theft refund fraud, and (3) the status of selected IRS filing season operations. This statement is based on previously published GAO work as well as an update of selected data. In March 2016, GAO reported that the Internal Revenue Service (IRS) had instituted numerous controls over key financial and tax processing systems; however, it had not always effectively implemented other controls intended to properly restrict access to systems and information, among other security measures. In particular, while IRS had improved some of its access controls, weaknesses remained in key controls for identifying and authenticating users, authorizing users' level of rights and privileges, encrypting sensitive data, auditing and monitoring network activity, and physically securing facilities housing its information technology resources. These weaknesses were due in part to IRS's inconsistent implementation of its agency-wide security program, including not fully implementing prior GAO recommendations. GAO concluded that these weaknesses collectively constituted a significant deficiency for the purposes of financial reporting for fiscal year 2015. As a result, taxpayer and financial data continue to be exposed to unnecessary risk. Identity theft refund fraud also poses a significant challenge. IRS estimates it paid $3.1 billion in these fraudulent refunds in filing season 2014, while preventing $22.5 billion (see figure). The full extent is unknown because of the challenges inherent in detecting this form of fraud. IRS has taken steps to combat identity theft refund fraud such as improving phone service for taxpayers to report suspected identity theft and working with industry, states, and financial institutions to detect and prevent it. However, as GAO reported in August 2014 and January 2015, additional actions can further assist the agency in addressing this crime, including pre-refund matching of taxpayer returns with information returns from employers, and assessing the costs, benefits, and risks of improving methods for authenticating taxpayers. In addition, the Consolidated Appropriations Act 2016 includes a provision that would help IRS with pre-refund matching and also includes an additional $290 million to enhance cybersecurity, combat identity theft refund fraud, and improve customer service. According to IRS and industry partners, the 2016 filing season has generally gone smoothly, with about 95 million returns and $215 billion in refunds processed through April 1, 2016. In addition, IRS increased its level of phone service to taxpayers, although it has not developed a comprehensive strategy for customer service as GAO recommended in December 2015. In addition to 49 prior recommendations that had not been implemented, GAO made 45 new recommendations to IRS to further improve its information security controls and the implementation of its agency-wide information security program. GAO has also made recommendations to help IRS combat identity theft refund fraud, such as assessing costs, benefits, and risks of taxpayer authentication options.

In 1991, we reported that, historically, INS leadership had allowed INS' organizational structure to become decentralized without adequate controls. Specifically, its regional structure had created geographical separation among INS programs and hampered resource allocation and consistent program implementation. The field structure designed to carry out INS' enforcement functions was bifurcated between districts and Border Patrol sectors, resulting in uncoordinated, overlapping programs. In addition, only a single senior INS headquarters manager supervised INS' 33 district directors and 21 Border Patrol chiefs. In 1994, with the appointment of a new Commissioner, INS implemented an organizational structure intended to remedy at least two problems. First, the headquarters operations office's unrealistically large span of control resulting in uneven and poorly coordinated field performance. Second, the lack of focus on program planning resulting from the operations office's preoccupation with matters that should have been handled by field managers. The Commissioner shifted some management authority to officials closer to field activities. While INS made some progress toward achieving its reorganization goals, its organizational structure is still in a state of flux and some problems persist. For example, in 1997 we reported that the responsibilities and authority of the Office of Field Operations and Office of Programs were unclear. We recommended, among other things, that the INS Commissioner provide written guidance on (1) the responsibilities and authorities of these two offices and (2) the appropriate coordination and communication methods between these two offices, and between the Office of Programs and field offices. Although INS has taken some steps to implement our 1997 recommendations, they have yet to be completed because, according to INS, these recommendations relate to INS restructuring that is currently under study. As previously mentioned, INS' mission involves carrying out two primary functions--enforcing immigration laws and providing services or benefits to eligible legal immigrants. These functions often translate into competing priorities at the program level that need to be balanced for effective program implementation. All too often, the emphasis placed on one over the other results in ineffective enforcement or poor benefit delivery. An example of this inability to balance these priorities can be found in our September 2000 report on the processing of visas for specialty occupations, called H-1B visas. The performance appraisal process for staff that evaluates the merits of applications filed with INS (called adjudicators) focused mainly on the number of applications reviewed, not the quality of the review. INS rewarded those adjudicators who processed the greatest number of applications over those who processed fewer applications. Some adjudicators told us that because of pressure to adjudicate cases quickly, they did not routinely use investigations staff to look into potentially fraudulent applications because doing so would take more time and reduce the number of applications they could complete. INS investigators following up on approved applications found instances of fraud; for example, they found employers who created shell corporations and false credentials and documents for aliens ineligible for H-1B employment. We found other examples where the goal of providing timely service delivery has negatively impacted INS' enforcement goal of providing benefits to only eligible aliens. In our May 2001 report on INS application processing, we stated that INS' policy is to grant work authorization to applicants who file for adjustment of status to that of a permanent resident before it adjudicates their application. This policy is intended to prevent aliens from having to wait for INS to adjudicate their application before they can work. However, in fiscal year 2000 INS denied about 80,000 applicants for adjustment of status (about 14 percent of all the adjustment of status applications completed) and had to revoke their work authorization. Because these aliens had work authorization while waiting for their application to be processed, they could have developed a work history that may have facilitated their obtaining employment even after INS' efforts to officially revoke their work authorization. A senior INS official stated that the policy to grant work authorization before the adjustment of status application is decided is intended to be fair to the majority of adjustment of status applicants who are approved. An investigation into INS' initiative to process naturalization applications more quickly found the initiative to be fraught with quality and integrity problems resulting in ineligible applicants receiving citizenship. According to a Department of Justice Office of Inspector General (OIG) report on INS' Citizenship USA initiative launched in 1995, INS made the timely completion of naturalization applications its guiding principle at the expense of accuracy and quality in determining eligibility. As a result of the problems found, INS instituted naturalization quality control procedures to enhance the integrity of the process. We are finding a similar situation in our ongoing review for this subcommittee of INS' efforts to deter immigration benefit fraud. We will discuss this and other issues related to immigration benefit fraud in a report to be released later this year. Other researchers have also found that INS had difficulty in balancing its enforcement and service delivery priorities. For example, the Visa Waiver Program allows nationals of certain counties to enter the United States with just a passport. No visa is required. According to a Department of Justice OIG report, abuse of the program poses a threat to national security and increases illegal immigration. The report found that aliens used stolen passports from Visa Waiver countries to illegally enter the United States. In one case, the OIG found that 27 stolen Icelandic passports had been used to smuggle children into the United States.Although the passport numbers of the stolen Icelandic passports had been entered into a lookout database, INS airport inspectors were not entering the passport numbers of passengers arriving with Icelandic passports into the lookout database. INS officials told the OIG investigators that manually keying in these passport numbers into the system would take too long and would hamper INS' ability to inspect all passengers from a flight within 45 minutes, as mandated by law. An INS contractor that evaluated INS' immigration benefits process in 1999 found that INS needed to strengthen the integrity of the process. The study found that INS had no standard quality control program for ensuring that applications were processed consistently. Although some adjudicators believed the number of fraudulent applications submitted was significantly higher than the number they were detecting, they received little training in fraud detection. According to the report, some management and operations personnel indicated that performance evaluations in large part are based on the quantity of applications processed. The report concluded that whether employees receive incentives and rewards depends more on the quantity of applications processed rather than on fraud detection. Therefore, adjudicators had no incentives to actively search out fraud. As we reported in our applications processing report, despite these pressures to complete applications more quickly, INS' backlog of applications increased to about 4 million applications by the end of fiscal year 2000, a four-fold increase since 1994. As of September 30, 2001 about 767,000 applicants out of almost 3 million with pending applications had been waiting at least 21 months for INS to process their application. In our 1997 management report, we found that poor communication was a problem, especially between headquarters and field units. For example, field and policy manuals were out of date and there was not one place that program staff could go for direction. Over one half of the employees we surveyed in preparing that report believed that INS had poor communications and that information was disseminated poorly. As noted earlier in our testimony, how INS' Office of Programs and Office of Field Operations were to coordinate was still unclear. Our recent work shows that coordination and communication is still a problem. For example, although both the Border Patrol and INS' Office of Investigations have anti-smuggling units that conduct alien smuggling investigations, these units operate through separate chains of command with different reporting structures. In May 2000, we reported that alien smuggling was a growing problem, and that the Border Patrol and Investigations anti-smuggling units operated autonomously, resulting in a lack of program coordination. Further, this lack of coordination sometimes led to different anti-smuggling units opening investigations on the same target. INS Investigations officials told us that the autonomy of the individual units and the lack of a single chain of command to manage INS' anti-smuggling investigations were major obstacles to building a more effective anti-smuggling program. Communicating the necessary information to the appropriate individuals has also been a problem. In our H-1B report, we stated that adjudicators told us that they did not have easy access to case-specific information that would have helped them correctly decide whether an application should be approved or denied. For example, evidence of a fraudulent employer or falsified worker credentials either was not available to the adjudicator or could only be accessed through a time-consuming and complicated process. Consequently, a previously denied application could be resubmitted and approved by a different adjudicator. At the time of our review, INS officials told us that INS was in the process of upgrading the computer system that tracks H-1B applications, which could make more accurate and up to date information available on-line for adjudicators. Our work and the work of an INS contractor both found that INS did not have a structure in place to manage the information that adjudicators needed to make correct decisions. Information systems were not easily accessible to all adjudicators, so these systems were generally not queried as part of the adjudication process. INS had no single repository of information where adjudicators could find the most up to date information on such things as adjudication processes and legal and regulatory policies. In one case, the lack of communication and unclear policies and procedures had tragic consequences. In January 1999, police in Texas obtained a warrant for the arrest of Rafael Resendez-Ramirez, the "railway killer" who traveled around the United States by freight train and committed murders near railroad lines. In early 1999 police contacted INS Investigations staff in Houston Texas several times about placing a "border lookout" for Resendez-Ramirez in case he was apprehended at the border. According to a Department of Justice OIG report, none of the Investigations staff contacted by the police thought to inform the police about the existence of IDENT, INS' automated fingerprint identification system. The Investigations staff also failed to enter a lookout in IDENT in case Resendez-Ramirez was apprehended trying to cross the border. On June 1, 1999, the Border Patrol apprehended Resendez-Ramirez trying to cross illegally and had him processed through the IDENT system. Because no border lookout had been placed, however, the Border Patrol voluntarily returned him to Mexico in accordance with standard Border Patrol practices. He subsequently returned illegally to the United States and committed four more murders before he was captured. INS' Houston investigations staff provided OIG investigators with various reasons as to why they did not mention IDENT or its lookout capability to police or enter a lookout in IDENT, including the following: They were unfamiliar with IDENT and how it worked. They never received any IDENT training. They were unaware IDENT had a lookout feature. They thought IDENT was a system primarily for the Border Patrol to use. The OIG concluded that the lack of knowledge about IDENT was largely the result of broader problems in the way INS implemented and monitored IDENT. INS failed to (1) (1) ensure that components outside of the Border Patrol, such as Investigations, understood IDENT policies, particularly the lookout policy and (2) provide adequate IDENT training for all INS staff. INS and the FBI are currently working on integrating IDENT with the FBI's automated fingerprint system to improve the quality and accuracy of criminal identification so that such mistakes can be averted in the future. Effective communication has also been a problem between INS and local communities. In August 2001, we reported that since 1994 as INS' Border Patrol has increased enforcement efforts in certain locations as part of its strategy to deter illegal entry along the southwest border, illegal alien traffic shifted to other locations. Officials from some border communities told us that they were caught by surprise by the increase in the number of illegal aliens apprehended in their communities. INS has recognized the need to improve communications with the public regarding its strategy and its potential implications and has increased its outreach efforts. INS has had long-standing difficulty developing and fielding information systems to support its program operations. In 1990, we reported that INS managers and field officials did not have adequate, reliable, and timely information to effectively carry out the Service's mission. We also reported that INS had not conducted a comprehensive agency-wide information needs assessment. As a result, program and management data were kept in a loose collection of automated systems as well as a number of ad-hoc labor-intensive manual systems. Effectively using information technology continues to remain a challenge for INS. In August 2000, we reported that INS did not have a "blueprint" to guide the development of its information systems. The absence of such a plan increases the risk that the information systems in which hundreds of millions of dollars are invested each year will not be well integrated or compatible and will not support mission needs. In December 2000, we reported that INS had limited capability to effectively manage its planned and ongoing information technology investments. While INS has some important information technology management capabilities in place, it has to do considerable work to fully implement mature and effective processes. The Department of Justice agreed with our recommendation that INS develop and submit a plan to Justice for implementing investment management process improvements. INS is in the process of developing this plan. The lack of adequate information technology systems has significantly impacted INS' ability to perform its core missions. As we reported in our applications processing report, INS headquarters and field staff cited automation problems as the number one factor affecting INS' ability to process applications in a timely manner to reduce backlogs. INS has no national case management system for applications filed at its 33 district offices. Most of these offices process applications manually. As a result, these offices cannot determine the number of pending cases, identify problem areas or bottlenecks, establish processing priorities, deploy staff based on workload, and ensure cases are processed in the order received. Due to the lack of any automated system, staff spend considerable time responding to applicants' inquires on the status of their case, which takes time away from application processing. Existing INS systems used to process applications do not provide accurate and reliable data. In our applications processing report we stated that the system INS Service Centers use to process some applications frequently fails to operate and does not always update data to INS' mainframe computer as it should. This lack of automation has resulted in INS expending considerable time and effort to obtain the data it needs. In our applications processing report we also stated that lack of reliable data was the primary reason INS undertook a time-consuming and costly hand-count of all pending applications in September 2000. INS undertook the hand-count to get an accurate count of pending applications hoping to obtain an unqualified opinion on its fiscal year 2000 financial statements. According to INS officials, the cost to complete this hand-count was high in terms of lost production and staff time. INS suspended nearly all case processing for 2-3 weeks. Due to the lack of accurate data in its computer systems, INS will have to do another hand-count of all pending applications at the end of fiscal year 2001 if it hopes to obtain an unqualified opinion on its financial statement. As a result of this lack of accurate data, INS has also approved more visas than the Congress has allowed. According to an INS contractor study, INS' system that tracks these visas was not designed to keep a running total of the number of visas issued and to compare it against the annual limit to ensure that only the allowable number is approved. Consequently, in fiscal year 1999, INS approved approximately 137,000 to 138,000 H-1B visas, well over the 115,000 limit. Program management issues at INS have caused continuing concern. Our work indicates that INS needs to improve its program management in several fundamental areas, including having efficient processes and clear policies and procedures, providing adequate staff training, and aligning its workforce with its workload. The INS contractor study on immigration benefits processing found that INS' processes were inefficient. For example, INS staff spends considerable time re-entering the same data into various INS computer systems. INS did not consistently adjudicate applications because the procedures used to process applications varied by office, most field offices allowed adjudicators to review cases using minimal guidelines, and standard quality controls were lacking. The study made numerous recommendations on how to make the processes more efficient and improve quality control. We stated in our applications processing report that INS was developing a strategic plan to reengineer applications processing. INS will make decisions regarding the contractor's recommendations after completing two related strategic plans - the plan to reengineer applications processing and the information technology strategic plan. Both are in the early planning stages. INS estimated that it will take 5 years or more to develop and implement the reengineered processes and implement a service-wide automated system to process applications. Adequate staff training is also a critical aspect of program management. As noted earlier in our testimony, an INS contractor study found that INS adjudicators received little training in fraud detection. According to a November 2000 INS report prepared as part of INS' Government Performance and Results Act reporting requirements, the INS workforce is not well supported in terms of training. Advanced training classes have been cut back or delayed. According to the report, because of the growing workforce and these training cutbacks, INS will have a larger portion of its workforce that is relatively inexperienced and inadequately trained for its work.

The Immigration and Naturalization's (INS) organizational structure has led to recurring management problems, including an inability to balance competing priorities, poor communications, and weaknesses in the development and fielding of critical information technology. Although restructuring may help, INS will still need to assemble the basic building blocks essential to any organization. These building blocks include clearly delineated roles and responsibilities, policies and procedures that effectively balance competing priorities, effective internal and external communication and coordination, and computer systems that provide accurate and timely information. Until these element are in place, it will be difficult to enforce the nation's immigration laws effectively.

While TCE and perchlorate are both DOD-classified emerging contaminants, there are key distinctions between the contaminants that affect the extent to which they are regulated, and the information that may be needed before further steps are taken to protect human health and the environment. Since 1989, a maximum contaminant level (MCL) under the Safe Drinking Water Act has been in place for TCE. In contrast, EPA has not adopted an MCL for perchlorate, although recent government- sponsored studies have raised concerns that even low-levels of exposure to perchlorate may pose serious risks to infants and fetuses of pregnant women. We provided details about EPA's evolving standards for TCE and the evolving knowledge of its health effects in our May 2007 report and June 2007 testimony on issues related to drinking water contamination on Camp Lejeune. TCE is a colorless liquid with a sweet, chloroform-like odor that is used mainly as a degreaser for metal parts. The compound is also a component in adhesives, lubricants, paints, varnishes, paint strippers, and pesticides. At one time, TCE was used as an extraction solvent for cosmetics and drug products and as a dry-cleaning agent; however, its use for these purposes has been discontinued. DOD has used the chemical in a wide variety of industrial and maintenance processes. More recently, the department has used TCE to clean sensitive computer circuit boards in military equipment such as tanks and fixed wing aircraft. Because TCE is pervasive in the environment, most people are likely to be exposed to TCE by simply eating, drinking, and breathing, according to the Department of Health and Human Services' Agency for Toxic Substances and Disease Registry (ATSDR). Industrial wastewater is the primary source of release of TCE into water systems, but inhalation is the main route of potential environmental exposure to TCE. ATSDR has also reported that TCE has been found in a variety of foods, with the highest levels in meats, at 12 to 16 ppb, and U.S. margarine, at 440 to 3,600 ppb. In fact, HHS's National Health and Nutrition Examination Survey (NHANES) suggested that approximately 10 percent of the population had detectable levels of TCE in their blood. Inhaling small amounts of TCE may cause headaches, lung irritation, poor coordination, and difficulty concentrating, according ATSDR's Toxicological Profile. Inhaling or drinking liquids containing high levels of TCE may cause nervous system effects, liver and lung damage, abnormal heartbeat, coma, or possibly death. ATSDR also notes that some animal studies suggest that high levels of TCE may cause liver, kidney, or lung cancer, and some studies of people exposed over long periods to high levels of TCE in drinking water or workplace air have shown an increased risk of cancer. ATSDR's Toxicological Profile notes that the National Toxicology Program has determined that TCE is "reasonably anticipated to be a human carcinogen" and the International Agency for Research on Cancer has determined that TCE is probably carcinogenic to humans-- specifically, kidney, liver and cervical cancers, Hodgkin's disease, and non- Hodgkin's lymphoma--based on limited evidence of carcinogenicity in humans and additional evidence from studies in experimental animals. Effective in 1989, EPA adopted an MCL of 5 ppb of TCE in drinking water supplies pursuant to the Safe Drinking Water Act. Despite EPA's regulation of TCE as a drinking water contaminant, concerns over serious long-term effects associated with TCE exposures have prompted additional scrutiny by both governmental and nongovernmental scientific organizations. For example, ATSDR initiated a public health assessment in 1991 to evaluate the possible health risks from exposure to contaminated drinking water on Camp Lejeune. The health concerns over TCE have been further amplified in recent years after scientific studies have suggested additional risks posed by human exposure to TCE. ATSDR is continuing to develop information about the possible long-term health consequences of these potential exposures in a subregistry to the National Exposure Registry specifically for hazardous waste sites. As we previously reported with respect to Camp Lejeune, those who lived on base likely had a higher risk of inhalation exposure to volatile organic compounds such as TCE, which may be more potent than ingestion exposure. Thus, pregnant women who lived in areas of base housing with contaminated water and conducted activities during which they could inhale water vapor--such as bathing, showering, or washing dishes or clothing--likely faced greater exposure than those who did not live on base but worked on base in areas served by the contaminated drinking water. Concerns about possible adverse health effects and government actions related to the past drinking water contamination on Camp Lejeune have led to additional activities, including new health studies, claims against the federal government, and federal inquiries. As a consequence of these growing concerns--and of anxiety among affected communities about these health effects and related litigation--ATSDR has undertaken a study to examine whether individuals who were exposed in utero to the contaminated drinking water are more likely to have developed certain childhood cancers or birth defects. This research, once completed later in 2007, is expected to help regulators understand the effects of low levels of TCE in our environment. In addition, some former residents of Camp Lejeune have filed tort claims and lawsuits against the federal government related to the past drinking water contamination. As of June 2007, about 850 former residents and former employees had filed tort claims with the Department of the Navy related to the past drinking water contamination. According to an official with the U.S. Navy Judge Advocate General--which is handling the claims on behalf of the Department of the Navy--the agency is currently maintaining a database of all claims filed. The official said that the Judge Advocate General is awaiting completion of the latest ATSDR health study before deciding whether to settle or deny the pending claims in order to base its response on as much objective scientific and medical information as possible. According to DOD, any future reassessment of TCE toxicity may result in additional reviews of DOD sites that utilized the former TCE toxicity values, as the action levels for TCE cleanup in the environment may change. As we discussed in our May 2005 report and April 2007 testimony, EPA has not established a standard for limiting perchlorate concentrations in drinking water under the SDWA. Perchlorate has emerged as a matter of concern because recent studies have shown that it can affect the thyroid gland, which helps to regulate the body's metabolism and may cause developmental impairments in the fetuses of pregnant women. Perchlorate is a primary ingredient in propellant and has been used for decades by the Department of Defense, the National Aeronautics and Space Administration, and the defense industry in manufacturing, testing, and firing missiles and rockets. Other uses include fireworks, fertilizers, and explosives. It is readily dissolved and transported in water and has been found in groundwater, surface water, drinking water, and soil across the country. The sources of perchlorate vary, but the defense and aerospace industries are the greatest known source of contamination. Scientific information on perchlorate was limited until 1997, when a better detection method became available for perchlorate, and detections (and concern about perchlorate contamination) increased. In 1998, EPA first placed perchlorate on its Contaminant Candidate List, the list of contaminants that are candidates for regulation, but the agency concluded that information was insufficient to determine whether perchlorate should be regulated under the SDWA. EPA listed perchlorate as a priority for further research on health effects and treatment technologies and for collecting occurrence data. In 1999, EPA required water systems to monitor for perchlorate under the Unregulated Contaminant Monitoring Rule to determine the frequency and levels at which it is present in public water supplies nationwide. Interagency disagreements over the risks of perchlorate exposure led several federal agencies to ask the National Research Council (NRC) of the National Academy of Sciences to evaluate perchlorate's health effects. In 2005, NRC issued a comprehensive review of the health effects of perchlorate ingestion, and it reported that certain levels of exposure may not adversely affect healthy adults. However, the NRC-recommended more studies on the effects of perchlorate exposure in children and pregnant women and recommended a reference dose of 0.0007 milligrams per kilogram per day. In 2005, the EPA adopted the NRC recommended reference dose, which translates to a drinking water equivalent level (DWEL) of 24.5 ppb. If the EPA were to develop a drinking water standard for perchlorate, it would adjust the DWEL to account for other sources of exposure, such as food. Although EPA has taken some steps to consider a standard, in April 2007 EPA again decided not to regulate perchlorate--citing the need for additional research--and kept perchlorate on its Contaminant Candidate List. Several human studies have shown that thyroid changes occur in human adults at significantly higher concentrations than the amounts typically observed in water supplies. However, more recent studies have since provided new knowledge and raised concerns about potential health risks of low-level exposures, particularly for infants and fetuses. Specifically, in October 2006, researchers from the Centers for Disease Control and Prevention (CDC) published the results of the first large study to examine the relationship between low-level perchlorate exposure and thyroid function in women with lower iodine levels. About 36 percent of U.S. women have these lower iodine levels. The study found decreases in a thyroid hormone that helps regulate the body's metabolism and is needed for proper fetal neural development. Moreover, in May 2007, FDA released a preliminary exposure assessment because of significant public interest in the issue of perchlorate exposure from food. FDA sampled and tested foods such as tomatoes, carrots, spinach, and cantaloupe; and other high water content foods such as apple and orange juices; vegetables such as cucumbers, green beans, and greens; and seafood such as fish and shrimp for perchlorate and found widespread low-level perchlorate levels in these items. FDA is also planning to publish, in late 2007, an assessment of exposure to perchlorate from foods, based on results from its fiscal year 2005-2006 Total Diet Study--a market basket study that is representative of the U.S. diet. Some federal funding has been directed to perchlorate studies and cleanup activities. For example, committee reports related to the DOD and EPA appropriations acts of fiscal year 2006 directed some funding for perchlorate cleanup. In the Senate committee report for the Department of Health and Human Services fiscal year 2006 appropriations act, the committee encouraged support for studies on the long-term effects of perchlorate exposure. The Senate committee report for FDA's fiscal year 2006 appropriations act directed FDA to continue conducting surveys of perchlorate in food and bottled water and to report the findings to Congress. In the current Congress, legislation has been introduced that would require EPA to establish a health advisory for perchlorate, as well as requiring public water systems serving more than 10,000 people to test for perchlorate and disclose its presence in annual consumer confidence reports. Other pending legislation would require EPA to establish a national primary drinking water standard for perchlorate. DOD has certain responsibilities with regard to emerging contaminants such as TCE that are regulated by EPA or state governments, but its responsibilities and cleanup goals are less definite for emerging contaminants such as perchlorate that lack federal regulatory standards. As we have previously reported, DOD must comply with any cleanup standards and processes under all applicable environmental laws, regulations, and executive orders, including the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), the Resource Conservation and Recovery Act (RCRA) and the Clean Water Act's National Pollutant Discharge Elimination System (NPDES), and the SDWA. DOD's designation of perchlorate as an emerging contaminant reflects the department's recognition that the chemical has a significant potential impact on people or the Department's mission. DOD's recognition of a substance as an emerging contaminant can lead DOD to decide to take to certain cleanup efforts even in the absence of a federal regulatory standard. In addition, federal laws enacted in fiscal years 2004 and 2005 required DOD to conduct health studies and evaluate perchlorate found at military sites. For example, the Ronald W. Reagan National Defense Authorization Act for fiscal year 2005 stated that the Secretary of Defense should develop a plan for cleaning up perchlorate resulting from DOD activities when the perchlorate poses a health hazard and continue evaluating identified sites. As we reported in our 2005 perchlorate report, DOD has sometimes responded at the request of EPA and state environmental authorities-- which have used a patchwork of statutes, regulations, and general oversight authorities--to act (or require others, including DOD, to act) when perchlorate was deemed to pose a threat to human health and the environment. For example, pursuant to its authority under the Clean Water Act's NPDES program, Texas required the Navy to reduce perchlorate levels in wastewater discharges at the McGregor Naval Weapons Industrial Reserve Plant to 4 parts per billion, the lowest level at which perchlorate could be detected. Similarly, after sampling required as part of a RCRA permit detected perchlorate, Utah officials required ATK Thiokol, an explosives and rocket fuel manufacturer, to install a monitoring well to determine the extent of perchlorate contamination at their facility and take steps to prevent additional releases of perchlorate. In addition, EPA and state officials also told us during our 2005 review that they have sometimes used their general oversight responsibilities to protect water quality and human health to investigate and sample groundwater and surface water areas for perchlorate. For example, EPA asked Patrick Air Force Base and the Cape Canaveral Air Force Station, Florida, to sample groundwater for perchlorate near rocket launch sites. Previously, both installations had inventoried areas where perchlorate was suspected and conducted limited sampling. DOD officials did not find perchlorate at Patrick Air Force Base and, according to an EPA official, the Department of the Air Force said it would not conduct additional sampling at either installation until there was a federal standard for perchlorate. Finally, according to EPA, in the absence of a federal perchlorate standard, at least eight states have established nonregulatory action levels or advisories for perchlorate ranging from 1 part per billion to 51 parts per billion. (See table 1.) Massachusetts is the only state to have established a drinking water standard--set at 2 ppb. The California Department of Health Services reports that California will complete the rulemaking for its proposed standard of 6 ppb later this year. States have used these thresholds to identify the level at which some specified action must be taken by DOD and other facilities in their state, in the absence of a federal standard. For example, Oregon initiated in-depth site studies to determine the cause and extent of perchlorate contamination when concentrations of 18 ppb or greater are found. Nevada required the Kerr-McGee Chemical site in Henderson to treat groundwater and reduce perchlorate concentration releases to 18 ppb, which is Nevada's action level for perchlorate. Utah officials told us that while the state did not have a written action level for perchlorate, it may require the responsible party to undertake cleanup activities if perchlorate concentrations exceed 18 ppb. DOD is undertaking a number of activities to address emerging contaminants in general, including the creation of the Materials of Evolving Regulatory Interest Team (MERIT) to systematically address the health, environmental, and safety concerns associated with emerging contaminants. As noted above, DOD is required to follow EPA regulations for monitoring and cleanup of TCE. In addition, DOD is working with ATSDR, which has projected a December 2007 completion date for its current study of TCE's health effects on pregnant women and their children. In the absence of a federal standard, DOD has adopted its own perchlorate policies for sampling and cleanup activities or is working under applicable state guidelines. DOD created MERIT to help address the health, environmental, and safety concerns associated with emerging contaminants. According to DOD, MERIT has focused on materials that have been or are used by DOD, or are under development for use, such as perchlorate, TCE, RDX, DNT and new explosives, naphthalene, perfluorooctanoic acid (PFOA), hexavalent chromium (i.e., chromium VI), beryllium, and nanomaterials. MERIT's initiatives include pollution prevention, detection/analytical methods, human health studies, treatment technologies, lifecycle cost analysis, risk assessment and risk management, and public outreach. Another of MERIT's activities was to create an Emerging Contaminant Action List of materials that DOD has assessed and judged to have a significant potential impact on people or DOD's mission. The current list includes five contaminants--perchlorate, TCE, RDX, naphthalene, and hexavalent chromium. To be placed on the action list, the contaminant will generally have been assessed by MERIT for its impacts on (1) environment, safety, and health (including occupational and public health), (2) cleanup efforts, (3) readiness and training, (4) acquisition, and (5) operation and maintenance activities. In 1979, EPA issued nonenforceable guidance establishing "suggested no adverse response levels" for TCE in drinking water. These levels provided EPA's estimate of the short- and long-term exposure to TCE in drinking water for which no adverse response would be observed and described the known information about possible health risks for these chemicals. However, the guidance for TCE did not suggest actions that public water systems should take if TCE concentrations exceeded those values. Subsequently, in 1989, EPA set an enforceable MCL for TCE of 5 micrograms per liter, equivalent to 5 ppb in drinking water. The new standard served as a regulatory basis for many facilities to take concrete action to measure and control TCE. According to EPA's Region 4 Superfund Director, for example, 46 sites on Camp Lejeune have since been identified for TCE cleanup. The Navy and EPA have selected remedies for 30 of those sites, and the remaining 16 are under active investigation. The first Record of Decision was signed in September 1992 and addressed contamination of groundwater in the Hadnot Point Area, one of Camp Lejeune's water systems. Remedies to address groundwater contamination include groundwater "pump and treat" systems, in-situ chemical oxidation, and monitored natural attenuation. DOD contends that it is aggressively treating TCE as part of its current cleanup program. It notes that the department uses much less TCE than in the past and requires strict handling procedures and pollution prevention measures to prevent exposure to TCE and the release of TCE into the environment. Specifically, DOD has replaced products containing TCE with other types of cleaning agents such as citrus-based agents, mineral oils and other non-toxic solutions. In the absence of a federal perchlorate standard, DOD has adopted its own policies with regard to sampling and cleanup. The 2003 Interim Policy on Perchlorate Sampling required the military services--Army, Navy, Air Force, and Marines--to sample on active installations (1) where a reasonable basis existed to suspect that a perchlorate release occurred as a result of DOD activities, and (2) a complete human exposure pathway likely existed or (3) where a particular installation must do so under state laws or applicable federal regulations such as the NPDES permit program. However, DOD's interim policy on perchlorate did not address cleanup responsibilities nor did it address contamination at closed installations. As we detailed in our previous work, DOD only sampled for perchlorate on closed installations when requested by EPA or a state agency, and only cleaned up active and closed installations when required by a specific environmental law, regulation, or program such as the environmental restoration program at formerly used defense sites. For example, at EPA's request, the U.S. Army Corps of Engineers (Corps) installed monitoring wells and sampled for perchlorate at Camp Bonneville, a closed installation near Vancouver, Washington. Utah state officials also reported to us that DOD removed soil containing perchlorate at the former Wendover Air Force Base in Utah, where the Corps found perchlorate in 2004. However, as we previously reported, DOD cited reluctance to sample on or near active installations because of the lack of a federal regulatory standard for perchlorate. In the absence of a federal standard, DOD has also worked with individual states on perchlorate sampling and cleanup. For example, in October 2004, DOD and California agreed to prioritize perchlorate sampling at DOD facilities in California, including identifying and prioritizing the investigation of areas on active installations and military sites (1) where the presence of perchlorate is likely based on previous and current defense-related activities and (2) near drinking water sources where perchlorate was found. In January 2006, DOD updated its policy with the issuance of its Policy on DOD Required Actions Related to Perchlorate. The new policy applies broadly to DOD's active and closed installations and formerly used defense sites within the United States, its territories and possessions. It directs DOD to test for perchlorate and take certain cleanup actions. The policy also acknowledges the importance of EPA direction in driving DOD's response to emerging contaminants. It stated, for example, that its adoption of 24 ppb as the current level of concern for managing perchlorate was in response to EPA's adoption of an oral reference dose that translates to a Drinking Water Equivalent Level of 24.5 ppb. The policy also states that when EPA or the states adopt standards for perchlorate, "DOD will comply with applicable state or federal promulgated standards whichever is more stringent." The 2006 policy directs DOD to test for perchlorate when it is reasonably expected that a release has occurred. If perchlorate levels exceed 24 ppb, a site-specific risk assessment must be conducted. When an assessment indicates that the perchlorate contamination could result in adverse health effects, the site must be prioritized for risk management. DOD uses a relative-risk site evaluation framework across DOD to evaluate the risks posed by one site relative to other sites and to help prioritize environmental restoration work and to allocate resources among sites. The policy also directs DOD's service components to program resources to address perchlorate contamination under four DOD programs-- environmental restoration, operational ranges, DOD-owned drinking water systems, and DOD wastewater effluent discharges. Under the 2006 perchlorate policy, DOD has sampled drinking water, groundwater, and soil where the release of perchlorate may result in human exposure and responded where it has deemed appropriate to protect public health. As we have reported, DOD is responsible for a large number of identified sites with perchlorate contamination, and the department has allotted significant resources to address the problem. According to DOD, sampling for perchlorate has occurred at 258 active DOD installations or facilities. Through fiscal year 2006, DOD reported spending approximately $88 million on perchlorate-related research activities, including $60 million for perchlorate treatment technologies, $9.5 million on health and toxicity studies, and $11.6 million on pollution prevention. Additional funds have been spent on testing technology and cleanup. DOD also claims credit for other efforts, including strict handling procedures to prevent the release of perchlorate into the environment and providing information about perchlorate at DOD facilities and DOD's responses. For example, DOD posts the results of its perchlorate sampling, by state, on MERIT's Web site. As we have previously reported, DOD must comply with cleanup standards and processes under applicable laws, regulations and executive orders, including EPA drinking water standards and state-level standards. In the absence of a federal perchlorate standard, DOD has also initiated perchlorate response actions to clean up perchlorate contamination at several active and formerly used defense sites under its current perchlorate policy. For example, at Edwards Air Force Base in California, DOD has treated 32 million gallons of ground water under a pilot project for contaminants that include perchlorate. In addition, DOD has removed soil and treated groundwater at the Massachusetts Military Reservation and Camp Bonneville in Washington State. In conclusion, Mr. Chairman, DOD faces significant challenges, and potentially large costs, in addressing emerging contaminants, particularly in light of the scientific developments and regulatory uncertainties surrounding these chemicals and materials. To help address them, DOD recently identified five emerging contaminants for which it is developing risk management options. As in the case of TCE, DOD took action to address contamination after EPA established an MCL in 1989. DOD has stated that further efforts to address perchlorate would require a regulatory standard from EPA and/or the states. The fact that some states have moved to create such standards complicates the issue for DOD by presenting it with varying cleanup standards across the country. As the debate over a federal perchlorate standard continues, the recently- issued health studies from CDC and FDA may provide additional weight to the view that the time for such a standard may be approaching. Until one is adopted, DOD will continue to face the challenges of differing regulatory requirements in different states and continuing questions about whether its efforts to control perchlorate contamination are necessary or sufficient to protect human health. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Subcommittee may have at this time. For further information about this testimony, please contact John Stephenson at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Contributors to this testimony include Steven Elstein, Assistant Director and Terrance Horner, Senior Analyst. Marc Castellano, Richard Johnson, and Alison O'Neill also made key contributions. Defense Health Care: Issues Related To Past Drinking Water Contamination at Marine Corps Base Camp Lejeune, GAO-07-933T (June 12, 2007). Defense Health Care: Activities Related To Past Drinking Water Contamination at Marine Corps Base Camp Lejeune, GAO-07-276 (May 11, 2007). Perchlorate: EPA Does Not Systematically Track Incidents of Contamination, GAO-07-797T (April 25, 2007). Environmental Information: EPA Actions Could Reduce the Availability Of Environmental Information To The Public, GAO-07-464T (February 6, 2007). Military Base Closures: Opportunities Exist to Improve Environmental Cleanup Cost Reporting and to Expedite Transfer of Unneeded Property, GAO-07-166 (January 30, 2007). Perchlorate: A System to Track Sampling and Cleanup Results Is Needed, GAO-05-462 (May 20, 2005). Military Base Closures: Updated Status of Prior Base Realignments and Closures, GAO-05-138 (January 13, 2005). Environmental Contamination: DOD Has Taken Steps To Improve Cleanup Coordination At Former Defense Sites But Clearer Guidance Is Needed To Ensure Consistency, GAO-03-146 (March 28, 2003). This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

DOD defines emerging contaminants as chemicals or materials with (1) perceived or real threat to health or the environment and (2) lack of published standards or a standard that is evolving or being reevaluated. Two emerging contaminants--trichloroethylene (TCE) and perchlorate--are of particular concern to DOD because they have significant potential to impact people or DOD's mission. TCE, a degreasing agent in metal cleaning which has been used widely in DOD industrial and maintenance processes, has been documented at low exposure levels to cause headaches and difficulty concentrating. High-level exposure may cause dizziness, headaches, nausea, unconsciousness, cancer, and possibly death. Similarly, perchlorate has been used by DOD, NASA, and others in making, testing, and firing missiles and rockets. It has been widely found in groundwater, surface water, and soil across the United States, Perchlorate health studies have documented particular risks to fetuses of pregnant women. GAO was asked for testimony to summarize its past work on perchlorate-, TCE-, and defense-activities related to (1) the state of knowledge about the emerging contaminants TCE and perchlorate, (2) DOD responsibilities for managing TCE and perchlorate contamination at its facilities, and (3) DOD activities to address TCE and perchlorate contamination. While TCE and perchlorate are both classified by DOD as emerging contaminants, there are important distinctions in how they are regulated and in what is known about their health and environmental effects. Since 1989, EPA has regulated TCE in drinking water. However, health concerns over TCE have been further amplified in recent years after scientific studies have suggested additional risks posed by human exposure to TCE. Unlike TCE, no drinking water standard exists for perchlorate--a fact that has caused much discussion in Congress and elsewhere. Recent Food and Drug Administration data documenting the extent of perchlorate contamination in the nation's food supply has further fueled this debate. While DOD has clear responsibilities to address TCE because it is subject to EPA's regulatory standard, DOD's responsibilities are less definite for perchlorate due to the lack of such a standard. Nonetheless, perchlorate's designation by DOD as an emerging contaminant has led to some significant control actions. These actions have included responding to requests by EPA and state environmental authorities, which have used a patchwork of statutes, regulations, and general oversight authorities to address perchlorate contamination. Pursuant to its Clean Water Act authorities, for example, Texas required the Navy to reduce perchlorate levels in wastewater discharges at the McGregor Naval Weapons Industrial Reserve Plant to 4 parts per billion (ppb), the lowest level at which perchlorate could be detected at the time. In addition, in the absence of a federal perchlorate standard, at least nine states have established nonregulatory action levels or advisories for perchlorate ranging from 1 ppb to 51 ppb. Nevada, for example, required the Kerr-McGee Chemical site in Henderson to treat groundwater and reduce perchlorate releases to 18 ppb, which is Nevada's action level for perchlorate. While nonenforceable guidance had existed previously, it was not until EPA adopted its 1989 TCE standard that many DOD facilities began to take concrete action to control the contaminant. According to EPA, for example, 46 sites at Camp Lejeune have since been identified for TCE cleanup. The Navy and EPA have selected remedies for 30 of those sites, and the remaining 16 are under active investigation. Regarding perchlorate, in the absence of a federal standard DOD has implemented its own policies on sampling and cleanup, most recently with its 2006 Policy on DOD Required Actions Related to Perchlorate. The policy applies broadly to DOD's active and closed installations and formerly used defense sites within the United States and its territories. It requires testing for perchlorate and certain cleanup actions and directs the department to comply with applicable federal or state promulgated standards, whichever is more stringent. The policy notes, that DOD has established 24 ppb as the current level of concern for managing perchlorate until the promulgation of a formal standard by the states and/or EPA.

As you know, the cost of the Decennial Census has steadily increased during the past 40 years, in part because the nation's population has steadily grown larger, more diverse, and increasingly difficult to enumerate. For example, at about $13 billion, the 2010 Census was the costliest U.S. census in history and was 56 percent more costly than the $8.1 billion 2000 Census (in constant 2010 dollars). To help save costs, in preparing for the 2020 Census, the Bureau has been researching and testing new methods and technologies to redesign the Census to more cost-effectively count the population while maintaining high-quality results. The Bureau's research and testing has focused on four redesign areas: Reengineering address canvassing: This involves reengineering processes for updating the Bureau's address list and maps of the nation to reduce the need for employing field staff to walk every street in the nation to verify addresses. Optimizing self-response: Includes efforts to maximize the self- response of households by, among other things, offering an Internet response option. As we have previously reported, to deliver the Internet response option, the Bureau would need to, among other things, design and develop an Internet response application, develop and acquire the IT infrastructure to support a large volume of data processing and storage, and plan communication and outreach strategies to motivate households to respond via the Internet. Using administrative records: This includes expanding the use of data previously obtained by other federal and state government agencies and commercial sources to reduce the need for costly and labor-intensive follow-up work. My colleague will address the Bureau's progress on using administrative records in his statement today. Reengineering field operations: This includes reducing the number of visits to households, automating the management of enumerator work to conduct non-response follow-up, and automating and optimizing case assignment and routing for enumerators to reduce the staffing, infrastructure, and field offices required for the 2020 Census. The Bureau has conducted several major field tests to examine the potential for each of these redesign areas: In mid-2014 the Bureau conducted the 2014 Census Test in the Maryland and Washington, D.C., areas to test new methods for conducting self-response and non-response follow-up. In early 2015 the Bureau completed the Address Validation Test, which was used to examine new methods for updating the Bureau's address list. In mid-2015 the Bureau conducted the 2015 Census Test in Arizona to test, among other things, the use of a field operations management system to automate data collection operations and provide real-time data and the ability to reduce the non-response follow-up workload using data previously provided to the government, as well as enabling enumerators to use their personally owned mobile devices to collect census data. Also in mid-2015, the Bureau conducted an optimizing self-response test in Savannah, Georgia, and the surrounding area, which was intended to further explore methods of encouraging households to respond using the Internet, such as using advertising and outreach to motivate respondents, and enabling households to respond without a Bureau-issued identification number. More recently, the Bureau began its National Content Test, which is currently ongoing and intended to, among other things, continue to test self-response modes and contact strategies and refine estimates of national self-response and Internet response rates. These tests were intended to inform the first version of the Bureau's 2020 Census Operational Plan, which is intended to outline design decisions that drive how the 2020 Census will be conducted. As part of these decisions, the Bureau has committed to aspects of the 2020 Census redesign. The operational plan articulated 326 total design decision points, which vary widely in their complexity, importance, and urgency. As of October 6, 2015, the Bureau had made decisions for about 47 percent of them related to each of the four redesign areas. For example, the Bureau has decided to conduct 100 percent of address canvassing (i.e., identifying all addresses where people could live) in the office, and target a subset of up to 25 percent for in-the-field address canvassing; offer an Internet self-response option, as well as alternative response options via telephone and paper for limited circumstances; allow people to respond without a unique census identification use mobile devices for enumerators to conduct field data collection; use administrative records to enumerate vacant units; use enterprise solutions to support the 2020 Census, when practicable; and reduce the field footprint by half in comparison to the 2010 Census (e.g., 6 regional census centers instead of 12 and up to 250 field offices instead of nearly 500). Figure 1 provides an overview of the Bureau's current plans and assumptions for the 2020 Census, resulting from the October 2015 operational plan. As a result of these decisions, the Bureau estimates saving $5.2 billion. Specifically, the Bureau estimated that repeating the design of the 2010 Census for 2020 would cost approximately $17.8 billion (in constant 2020 dollars), while successfully implementing the four redesign areas is expected to result in an overall 2020 Census cost of $12.5 billion (in constant 2020 dollars). Table 1 illustrates the estimated cost savings associated with each redesign area. Moving forward, the Bureau plans to conduct additional research and testing and further refine the design through 2018. By August 2017, the Bureau plans to begin preparations for end-to-end testing, which is intended to test all systems and operations to ensure readiness for the 2020 Census. Figure 2 shows the timeline for planned 2020 Census research and testing. Concurrent with redesigning the decennial census, the Bureau has also begun a significant effort to modernize and consolidate its survey data collection and processing functions. This is being undertaken through an enterprise-wide IT initiative called Census Enterprise Data Collection and Processing (CEDCAP). This initiative is a large and complex modernization program intended to deliver a system-of-systems for all the Bureau's survey data collection and processing functions--rather than continuing to rely on unique, survey-specific systems with redundant capabilities. For the 2020 Census, CEDCAP is expected to deliver the systems and IT infrastructure needed to implement the Bureau's redesign areas. For example: To reengineer field work, CEDCAP is expected to implement a new dynamic operational control system to track and manage field work. This system is to be able to make decisions about which visits enumerators should attempt on a daily basis using real-time data, as well as provide automated route planning to make enumerator travel more efficient. CEDCAP also includes testing the use of mobile devices, either government-furnished or employee-owned, to automate data collection in the field. To maximize self-response with the Internet response option, CEDCAP is responsible for developing and testing a web-based survey application and exploring options for establishing the IT infrastructure to support the increased volume of data processing and storage that will be needed. CEDCAP consists of 12 projects that are to deliver capabilities incrementally, over the course of at least 10 releases. The Bureau plans to roll out capabilities for the 2020 Census incrementally through 6 of these releases, while also deploying capabilities for other surveys such as the American Community Survey and Economic Census. The Bureau expects to reuse selected systems, make modifications to other systems, and develop or acquire additional systems and infrastructure. As of August 2015, the CEDCAP program was projected to cost about $548 million through 2020. However, the Bureau's past efforts to implement new approaches and systems have not always gone well. As one example, during the 2010 Census, the Bureau planned to use handheld mobile devices to support field data collection for the census, including following up with nonrespondents. However, due to significant problems identified during testing of the devices, cost overruns, and schedule slippages, the Bureau decided not to use the handheld devices for non-response follow-up and reverted to paper-based processing, which increased the cost of the 2010 Census by up to $3 billion and significantly increased its risk as it had to switch its operations to paper-based operations as a backup. Last month's issuance of the 2020 Census Operational Plan, which documents many key decisions about the redesign of the 2020 Census, represents progress; however, the Bureau faces critical challenges in delivering the IT systems needed to support the redesign areas. Specifically, with preparations for end-to-end testing less than 2 years away, the window to implement CEDCAP, which is intended to be the backbone of the 2020 Census, is narrow. Additionally, while the Bureau has demonstrated improvements in IT management, as we have previously reported, it faces critical gaps in its IT workforce planning and information security. Until it takes actions we have previously recommended to address these challenges, the Bureau is at risk of cost overruns, schedule delays, and performance shortfalls, which will likely diminish the potentially significant cost savings that it estimates will result from redesigning the census for 2020. The Bureau has not prioritized key IT-related decisions, which is a trend we have reported for the past few years. Specifically, in April 2014, we reported the Bureau had not prioritized key IT research and testing needed for the design decisions planned for the end of 2015. In particular, the Bureau had not completed the necessary plans and schedules for research and testing efforts and had not prioritized what needed to be done in time for the 2015 design decisions--a milestone that had already been pushed back by a year (see fig. 3). We concluded that, given the current trajectory and the lack of supporting schedules and plans, it was unlikely that all planned IT-related research and testing activities would be completed in time to support the 2015 design decisions--which ultimately came to fruition (as discussed later). In light of these ongoing challenges, we recommended in our April 2014 report that the Bureau prioritize its IT-related research and testing projects that need to be completed to support the design decisions and develop schedules and plans to reflect the new prioritized approach. The Bureau agreed with our recommendations and has taken steps to address them. For example, in September 2014, the Bureau released a plan that identified inputs, such as research questions, design components, and testing, that were needed to inform the operational design decisions expected in the fall of 2015. However, as we reported in February 2015, the Bureau had not yet determined how key IT research questions that had been identified as critical inputs into the design decisions--estimating the Internet self- response rate and determining the IT infrastructure for security and scalability needed to support Internet response--were to be answered. We therefore recommended that the Bureau, among other things, develop methodologies and plans for answering key IT-related research questions in time to inform key design decisions. While the recent 2020 Census Operational Plan documents many key IT- related decisions about the redesign of the census, other critical questions, including the ones identified in our February 2015 report, remain unanswered. Of greater concern, the Bureau does not intend to answer these and other questions until 2016 through 2018. Specifically, there are several significant IT decisions that are being deferred, which have implications on the CEDCAP program's ability to have production- ready systems in place in time to conduct end-to-end testing. For example, the Bureau does not plan to decide on the projected demand that the IT infrastructure and systems would need to accommodate or whether the Bureau will build or buy the needed systems until June 2016, at the earliest; the high-level design and description of the systems (referred to as the solutions architecture) until September 2016--leaving about a year to, among other things, build or acquire, integrate, and test the systems that are intended to serve as the backbone to the 2020 Census before preparations for end-to-end testing begins in August 2017; and the strategy for the use of mobile devices for field work until October 2017. Figure 4 illustrates several key IT-related decisions that have been deferred which will impact preparations for the end-to-end test and 2020 Census. Unless the Bureau makes these key decisions soon, it will likely run out of time to put CEDCAP systems in place. Institutionalizing key IT management controls, such as IT governance, system development methodology, and requirements management processes, helps establish a consistent and repeatable process for managing and overseeing IT investments and reduces the risk of experiencing cost overruns, schedule slippages, and performance shortfalls, like those that affected the previous census. However, in September 2012, we reported that the Bureau lacked a sufficiently mature IT governance process to ensure that investments are properly controlled and monitored, did not have a comprehensive system development methodology, and continued to have long-standing challenges in requirements management. We made several recommendations to address these issues, and the Bureau took actions to fully implement each of the recommendations. For example, the Bureau addressed gaps in policies and procedures related to IT governance, such as establishing guidelines on the frequency of investment review board meetings and thresholds for escalation of cost, risk, or impact issues; finalized its adoption of an enterprise system development life-cycle methodology, which included the short incremental development model, referred to as Agile, and a process for continuously improving the methodology based on lessons learned; and implemented a consistent requirements development tool that includes guidance for developing requirements at the strategic mission, business, and project levels and is integrated with its enterprise system development life-cycle methodology. As a result, the Bureau has established a consistent process for managing and overseeing its IT investments. Effective workforce planning is essential to ensure organizations have the proper skills, abilities, and capacity for effective management. While the Bureau has made progress in IT workforce planning efforts, many critical IT competency gaps remain to be filled. In September 2012 we reported, among other things, that the Bureau had not developed a Bureau-wide IT workforce plan; identified gaps in mission-critical IT occupations, skills, and competencies; or developed strategies to address gaps. Accordingly, we recommended that the Bureau establish a repeatable process for performing IT skills assessments and gap analyses and establish a process for directorates to coordinate on IT workforce planning. In response, in 2013 the Bureau completed an enterprise-wide competency assessment and identified several mission-critical gaps in technical competencies. In 2014, the Bureau established documents to institutionalize a strategic workforce planning process, identified actions and targets to close the competency gaps by December 2015, and established a process to monitor quarterly status reports on the implementation of these actions. However, as we reported in February 2015, while these are positive steps in establishing strategic workforce planning capabilities, the Bureau's workforce competency assessment identified several mission-critical gaps that would challenge its ability to deliver IT-related initiatives, such as the IT systems that are expected to be delivered by CEDCAP. For example, the Bureau found that competency gaps existed in cloud computing, security integration and engineering, enterprise/mission engineering life- cycle, requirements development, and Internet data collection. The Bureau also found that enterprise-level competency gaps existed in program and project management, budget and cost estimation, systems development, data analytics, and shared services. The Bureau has taken steps to regularly monitor and report on the status of its efforts to close competency gaps and has completed several notable actions. For example, in August 2015, the Bureau filled the position of Decennial IT Division Chief and in September 2015 awarded an enterprise-wide IT services contract for systems engineering and integration support. However, more work remains for the Bureau to close competency gaps critical to the implementation of its IT efforts. Most significantly, in July 2015, the Chief Information Officer resigned. As of October 2015, the Bureau was working to fill that gap and had an acting Chief Information Officer temporarily in the position. Additionally, there are other gaps in key positions, such as the Chief of the Office of Information Security and Deputy Chief Information Security Officer, Big Data Center Chief, Chief Cloud Architect, and the CEDCAP Assistant Chief of Business Integration, who is responsible for overseeing the integration of schedule, risks, and budget across the 12 projects. According to Bureau officials, they are working to address these gaps. Critical to the Bureau's ability to perform its data collection and analysis duties are its information systems and the protection of the information they contain. A data breach could result in the public's loss of confidence in the Bureau, thus affecting its ability to collect census data. To ensure the reliability of their computerized information, agencies should design and implement controls to prevent, limit, and detect unauthorized access to computing resources, programs, information, and facilities. Inadequate design or implementation of access controls increases the risk of unauthorized disclosure, modification, and destruction of sensitive information and disruption of service. In January 2013, we reported on the Bureau's implementation of information security controls to protect the confidentiality, integrity, and availability of the information and systems that support its mission. We concluded that the Bureau had a number of weaknesses in controls intended to limit access to its systems and information, as well as those related to managing system configurations and unplanned events. We attributed these weaknesses to the fact that the Bureau had not fully implemented a comprehensive information security program, and made 115 recommendations aimed at addressing these deficiencies. The Bureau expressed broad agreement with the report and said it would work to find the best ways to address our recommendations. As of October 29, 2015, the Bureau had addressed 66 of the 115 recommendations we made in January 2013. Of the remaining open recommendations, we have determined that 30 require additional actions by the Bureau, and for the other 19 we have work under way to evaluate if they have been fully addressed. The Bureau's progress toward addressing our security recommendations is encouraging. However, more work remains to address the recommendations. A cyber incident recently occurred at the Bureau, and while it appears to have had limited impact, it demonstrates vulnerabilities at the Bureau. Specifically, in July 2015, the Bureau reported that it had been targeted by a cyber attack aimed at gaining access to its Federal Audit Clearinghouse, which contains non-confidential information from state and local governments, nonprofit organizations, and Indian tribes to facilitate oversight of federal grant awards. According to Bureau officials, the breach was limited to this database on a segmented portion of the Bureau's network that does not touch administrative records or sensitive respondent data protected under Title 13 of the U.S. Code, and the hackers did not obtain the personally identifiable information of census and survey respondents. Given that the Bureau is planning to build or acquire IT systems to collect the public's personal information for the 2020 Census in ways that it has not for previous censuses (e.g., web-based surveys, cloud computing, and enabling mobile devices to collect census data), continuing to implement our recommendations and apply IT security best practices as it implements CEDCAP systems must be a high priority. As a result of the Bureau's challenges in key IT internal controls and its looming deadline, we identified CEDCAP as an IT investment in need of attention in our February 2015 High-Risk report. We recently initiated a review of the CEDCAP program for your subcommittees, and expect to issue a report in the spring of 2016. In conclusion, the Bureau is pursuing initiatives to significantly reform its outdated and inefficient methods of conducting decennial censuses. However, with less than 2 years remaining until the Bureau plans to have all systems and processes for the 2020 Census developed and ready for end-to-end testing, it faces challenges that pose significant risk to 2020 Census program. These include the magnitude of the planned changes to the design of the census, the Bureau's prior track record in executing large-scale IT projects, and the current lack of a permanent Chief Information Officer, among others. Moreover, the Bureau's preliminary decision deadline has come and gone, and many IT-related decisions have been deferred to 2016 through 2018. Consequently, it is running out of time to develop, acquire, and implement the production systems it will need to deliver the redesign and achieve its projected $5.2 billion in cost savings. The Bureau needs to take action to address the specific challenges we have highlighted in prior reports. If these actions are not taken, cost overruns, schedules delays, and performance shortfalls may diminish the potentially significant cost savings that the Bureau estimates will result from redesigning the census for 2020. Chairmen Meadows and Hurd, Ranking Members Connolly and Kelly, and Members of the Subcommittees, this completes my prepared statement. I would be pleased to respond to any questions that you may have. If you have any questions concerning this statement, please contact Carol Cha, Director, Information Technology Acquisition Management Issues, at (202) 512-4456 or [email protected]. Other individuals who made key contributions include Shannin O'Neill, Assistant Director; Andrew Beggs; Lee McCracken; and Jeanne Sung. 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 cost of the nation's decennial census has steadily increased over the past 40 years; the 2010 Census was the most expensive to date, at about $13 billion. To achieve cost savings while still conducting an accurate count of the population, the U.S. Census Bureau is planning significant changes for the design of the 2020 Decennial Census, including major efforts to implement new technologies and IT systems supporting its surveys. For example, the Bureau is planning to offer an option for households to respond via the Internet, which requires developing new applications and IT infrastructure. This statement summarizes the critical challenges the Bureau faces in successfully delivering IT systems in time for testing redesigned 2020 Census operations. To develop this statement, GAO relied on previously published work, as well as information on steps the Bureau has taken to implement prior GAO recommendations. GAO has previously reported that the U.S. Census Bureau (Bureau) faces a number of critical challenges in developing and deploying the information technology (IT) systems and infrastructure it plans to rely on to conduct the significantly redesigned 2020 Census. Specifically, the Bureau has a major IT program under way to modernize and consolidate the multiple, duplicative systems it currently uses to carry out survey data collection and processing functions; however, with less than 2 years before preparations begin for end-to-end testing of all systems and operations to ensure readiness for the 2020 Census, there is limited time to implement it. While the Bureau documented many key decisions about the redesigned 2020 Census in the 2020 Census Operational Plan, released in October 2015, several key IT-related decisions have not been made. Specifically, the Bureau has not yet made decisions about the projected demand that the IT infrastructure would need to meet or whether it will build or buy the needed systems. This lack of prioritization of IT decisions has been a continuing trend, which GAO has previously identified. For example: In April 2014, GAO reported that the Bureau had not prioritized key IT research and testing needed for its design decisions. Accordingly, GAO recommended that the Bureau prioritize its IT-related research and testing projects. The Bureau had taken steps to address this recommendation, such as releasing a plan in September 2014 that identified research questions intended to inform the operational design decisions. In February 2015, however, GAO reported that the Bureau had not determined how key IT research questions that were identified in the September 2014 plan would be answered--such as the expected rate of respondents using its Internet response option or the IT infrastructure that would be needed to support this option. GAO recommended that the Bureau, among other things, develop methodologies and plans for answering key IT-related research questions in time to inform design decisions. However, this has not yet happened. In addition, while the Bureau has made improvements in some key IT management areas, it still faces challenges in the areas of workforce planning and information security. Specifically: It has taken steps to develop an enterprise-wide IT workforce planning process, as GAO recommended in 2012. However, the Bureau has yet to fill key positions. Most concerning, it is currently without a permanent chief information officer. The Bureau has taken steps to implement the majority of the 115 recommendations GAO made in 2013 to address information security weaknesses; however, completing this effort is necessary to ensure that sensitive information it will collect during the census is adequately protected. With the deferral of key IT-related decisions, the Bureau is running out of time to develop, acquire, and implement the systems it will need to deliver the redesign and achieve its projected $5.2 billion in cost savings. In its prior work, GAO made recommendations to the Census Bureau to prioritize IT testing and research and determine how key decisions for the 2020 Census were to be answered. GAO also made recommendations to improve IT management, workforce planning, and information security. The Bureau has taken steps to address selected recommendations, but more actions are still needed to fully address these recommendations.

DOE is responsible for a nationwide complex of facilities created during World War II and the Cold War to research, produce, and test nuclear weapons. Much of the complex is no longer in productive use, but it contains vast quantities of radioactive waste related to the production of nuclear material, such as plutonium-contaminated sludge, and hazardous waste, such as solvents and hazardous chemicals. Since the 1980s, DOE has been planning and carrying out activities around the complex to clean up, contain, safely store, and dispose of these materials. It is a daunting challenge, involving the development of complicated technologies and costing about $220 billion over 70 years or more. DOE has reported completing its cleanup work at 74 of the 114 sites in the complex, but those were small and the least difficult to deal with. The sites remaining to be cleaned up present enormous challenges to DOE. DOE's cleanup program is carried out primarily under two environmental laws. Under section 120 of CERCLA, EPA must, where appropriate, evaluate hazardous waste sites at DOE's facilities to determine whether the waste sites qualify for inclusion on the National Priorities List, EPA's list of the nation's most serious hazardous waste sites. For each facility listed on the National Priorities List, section 120(e) (2) of CERCLA requires DOE to enter into an interagency agreement with EPA for the completion of all necessary remedial actions at the facility. These agreements often include the affected states as parties to the agreements. These agreements may be known as Federal Facility Agreements or Tri- Party Agreements. Under amendments to RCRA contained in section 105 of the Federal Facility Compliance Act of 1992, DOE generally must develop site treatment plans for its mixed-waste sites. These plans are submitted for approval to states authorized by EPA to perform regulatory responsibilities for RCRA within their borders or to EPA if the state does not have the required authority. Upon approval of the treatment plans, the state or EPA must issue an order requiring compliance with the approved plan. The agreements are generally known as Federal Facility Compliance orders. DOE carries out its cleanup program through the Assistant Secretary for Environmental Management and in consultation with a variety of stakeholders. These include the federal EPA and state environmental agencies, county and local governmental agencies, citizen groups, advisory groups, Native American tribes, and other organizations. In most cases, DOE's regulators are parties to the compliance agreements. Other stakeholders advocate their views through various public involvement processes including site-specific advisory boards. Compliance agreements in effect at DOE sites can be grouped into three main types (see table 1). Agreements of the first type--those specifically required by CERCLA or by RCRA--are in effect at all of DOE's major sites. They tend to cover a relatively large number of cleanup activities and have the majority of schedule milestones that DOE must meet. By contrast, agreements that implement court-ordered settlements exist at only a few DOE sites, tend to be focused on a specific issue or concern, and have fewer associated schedule milestones. These agreements are typically between DOE and states. The remaining agreements are based on either federal or state environmental laws and address a variety of purposes, such as cleaning up spills of hazardous waste or remediating groundwater contamination, and have a wide-ranging number of milestones. Most of the milestones DOE must meet are contained in the compliance agreements at its six largest sites--Hanford, Savannah River, Idaho Falls, Rocky Flats, Oak Ridge, and Fernald. These six DOE sites are important because they receive about two-thirds of DOE's cleanup funding. In all, these sites account for 40 of the agreements and more than 4,200 milestones. DOE reported completing about two-thirds of the 7,186 milestones contained in its compliance agreements as of December 2001. Of the 4,558 milestones completed, about 80 percent were finished by the original due date for the milestone. The remainder of the completed milestones were finished either after the original due date had passed or on a renegotiated due date, but DOE reported that the regulators considered the milestones to be met. DOE's six largest sites reported completing a total of 2,901 of their 4,262 milestones and met the original completion date for the milestones an average of 79 percent of the time. As table 2 shows, this percentage varied from a high of 95 percent at Rocky Flats to a low of 47 percent at Savannah River. Besides the 1,334 milestones currently yet to be completed, additional milestones will be added in the future. Although DOE has completed many of the milestones on time, for several reasons DOE's success in completing milestones on time is not a good measure of progress in cleaning up the weapons complex. Specifically: Many of the milestones do not indicate what cleanup work has been accomplished. For example, many milestones require completing an administrative requirement that may not indicate what, if any, actual cleanup work was performed. At DOE's six largest sites, DOE officials reported that about 73 percent of the 2,901 schedule milestones completed were tied to administrative requirements, such as obtaining a permit or submitting a report. Some agreements do not have a fixed number of milestones, and additional milestones are added over time as the scope of work is more fully defined. For example, one of Idaho Falls' compliance agreements establishes milestones for remedial activities after a record of decisionhas been signed for a given work area. Four records of decision associated with the agreement have not yet been approved. Their approval will increase the number of enforceable milestones required under that agreement. Many of the remaining milestones are tied to DOE's most expensive and challenging cleanup work, much of which still lies ahead. Approximately two-thirds of the estimated $220 billion cost of cleaning up DOE sites will be incurred after 2006. DOE has reported that the remaining cleanup activities present enormous technical and management challenges, and considerable uncertainties exist over the final cost and time frame for completing the cleanup. Even though schedule milestones are of questionable value as a measure of cleanup progress, the milestones do help regulators track DOE's activities. Regulators at the four sites we visited said that the compliance agreements they oversee and the milestones associated with those agreements provide a way to bring DOE into compliance with existing environmental laws and regulations. They said the agreements also help to integrate the requirements under various federal laws and allow regulators to track annual progress against DOE's milestone commitments. Regulators have generally been flexible in agreeing with DOE to change milestone dates when the original milestone could not be met. DOE received approval to change milestone deadlines in over 93 percent of the 1,413 requests made to regulators. Only 3 percent of DOE's requests were denied. Regulators at the four sites we visited told us they prefer to be flexible with DOE on accomplishing an agreement's cleanup goals. For example, they generally expressed willingness to work with DOE to extend milestone deadlines when a problem arises due to technology limitations or engineering problems. Because regulators have been so willing to adjust milestones, DOE officials reported missing a total of only 48 milestones, or about 1 percent of milestones that have been completed. Even in those few instances where DOE missed milestone deadlines and regulators were unwilling to negotiate revised dates, regulators have infrequently applied penalties available under the compliance agreements. DOE reported that regulators have taken enforcement actions only 13 times since 1988 when DOE failed to meet milestone deadlines. These enforcement actions resulted in DOE paying about $1.8 million in monetary penalties, as shown in table 3. In addition to or instead of regulators assessing monetary penalties, several DOE sites agreed to other arrangements valued at about $4 million. For example, for missing a milestone to open a transuranic waste storage facility at the Rocky Flats site, the site agreed to provide a $40,000 grant to a local emergency planning committee to support a chemical-safety-in- schools program. At the Oak Ridge site, because of delays in operating a mixed waste incinerator, site officials agreed to move up the completion date for $1.4 million worth of cleanup work already scheduled. Also, at three sites--Paducah, Kentucky; Lawrence Livermore Main Site, California; and Nevada Test Site, Nevada--the regulators either did not impose penalties for missed milestones or the issue was still under discussion with DOE at the time of our review. The President's budget submitted to the Congress does not provide information on the amount of funding requested for DOE's compliance requirements. DOE sites prepare budget estimates that include compliance cost estimates and submit them for consideration by DOE headquarters. However, DOE headquarters officials evaluate individual site estimates and combine them into an overall DOE-wide budget, taking into account broader considerations and other priorities that it must address as part of the give-and-take of the budget process. As a result, the final budget sent to the Congress has summary information on DOE's programs and activities, but it provides no information on the portion of the budget needed to fund compliance requirements. DOE is not required to develop or present this information to the Congress. The President's budget typically states that the DOE funding requested is sufficient to substantially comply with compliance agreements, but it does not develop or disclose the total amount of funding needed for compliance. Officials at DOE headquarters told us that budget guidance from the Office of Management and Budget does not require DOE to develop or present information on the cost of meeting compliance requirements, and they said doing so for the thousands of milestones DOE must meet would be unnecessarily burdensome. They said their approach has been to allocate funds appropriated by the Congress and make it the sites' responsibility to use the funds in a way that meets the compliance agreement milestones established at the site level. Individual DOE sites develop information on the estimated cost of meeting compliance agreements, but the annual estimates are a flexible number. Sites develop these estimates because many of the compliance agreements require DOE to request sufficient funding each year to meet all of the requirements in the agreements. Also, DOE must respond to Executive Order 12088, which directs executive agencies to ensure that they request sufficient funds to comply with pollution control standards. Accordingly, each year DOE's sites develop budget estimates that also identify the amount needed to meet compliance requirements. The sites' process in developing these compliance estimates shows that a compliance estimate is a flexible number. For example, two budget estimates typically completed by the sites each year are the "full requirements" estimate and the "target" estimate. The full requirements estimate identifies how much money a site would need to accomplish its work in what site officials consider to be the most desirable fashion. The target estimate reflects a budget strategy based primarily on the amount of funding the site received the previous year and is considered a more realistic estimate of the funding a site can expect to receive. For each of these budget estimates, DOE sites also include an estimate of their compliance costs. As a result of this process, DOE sites usually have at least two different estimates of their compliance costs for the same budget year. Table 4 shows how the compliance cost estimates related to compliance agreements changed under different budget scenarios at four DOE sites. The multiple estimates of compliance costs developed by individual DOE sites indicate that DOE sites have alternative ways of achieving compliance in any given year. DOE site officials said that how much DOE plans to spend on compliance activities each year varies depending on the total amount of money available. Because many of the compliance milestones are due in the future, sites estimate how much compliance activity is needed each year to meet the future milestones. If sites anticipate that less money will be available, they must decide what compliance activities are critical for that year and defer work on some longer-term milestones to future years. On the other hand, if more money is available, sites have an opportunity to increase spending on compliance activities earlier than absolutely necessary. DOE's compliance agreements focus on environmental issues at specific sites and do not include information on the risks being addressed. As a result, they do not provide a means of setting priorities for risks among sites or a basis for decision-making across all DOE sites. Risk is only one of several factors considered in setting the milestones in compliance agreements. Other factors include the preferences and concerns of local stakeholders, business and technical risk, the cost associated with maintaining old facilities, and the desire to achieve demonstrable progress on cleanup. The schedules for when and in what sequence to perform the cleanup work reflect local DOE and stakeholder views on these and other factors and may not reflect the level of risk. For example, regulators at DOE's Savannah River site told us that they were primarily concerned that DOE maintain a certain level of effort and they expected DOE to schedule cleanup activities to most efficiently clean up the site. DOE developed a decision model to determine how to allocate its cleanup dollars at Savannah River to achieve this efficiency. A group of outside reviewers assessing the system at the request of site management concluded that the model was so strongly weighted to efficiency that it was unlikely that serious risks to human health or the environment could alter the sequencing of work. DOE officials said they revised the model so that serious risks receive greater emphasis. In response to concerns expressed by the Congress and others about the effectiveness of the cleanup program, DOE has made several attempts to develop a national, risk-based approach to cleanup, but has not succeeded. For example, in 1999, DOE pilot-tested the use of site risk profiles at 10 DOE offices. The profiles were intended to provide risk information about the sites, make effective use of existing data at the sites, and incorporate stakeholder input. However, reviewers found that the site profiles failed to adequately address environmental or worker risks because the risks were not consistently or adequately documented. In 2001, DOE eliminated a support group responsible for assisting the sites with this effort, and the risk profiles are generally no longer being developed or used. A 1999 DOE-funded study to evaluate its efforts to establish greater use of risk-based decision-making concluded that none of the attempts had been successful. Common problems identified by the study included poor documentation of risks and inconsistent scoring of risks between sites. The study reported that factors contributing to the failure of these efforts included a lack of consistent vision about how to use risk to establish work priorities, the lack of confidence in the results by DOE personnel, the unacceptability of the approaches to stakeholders at the sites, and DOE's overall failure to integrate any of the approaches into the decision- making process. However, the study concluded that the use of risk as a criterion for cleanup decision-making across DOE's sites not only was essential, it was also feasible and practical, given an appropriate level of commitment and effort by DOE. DOE plans to shift its cleanup program to place greater focus on rapid reduction of environmental risk, signaling yet again the need for a national risk-based approach to cleanup. Without a national, risk-based approach to cleanup in place, DOE's budget strategy had been to provide stable funding for individual sites and to allow the sites to determine what they needed most to accomplish. However, in a February 2002 report, DOE described numerous problems with the environmental management program and recommended a number of corrective actions. The report concluded that, among other things, the cleanup program was not based on a comprehensive, coherent, technically supported risk prioritization; it was not focused on accelerating risk reduction; and it was not addressing the challenges of uncontrolled cost and schedule growth. The report recommended that DOE, in consultation with its regulators, move to a national strategy for cleanup. In addition, the report noted that the compliance agreements have failed to achieve the expected risk reduction and have sometimes not focused on the highest risk. The report recommended that DOE develop specific proposals and present them to the states and EPA with accelerated risk reduction as the goal. DOE's new initiative provides additional funds for cleanup reform and is designed to serve as an incentive to sites and regulators to identify accelerated risk reduction and cleanup approaches. DOE's fiscal year 2003 budget request includes a request for $800 million for this purpose. Moreover, the Administration has agreed to support up to an additional $300 million if needed for cleanup reforms. The set-aside would come from a reduction in individual site funding levels and an increase in the overall funding level for the cleanup program. The money would be made available to sites that reach agreements with federal and state regulators on accelerated cleanup approaches. Sites that do not develop accelerated programs would not be eligible for the additional funds. As a result, sites that do not participate could receive less funding than in past years. To date, at least five major DOE sites with compliance agreements have signed letters of intent with their regulators outlining an agreement in principle to accelerate cleanup--Hanford, Idaho, Los Alamos, Oak Ridge, and Nevada Test Site. However, the letters of intent generally also include a provision that the letters do not modify the obligations DOE agreed to in the underlying compliance agreements. At Hanford, DOE and the regulators signed a letter of intent in March 2002 to accelerate cleanup at the site by 35 years or more. DOE and the regulators agreed to consider the greatest risks first as a principle in setting cleanup priorities. They also agreed to consider, as targets of opportunity for accelerated risk reduction, 42 potential areas identified in a recent study at the site. While accelerating the cleanup may hold promise, Hanford officials acknowledged that many technical, regulatory, and operational decisions need to be made to actually implement the proposals in the new approach. DOE is proceeding with the selection and approval of accelerated programs at the sites, as well as identifying the funding for those accelerated programs. At the same time, DOE is considering how best to develop a risk-based cleanup strategy. DOE's Assistant Secretary for Environmental Management said that in developing the risk-based approach, DOE should use available technical information, existing reports, DOE's own knowledge, and common sense to make risk-based decisions. Because DOE's approach to risk assessment is under development, it is unclear whether DOE will be able to overcome the barriers encountered during past efforts to formalize a risk-assessment process. In the interim, DOE headquarters review teams were evaluating the activities at each site and were qualitatively incorporating risk into those evaluations. Compliance agreements have not been a barrier to previous DOE management improvements, but it is not clear if the agreements will be used to oppose proposed changes stemming from the February 2002 initiative. DOE has implemented or tried to implement a number of management initiatives in recent years to improve its performance and address uncontrolled cost and schedule growth. For example, in 1994, it launched its contract reform initiative; in 1995, it established its privatization initiative; and in 1998, it implemented its accelerated path- to-closure initiative. These initiatives affected how DOE approached the cleanup work, the relationship DOE had with its contractors, and, in some cases, the schedule for completing the work. Based on our review of past evaluations of these initiatives and discussions with DOE officials and regulators at DOE sites, it appears that DOE proceeded with these initiatives without significant resistance or constraints as a result of the compliance agreements. Because DOE's cleanup reform initiative is in its early stages, and site- specific strategies are only beginning to emerge, it is unclear how the site compliance agreements will affect implementation of DOE's latest cleanup reforms. For example, it is not yet known how many sites will participate in DOE's initiative and how many other sites will encounter cleanup delays because of reduced funding. However, early indications suggest caution. Parties to the agreements at the sites we visited were supportive of DOE's overall efforts to improve management of the cleanup program, but expressed some concerns about proposals stemming from the February 2002 review of the program. They said that they welcome DOE's efforts to accelerate cleanup and focus attention on the more serious environmental risks because such initiatives are consistent with the regulators' overall goals of reducing risks to human health and the environment. Most regulators added, however, that DOE generally had not consulted with them in developing its reform initiative and they were concerned about being excluded from the process. Furthermore, they said DOE's initiative lacked specific details and they had numerous questions about the criteria DOE will use to select sites and the process it will follow at those sites to develop an implementation plan to accelerate cleanup and modify cleanup approaches. Most regulators said they would not view as favorable any attempt by DOE to avoid appropriate waste treatment activities or significantly delay treatment by reducing funding available to sites. In such a case, these regulators are likely to oppose DOE's initiative. They told us that they most likely would not be willing to renegotiate milestones in the compliance agreements if doing so would lead to delays in the cleanup program at their sites. In addition, these regulators said that if DOE misses the milestones after reducing the funding at individual sites, they would enforce the penalty provisions in the compliance agreements. The effect of compliance agreements on other aspects of DOE's initiative, especially its proposal to reclassify waste into different risk categories to increase disposal options, is also unclear. Some of the proposed changes in waste treatment would signal major changes in DOE assumptions about acceptable waste treatment and disposal options. For example, one change would eliminate the need to vitrify at least 75 percent of the high- level waste, which could result in disposing of more of the waste at DOE sites. In addition, DOE is considering the possibility of reclassifying much of its high-level waste as low-level mixed waste or transuranic waste based on the risk attributable to its actual composition. However, at all four sites we visited, regulators said that it is unclear how DOE's proposed initiatives will be implemented, what technologies will be considered, and whether the changes will result in reduced cost and accelerated cleanup while adequately protecting human health and the environment. DOE generally did not seek input from site regulators or other stakeholders when developing its latest initiative. DOE's review team leader said that when the review team visited individual sites, the team had not formulated its conclusions or recommendations and so did not seek regulators' views. Furthermore, the team leader said that, during the review, DOE was holding internal discussions about improving ineffective cleanup processes, such as contracting procedures. To include regulators on the review team during these discussions, according to the team leader, could have created the impression that the criticism of DOE processes came from the regulators rather than from DOE and contractor staff. According to the Associate Deputy Assistant Secretary for Planning and Budget, since the review team's proposals were made public in February, DOE has held discussions with regulators at all sites and headquarters about implementing the proposals. In summary, Mr. Chairman, DOE faces two main challenges in going forward with its initiative. The first is following through on its plan to develop and implement a risk-based method to prioritize its various cleanup activities. Given past failed attempts to implement a risk-based approach to cleanup, management leadership and resolve will be needed to overcome the barriers encountered in past attempts. The second challenge for DOE is following through on its plan to involve regulators in site implementation plans. DOE generally did not involve states and regulatory agencies in the development of its management initiative. Regulators have expressed concerns about the lack of specifics in the initiative, how implementation plans will be developed at individual sites, and about proposals that may delay or significantly alter cleanup strategies. Addressing both of these challenges will be important to better ensure that DOE's latest management initiative will achieve the desired results of accelerating risk reduction and reducing cleanup costs. Thank you, Mr. Chairman and Members of the Subcommittee. This concludes my testimony. I will be happy to respond to any questions that you may have. For future contacts regarding this testimony, please contact (Ms.) Gary Jones at (202) 512-3841. Chris Abraham, Doreen Feldman, Rich Johnson, Nancy Kintner-Meyer, Tom Perry, Ilene Pollack, Stan Stenersen, and Bill Swick made key contributions to this report.

Compliance agreements between the Department of Energy (DOE) and its regulators specify cleanup activities and milestones that DOE has agreed to achieve. The 70 compliance agreements at DOE sites vary, but can be divided into three main types. These are: (1) agreements specifically required by the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 to address cleanup of federal sites on EPA's national priorities list or by the Resource Conservation and Recovery Act of 1976 to address the management of mixed radioactive and hazardous waste at DOE facilities; (2) court-ordered agreements resulting from lawsuits initiated primarily by states; and (3) other agreements, including state administrative orders enforcing state hazardous waste management laws. DOE reported completing about 80 percent of its milestones by the time originally scheduled in the agreements. The cost of complying with these agreements is not specifically identified in the DOE budget submitted to Congress. Individual DOE sites develop annual compliance cost estimates as part of their budget requests. However, DOE headquarters officials adjust those individual site estimates to reflect national priorities and to reconcile various competing demands. Compliance agreements are site-specific and are not intended to provide a mechanism for DOE to use in prioritizing risks among the various sites. Compliance agreements have not been a barrier to previous DOE management initiatives, but it is not clear if the compliance agreements will be used to oppose DOE's latest initiative to focus on accelerating risk reduction at sites.

Under TRICARE, beneficiaries may obtain health care through either the direct care system of military treatment facilities or the purchased care system of civilian providers and hospitals, including SCHs. SCHs were exempted from TRICARE's reimbursement rules for hospitals until revised rules were implemented in January 2014. SCHs serve communities that rely on them for inpatient care, and they include hospitals and regional medical centers ranging in size from 9 to 598 beds. The intent of the SCH designation is to maintain access to needed health services for Medicare beneficiaries by providing financial assistance to hospitals that are geographically isolated. A hospital may generally qualify for SCH status by showing that because of factors such as isolated location, weather conditions, travel conditions, or absence of other like hospitals, it is the sole source of inpatient hospital services reasonably available in a geographic area. In 2014, 459 hospitals were designated as SCHs under the Medicare program. A hospital that qualifies as an SCH under the Centers for Medicare & Medicaid Services's (CMS) Medicare regulations is also considered an SCH under TRICARE. Specifically, a hospital paid under the Medicare Acute Care Hospital IPPS is eligible for classification as an SCH if it meets one of the following criteria established by CMS: The hospital is at least 35 miles from other like hospitals; The hospital is rural, between 25 and 35 miles from other like hospitals, and meets one of the following criteria: No more than 25 percent of hospital inpatients or no more than 25 percent of the Medicare inpatients in the hospital's service area are admitted to other like hospitals within a 35-mile radius of the hospital or, if larger, within its service area; The hospital has fewer than 50 beds and would meet the 25 percent criterion except that some beneficiaries or residents were forced to seek specialized care outside of the service area due to the unavailability of necessary specialty services at the hospital; or Because of local topography or periods of prolonged severe weather conditions, the other like hospitals are inaccessible for at least 30 days in each 2 out of 3 years. The hospital is rural and located between 15 and 25 miles from other like hospitals, but because of local topography or periods of prolonged severe weather conditions, the other like hospitals are inaccessible for at least 30 days in each of 2 out of 3 years; or The hospital is rural and because of distance, posted speed limits, and predictable weather conditions, the travel time between the hospital and the nearest like hospital is at least 45 minutes. Under the TRICARE program, beneficiaries can obtain care either from providers at military treatment facilities or from civilian providers. DHA contracts with three regional managed care support contractors to develop networks of civilian providers in their respective regions, including SCHs, to serve TRICARE beneficiaries in geographic areas called Prime Service Areas. Prime Service Areas are geographically defined by a set of 5-digit zip codes, usually within an approximate 40-mile radius of a military treatment facility. These civilian provider networks are required to meet specific access standards for certain types of TRICARE beneficiaries, such as travel times or wait times for appointments. However, these access standards do not apply to inpatient care. Since 1987, DHA has reimbursed hospitals for claims using the agency's DRG-based payment system, which was modeled after Medicare's system. Under this system, claims are priced using an annual standard amount and a weighted value for each DRG. For example, in fiscal year 2014, the TRICARE annual standard amount was approximately $5,500.00. Payment weights are assigned to each DRG based on the average resources used to treat patients. For example, in fiscal year 2014, a lung transplant had a weight of 8.6099, which would be multiplied by the annual standard payment amount ($5,500.00) for a reimbursement of $47,354.45. TRICARE's DRG-based payment system differs from Medicare's DRG-based payment system in that each program has different annual standard amounts and different DRG weights due to differences in the characteristics of their beneficiary populations. For example, Medicare's population, which is generally older and less healthy than TRICARE's population, may require more resources and may require longer inpatient lengths of stay. Also, some services, notably obstetric and pediatric services, are nearly absent from Medicare, but are a much larger component of TRICARE's services. SCHs were exempted from DHA's DRG-based payment system because they had special payment provisions under Medicare that allowed for payments based on historical costs as well as certain types of adjustments, such as additional payments for significant volume decreases defined as a more than 5 percent decrease in total inpatient discharges as compared to the immediately preceding cost reporting period. Instead, DHA generally reimbursed SCHs based on their billed charges for inpatient care provided to TRICARE beneficiaries. However, distinctions were made among providers based on network status. Specifically, nonnetwork SCHs were reimbursed for their billed charges, and network hospitals were reimbursed based on their billed charges less any discounts that they negotiated with the managed care support contractors. Under its revised reimbursement rules for SCHs, DHA's methodology for TRICARE approximates the rules for Medicare for these hospitals. Specifically, both programs reimburse SCHs using the greater of either a cost-based amount or the allowed amount under a DRG-based payment system. However, each program takes a different approach in implementing these methods. Medicare reimburses each SCH based on which of the following methods yields the greatest aggregate payment for that hospital: (1) the updated hospital-specific rate based on cost per discharge from fiscal year 1982, (2) the updated hospital-specific rate based on cost per discharge from fiscal year 1987, (3) the updated hospital-specific rate based on cost per discharge from fiscal year 1996, (4) the updated hospital-specific rate based on cost per discharge from fiscal year 2006, or (5) the IPPS hospital-specific DRG rate payment. Medicare's reimbursement rules also include payment adjustments that SCHs may receive under special programs or circumstances, such as adjustments to SCHs that experience significant volume decreases. Beginning January 1, 2014, TRICARE began reimbursing SCHs based upon the greater of (1) the SCH's Medicare cost-to-charge ratio, or (2) TRICARE's DRG-based payment system. The Medicare cost-to-charge ratio that TRICARE uses is calculated for each hospital by CMS and is distinct from the historical hospital-specific rates based on the cost per discharge that Medicare uses to reimburse SCHs. Under TRICARE's revised rules for SCHs, the cost-to-charge ratio will be multiplied by each hospital's billed charges to determine its reimbursement amount. Also, at the end of each year, DHA calculates the aggregate amount that each SCH would have been reimbursed under TRICARE's DRG-based payment system, which it uses to reimburse other hospitals that provide inpatient care to TRICARE beneficiaries. If an SCH's aggregate reimbursement would have been more under this system than it would have using the Medicare cost-to-charge ratio, DHA pays the SCH the difference. TRICARE's revised reimbursement rules also include payment adjustments that SCHs may receive under special circumstances, although the specific TRICARE adjustments differ from those available under Medicare. For example, effective with the revised reimbursement rules, SCHs may qualify for a General Temporary Military Contingency Payment Adjustment if they meet certain criteria, including serving a disproportionate share of active duty servicemembers and their dependents--10 percent or more of the SCH's total admissions. At the time of our review, DHA officials did not have an estimate of the number of SCHs that would qualify for this adjustment. Under TRICARE's revised rules, some SCHs--which were previously reimbursed at up to 100 percent of their billed charges--will eventually be reimbursed at 30 to 50 percent of their billed charges. In order to minimize sudden significant reimbursement reductions on SCHs, DHA's revised rules include a transition period to the new reimbursement levels for most SCHs. Eligible SCHs are reimbursed using an individually derived base-year ratio that is reduced annually until it matches the SCH's Medicare cost-to-charge ratio that CMS has calculated for each hospital. For each hospital designated as an SCH during fiscal year 2012, DHA calculated a base-year ratio of their allowed-to-billed charges using fiscal year 2012 TRICARE claims data. Based on these calculations, each SCH fell into one of two categories: (1) SCHs with base-year ratios higher than their Medicare cost-to-charge ratios, or (2) SCHs with base- year ratios lower than, or equal to, their Medicare cost-to-charge ratios. Most SCHs fell into the first category with base-year ratios higher than their Medicare cost-to-charge ratios (339 or 74 percent), which qualified them for a transition period. For these SCHs, their base-year ratios are reduced annually based on their network participation status, and their modified ratios are multiplied by their billed charges beginning January 1, 2014. Specifically, a nonnetwork SCH has no more than a 15 percentage point reduction each year, while a network SCH has no more than a 10 percentage point reduction as its reimbursement level declines to its respective Medicare cost-to-charge ratio. The length of the transition period differs for each SCH and is determined by the difference between its base-year ratio and its Medicare cost-to-charge ratio, and its network status. Figure 1 shows an example of the transition for a network SCH with a 95 percent base-year ratio that is transitioning to a Medicare cost- to-charge ratio of 40 percent. As a network provider, the SCH's base-year ratio would be reduced by 10 percentage points to 85 percent during the first year of implementation of the revised rules and would continue to be reduced until its reimbursement ratio matches the SCH's Medicare ratio 5 years later. Twenty-four percent (111 of 459) of the hospitals that were designated as SCHs during fiscal year 2012 with base-year ratios less than or equal to their Medicare cost-to-charge ratios did not qualify for a transition period because either their reimbursement increased to their Medicare cost-to- charge ratio, or they continued to be reimbursed at their Medicare cost-to- charge ratio. Similarly, about 2 percent (9 of 459) of the hospitals that were not designated as SCH in fiscal year 2012 also did not qualify for a transition period. Instead, these SCHs are now reimbursed using their Medicare cost-to-charge ratio in accordance with TRICARE's revised reimbursement rules. Once an SCH reaches its Medicare cost-to-charge ratio, TRICARE reimburses labor, delivery, and nursery care services at 130 percent of this ratio. This rule is based on DHA's assessment that Medicare's ratio does not accurately reflect the costs for these services. According to TRICARE's fiscal year 2013 claims data, 120 SCHs (approximately 30 percent of all SCHs) were already reimbursed using rates that were at or below their Medicare cost-to-charge ratios. Because most SCHs have just completed the first year of a multi-year transition, it is too early to determine the full effect of the revised reimbursement rules on SCHs, including any effect on TRICARE beneficiaries' ability to obtain care at these hospitals. Nonetheless, early indications show that TRICARE beneficiaries have not experienced problems accessing inpatient care at these facilities. For fiscal year 2013, we found that overall TRICARE reimbursements for SCHs averaged less than 1 percent of their net patient revenue, with TRICARE beneficiaries making up just over 1 percent of their total discharges. We also found that the majority of SCHs--58 percent (265 of 459)--had fewer than 20 TRICARE admissions during this time while 10 percent (44 of 459) had 100 or more TRICARE admissions. As a result, the impact of TRICARE's revised reimbursement rules may likely be small for most SCHs. Figure 2 illustrates a breakdown of the 459 SCHs by their fiscal year 2013 TRICARE admissions. DHA officials reported that they do not think access to inpatient care at SCHs will be an issue because hospitals that participate in the Medicare program are required to participate in the TRICARE program and serve its beneficiaries. Officials from the 10 SCHs we identified as having the highest number of TRICARE admissions, the highest reimbursement amounts, or both, told us that they provide care to all patients, including TRICARE beneficiaries--although some of them were not familiar with this requirement. TRICARE reimbursement for these SCHs ranged from about 2 to 12 percent of their net patient revenue, and TRICARE beneficiaries accounted for about 1 to 27 percent of their total discharges. See table 1 for TRICARE percentages of net patient revenue and total discharges for each of these SCHs. However, TRICARE beneficiaries' access to care at SCHs could be affected if these hospitals reduced or eliminated their inpatient services. The SCH officials we spoke with told us that they had not reduced the inpatient services available at their hospitals as a result of TRICARE's revised reimbursement rules. However, officials at two SCHs did express concerns about future difficulties maintaining their current level of operations as they face further reductions in reimbursements not only from TRICARE, but also from other sources, such as Medicare and Medicaid. These officials said that they are concerned about their facilities' long-term survival. Given the current environment of decreasing reimbursements, some SCHs we interviewed reported taking proactive steps, such as eliminating equipment maintenance contracts, to help offset the reimbursement reductions. Officials from one facility we interviewed told us that they are considering an option to partner with another SCH as a way to increase efficiency. TRICARE beneficiaries' demand for inpatient care at SCHs also may be affected by the availability of inpatient care from their respective military installation. We found that 24 of the 44 SCHs we identified as having 100 or more TRICARE admissions in fiscal year 2013--about half--were within 40 miles of a military installation that only had an outpatient clinic. (See appendix II for a list of the 44 SCHs and their proximity to military hospitals and clinics). As a result, servicemembers and their dependents in those locations may be more reliant on a nearby SCH for their inpatient care. We found that TRICARE inpatient admissions for these 24 facilities ranged from 101 to 2,178 in fiscal year 2013, and 6 of them were among the 10 SCHs that we interviewed because they had the highest number of TRICARE admissions, the highest reimbursement amounts, or both. Officials from these 6 SCHs told us that nearby TRICARE beneficiaries tend to rely on their facilities for certain types of inpatient services, such as labor and delivery. See figure 3 for additional information about SCHs with 100 or more TRICARE admissions and their proximity to military hospitals and clinics. We also found that 12 of the 44 SCHs with 100 or more admissions were located fewer than 40 miles from a military hospital. TRICARE admissions for these facilities ranged from 117 to 2,364 in fiscal year 2013. Three of these SCHs--which are located near Naval hospitals in North Carolina and South Carolina--were among the 10 SCHs with the highest number of TRICARE admissions or the highest numbers of both admissions and reimbursement that we interviewed. An official with Naval Hospital Camp Lejeune (North Carolina) told us the hospital relies on local SCHs because it is either unable to meet their beneficiaries' demand for certain services, such as obstetric care, or because the SCHs offer services not available at the Naval hospital, such as some cardiac care. Naval Hospital Beaufort (South Carolina) provides limited inpatient services, and according to an official there, most of that hospital's beneficiaries obtain inpatient care at the local SCH, including intensive care, all pediatric care, maternity and newborn care, and certain types of specialty care not provided at the Naval hospital (neurology, cardiology, and gastroenterology). We also interviewed officials at two additional military hospitals--Naval Hospital Lemoore (California) and Naval Hospital Oak Harbor (Washington)--that had eliminated all or most of their inpatient care and were within 40 miles of an SCH. These officials told us that they rely more on other hospitals that are closer to their installations than the SCHs. For example, an official with Naval Hospital Lemoore told us that Lemoore currently has a resource sharing agreement with another hospital, which is closer to them than the nearby SCH. This agreement allows military providers with privileges to deliver babies for TRICARE beneficiaries at that facility. Officials from Naval Hospital Oak Harbor told us that their hospital tends to utilize three smaller facilities closer to it than the SCH depending on the type of service needed. DHA and managed care support contractor officials told us that they have not heard of concerns or issues with beneficiary access at SCHs resulting from the revised reimbursement rules. DHA officials reported that they do not think access to inpatient care at SCHs will be an issue because hospitals that participate in the Medicare program are required to participate in the TRICARE program and serve its beneficiaries. DHA officials told us they track access issues pertaining to inpatient care at SCHs through concerns or complaints communicated to them through the TRICARE Regional Offices or directly from beneficiaries. As of February 2015, these officials told us they have not received any such complaints. They noted that they are looking at ways to measure changes in access to care at these facilities, possibly by comparing the number of discharges from one year to the next. Although their plans are under development, officials stated that they will likely focus on the 44 SCHs that had 100 or more TRICARE admissions. Officials from DHA's TRICARE Regional Offices and the managed care support contractors also told us that they have not received complaints or heard of issues from beneficiaries about their ability to access inpatient care at SCHs. In addition, officials from national health care associations and military beneficiary coalition groups that we spoke with also reported that they have not heard any concerns about access to care at SCHs resulting from TRICARE's revised reimbursement rules. We provided a draft of this report to DOD for comment. DOD responded that it agreed with the report's findings, and its comments are reprinted in appendix III. DOD also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Defense and appropriate 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 any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix IV. We obtained TRICARE claims data on the number of admissions and reimbursement amounts for each sole community hospital (SCH) for fiscal year 2013. We used these data to select the eight SCHs with the highest number of TRICARE admissions and the eight SCHs with the highest reimbursement amounts. Due to overlap, the number of unique SCHs we selected totaled 10. We interviewed officials at those hospitals about the change in TRICARE reimbursement rules and any resulting effect on access to care. Sole community hospital (SCH) 8 SCHs that were 40 miles or more from a military outpatient clinic or hospital Fiscal Year (FY) 2013 TRICARE admissions 40 miles from a military outpatient clinic(s) military hospital(s) Sole community hospital (SCH) 12 SCHs that were less than 40 miles from a military hospital or a hospital and an outpatient clinic Fiscal Year (FY) 2013 TRICARE admissions outpatient clinic(s) military hospital(s) Debra A. Draper, Director, (202) 512-7114 or [email protected]. In addition to the contact name above, Bonnie Anderson, Assistant Director; Jennie Apter; Jackie Hamilton; Natalie Herzog; Giselle Hicks; Sylvia Diaz Jones; and Eric Wedum made key contributions to this report.

DOD offered health care to about 9.6 million eligible beneficiaries through TRICARE, which provides care through military treatment facilities and civilian providers. Because DOD determined that its approach for reimbursing SCHs (459 in 2014) based on their billed charges was inconsistent with TRICARE's governing statute to reimburse civilian providers in a manner similar to Medicare, it implemented revised rules in January 2014. House Report 113-446, which accompanied the National Defense Authorization Act for Fiscal Year 2015, included a provision for GAO to review issues related to the changes in TRICARE's reimbursement rules for SCHs. In this report, GAO examines (1) how TRICARE's revised reimbursement rules for SCHs compare to Medicare's reimbursement rules for these hospitals, and (2) the extent to which TRICARE's revised reimbursement rules for SCHs may have affected access to these facilities by servicemembers and their dependents. GAO reviewed federal laws and regulations as well as TRICARE and Medicare's rules for reimbursing SCHs. GAO analyzed fiscal year 2013 TRICARE claims data on SCH admissions and reimbursement amounts, and Medicare data on SCH net patient revenue and total discharges. GAO interviewed 10 SCHs with the highest number of TRICARE admissions or reimbursement amounts about access issues. GAO also interviewed officials from DOD and national health care associations and military beneficiary coalition groups. TRICARE's revised reimbursement rules for Sole Community Hospitals (SCHs), which provide health care in rural areas or where similar hospitals do not exist under certain criteria, approximate those for Medicare's. Specifically, both programs reimburse SCHs using the greater of either a cost-based amount or the allowed amount under a diagnostic-related-group-based payment system, although each program takes a different approach in implementing these methods. Each program also provides for reimbursement adjustments under specific circumstances. In order to minimize sudden significant reductions in SCHs' TRICARE reimbursements, the revised rules include a transition period during which an eligible SCH is reimbursed using a cost-based ratio that is reduced annually until it matches the SCH's Medicare cost-to-charge ratio, which is calculated by the Centers for Medicare & Medicaid Services for each hospital. Under TRICARE's revised rules for SCHs, this cost-to-charge ratio will be multiplied by the hospitals' billed charges to determine their reimbursement amounts. Most SCHs--about 74 percent--qualified for a transition to their Medicare cost-to-charge ratios. Because most SCHs have just completed the first year of a multi-year transition, it is too early to determine the full effect of the revised reimbursement rules, including any impact on TRICARE beneficiaries' access to care at these hospitals. Nonetheless, early indications show that TRICARE beneficiaries have not experienced problems accessing inpatient care at these facilities. Specifically, Defense Health Agency (DHA) officials reported that they do not think access to inpatient care at SCHs will be an issue because hospitals that participate in the Medicare program are required to participate in the TRICARE program and serve its beneficiaries. Although some of them were not familiar with this requirement, officials from the 10 SCHs GAO interviewed with the highest number of TRICARE admissions, the highest reimbursement amounts, or both, stated that they provide care to all patients, including TRICARE beneficiaries. DHA officials also said that they track access issues pertaining to inpatient care at SCHs through concerns or complaints, and as of February 2015, they had not received any access complaints. They noted that they are still looking at ways to measure changes in access to care at these facilities and will likely focus on the 44 SCHs that had 100 or more TRICARE admissions. In addition, other stakeholders, including representatives of national health care associations and military beneficiary coalition groups, said that they are not aware of TRICARE beneficiaries having difficulty accessing care at SCHs. Moreover, in its analysis of available Medicare data for these facilities (427 of 459 SCHs), GAO found that overall TRICARE reimbursements for SCHs averaged less than 1 percent of SCHs' net patient revenue, with TRICARE beneficiaries making up just over 1 percent of their total discharges for fiscal year 2013. As a result, the impact of TRICARE's revised reimbursement rules may likely be small for most SCHs. GAO provided a draft of this report to the Department of Defense (DOD) for comment. DOD responded that it agreed with the report's findings and provided technical comments, which we incorporated as appropriate.

Although VA has been authorized to collect third-party health insurance payments since 1986, it was not allowed to use these funds to supplement its medical care appropriations until enactment of the Balanced Budget Act of 1997. Part of VA's 1997 strategic plan was to increase health insurance payments and other collections to help fund an increased health care workload. The potential for increased workload occurred in part because the Veterans' Health Care Eligibility Reform Act of 1996 authorized VA to provide certain medical care services not previously available to higher-income veterans or those without service-connected disabilities. VA expected that the majority of the costs of their care would be covered by collections from third-party payments, copayments, and deductibles. These veterans increased from about 4 percent of all veterans treated in fiscal year 1996 to about a quarter of VA's total patient workload in fiscal year 2002. VA can bill insurers for treatment of conditions that are not a result of injuries or illnesses incurred or aggravated during military service. However, VA cannot bill them for health care conditions that result from military service, nor is it generally authorized to collect from Medicare or Medicaid, or from health maintenance organizations when VA is not a participating provider. To collect from health insurers, VA uses five related processes to manage the information needed to bill and collect. The patient intake process involves gathering insurance information and verifying that information with the insurer. The medical documentation process involves properly documenting the health care provided to patients by physicians and other health care providers. The coding process involves assigning correct codes for the diagnoses and medical procedures based on the documentation. Next, the billing process creates and sends bills to insurers based on the insurance and coding information. Finally, the accounts receivable process includes processing payments from insurers and following up with insurers on outstanding or denied bills. In September 1999, VA adopted a fee schedule, called "reasonable charges." Reasonable charges are itemized fees based on diagnoses and procedures. This schedule allows VA to more accurately bill for the care provided. However, by making these changes, VA created additional bill- processing demands--particularly in the areas of documenting care, coding that care, and processing bills per episode of care. First, VA must accurately assign medical diagnoses and procedure codes to set appropriate charges, a task that requires coders to search through medical documentation and various databases to identify all billable care. Second, VA must be prepared to provide an insurer supporting medical documentation for the itemized charges. Third, in contrast to a single bill for all the services provided during an episode of care under the previous fee schedule, under reasonable charges VA must prepare a separate bill for each provider involved in the care and an additional bill if a hospital facility charge applies. For fiscal year 2002, VA collected $687 million in insurance payments, up 32 percent compared to the $521 million collected during fiscal year 2001. Collections through the first half of fiscal year 2003 total $386 million in third-party payments. The increased collections in fiscal year 2002 reflected that VA processed a higher volume of bills than it did in the prior fiscal year. VA processed and received payments for over 50 percent more bills in fiscal year 2002 than in fiscal year 2001. VA's collections grew at a lower percentage rate than the number of paid bills because the average payment per paid bill dropped 18 percent compared to the prior fiscal year. Average payments dropped primarily because a rising proportion of VA's paid bills were for outpatient care rather than inpatient care. Since the charges for outpatient care were much lower on average, the payment amounts were typically lower as well. Although VA anticipated that the shift to reasonable charges in 1999 would yield higher collections, collections had dropped in fiscal year 2000. VA attributed that drop to its being unprepared to bill under reasonable charges, particularly because of its lack of proficiency in developing medical documentation and coding to appropriately support a bill. As a result, VA reported that many VA medical centers developed billing backlogs after initially suspending billing for some care. As shown in figure 1, VA's third-party collections increased in fiscal year 2001--reversing fiscal year 2000's drop in collections--and increased again in fiscal year 2002. After initially being unprepared in fiscal year 2000 to bill reasonable charges, VA began improving its implementation of the processes necessary to bill and increase its collections. By the end of fiscal year 2001, VA had submitted 37 percent more bills to insurers than in fiscal year 2000. VA submitted even more in fiscal year 2002, as over 8 million bills--a 54 percent increase over the number in fiscal year 2001--were submitted to insurers. Managers we spoke with in three networks--Network 2 (Albany), Network 9 (Nashville), and Network 22 (Long Beach)--mainly attributed the increased billings to reductions in the billing backlogs. Networks 2 (Albany) and 9 (Nashville) reduced backlogs, in part by hiring more staff, contracting for staff, or using overtime to process bills and accounts receivable. Network 2 (Albany), for instance, managed an increased billing volume through mandatory overtime. Managers we interviewed in all three networks noted better medical documentation provided by physicians to support billing. In Network 22 (Long Beach) and Network 9 (Nashville), revenue managers reported that coders were getting better at identifying all professional services that can be billed under reasonable charges. In addition, the revenue manager in Network 2 (Albany) said that billers' productivity had risen from 700 to 2,500 bills per month over a 3-year period, as a result of gradually increasing the network's productivity standards and streamlining their jobs to focus solely on billing. VA officials cited other reasons for the increased number of bills submitted to insurers. An increased number of patients with billable insurance was one reason for the increased billing. In addition, a May 2001 change in the reasonable-charges fee schedule for medical evaluations allowed separate bills for facility charges and professional service charges, a change that contributed to the higher volume of bills in fiscal year 2002. Studies have suggested that operational problems--missed billing opportunities, billing backlogs, and inadequate pursuit of accounts receivable--limited VA's collections in the years following the implementation of reasonable charges. For example, a study completed last year estimated that 23.8 percent of VA patients in fiscal year 2001 had billable care, but VA actually billed for the care of only 18.3 percent of patients. This finding suggests that VA could have billed for 30 percent more patients than it actually billed. Further, after examining activities in fiscal years 2000 and 2001, a VA Inspector General report estimated that VA could have collected over $500 million more than it did. About 73 percent of this uncollected amount was attributed to a backlog of unbilled medical care; most of the rest was attributed to insufficient pursuit of delinquent bills. Another study, examining only professional-service charges in a single network, estimated that $4.1 million out of $4.7 million of potential collections was unbilled for fiscal year 2001. Of that unbilled amount, 63 percent was estimated to be unbillable primarily because of insufficient documentation. In addition, the study found that coders often missed services that should have been coded for billing. According to a CBO official, VA could increase collections by working on operational problems. These problems included unpaid accounts receivable and missed billing opportunities due to insufficient identification of insured patients, inadequate documentation to support billing, and coding problems that result in unidentified care. From April through June 2002, three network revenue managers told us about backlogs and processing issues that persisted into fiscal year 2002. For example, although Network 9 (Nashville) had above average increases in collections for both inpatient and outpatient care, it still had coding backlogs in four of six medical centers. According to Network 9's (Nashville) revenue manager, eliminating the backlogs for outpatient care would increase collections by an estimated $4 million, or 9 percent, for fiscal year 2002. Additional increases might come from coding all inpatient professional services, but the revenue manager did not have an estimate because the extent to which coders are capturing all billable services was unknown. Moreover, although all three networks reported that physicians' documentation for billing was improving, they also reported a continuing need to improve physicians' documentation. In addition, Network 22 (Long Beach) reported that its accounts receivable staff had difficulties keeping up with the increased volume of bills because it had not hired additional staff members or contracted help on accounts receivable. As a result of these operational limitations, VA lacks a reliable estimate of uncollected dollars, and therefore does not have the basis to assess its systemwide operational effectiveness. For example, some uncollected dollars result from billing backlogs and billable care missed in coding. In addition, VA does not know the net impact of actual third-party collections on supplementing its annual appropriation for medical care. For example, CBO relies on reported cost data from central office and field staff directly involved in billing and collection functions. However, these costs do not include all costs incurred by VA in the generation of revenue. According to a CBO official, VA does not include in its collections cost the investments it has made in information technology or resources used in the identification of other health insurance during the enrollment process. VA continues to implement its 2001 Improvement Plan, which is designed to increase collections by improving and standardizing VA's collections processes. The plan's 24 actions are to address known operational problems affecting revenue performance. These problems include unidentified insurance for some patients, insufficient documentation for billing, coding staff shortages, gaps in the automated capture of billing data, and insufficient pursuit of accounts receivable. The plan also addresses uneven performance across collection sites. The plan seeks increased collections through standardization of policy and processes in the context of decentralized management, in which VA's 21 network directors and their respective medical center directors have responsibility for the collections process. Since management is decentralized, collections procedures can vary across sites. For example, sites' procedures can specify a different number of days waited until first contacting insurers about unpaid bills and can vary on whether to contact by letter, telephone, or both. The plan intends to create greater process standardization, in part, by requiring certain collections processes, such as the use of electronic medical records by all networks to provide coders better access to documentation and legible records. When fully implemented, the plan's actions are intended to improve collections by reducing operational problems, such as missed billing opportunities. For example, two of the plan's actions--requiring patient contacts to gather insurance information prior to scheduled appointments and electronically linking VA to major insurers to identify patients' insurance--are intended to increase VA's awareness of its patients who have other health insurance. VA has implemented some of the improvement plan's 24 actions, which were scheduled for completion at various times through 2003, but is behind the plan's original schedule. The plan had scheduled 15 of the 24 actions for completion through May 25, 2002, but as of that date VA had only completed 8 of the actions. Information obtained from CBO in April 2003 indicates that 10 are complete and 7 are scheduled for implementation by the end of 2003. Implementation of the remaining actions will begin in 2004 as part of a financial system pilot with full implementation expected in 2005 or 2006. (Appendix I lists the actions and those VA reports as completed through April 28, 2003.) In May 2002, VHA established its CBO to underscore the importance of revenue, patient eligibility, and enrollment and to give strategic focus to improving these functions. Officials in the office told us that they have developed a new approach for improving third-party collections that can help increase revenue collections by further revising processes and providing a new business focus on collections. For example, the CBO's strategy incorporates improvements to the electronic transmission of bills and initiation of a system to receive and process third-party payments electronically. CBO's new approach also encompasses initiatives beyond the improvement plan, such as the one in the Under Secretary for Health's May 2002 memorandum that directed all facilities to refer accounts receivable older than 60 days to a collection agency, unless a facility can document a better in-house process. According to the Deputy Chief Business Officer, the use of collection agencies has shown some signs of success--with outstanding accounts receivables dropping from $1,378 million to $1,317 million from the end of May to the end of July 2002, a reduction of about $61 million or 4 percent. CBO is in the process of acquiring a standardized Patient Financial Services System (PFSS) that could be shared across VA. VA's goal with PFSS is to implement a commercial off-the-shelf health care billing and accounts receivable software system. Under PFSS, a unique record will be established for each veteran. Patient information will be standardized-- including veteran insurance data, which will be collected, managed, and verified. Receipts of health care products and services will be added to the patient records as they are provided or dispensed. And PFSS will automatically extract needed data for billing, with the majority of billings sent to payers without manual intervention. After the system is acquired, VA will conduct a demonstration project in Network 10 (Cincinnati). According to the Deputy Chief Business Officer, in May 2003 VA anticipates awarding a contract for the development and implementation of PFSS. CBO's plan is to install this automated financial system in other facilities and networks if it is successfully implemented in the pilot site. CBO is taking action on a number of other initiatives to improve collections, including the following: Planning and developing software upgrades to facilitate the health care service review process and electronically receive and respond to requests from insurers for additional documentation. Establishing the Health Revenue Center to centralize preregistration, insurance identification and verification, and accounts receivable activities. For example, during a preregistration pilot in Network 11 (Ann Arbor), the Health Revenue Center made over 246,000 preregistration telephone calls to patients to verify their insurance information. According to VA, over 23,000 insurance policies were identified, resulting in $4.8 million in collections. Assessing its performance based on private sector performance metrics, including measuring the pace of collections relative to the amount of accounts receivable. As VA faces increased demand for medical care, particularly from higher- income veterans, third-party collections for nonservice-connected conditions remain an important source of revenue to supplement VA's appropriations. VA has been improving its billing and collecting under a reasonable-charges fee schedule it established in 1999, but VA has not completed its efforts to address problems in collections operations. In this regard, fully implementing the 2001 Improvement Plan could help VA maximize future collections by addressing problems such as missed billing opportunities. CBO's initiatives could further enhance collections by identifying root causes of problems in collections operations, providing a focused approach to addressing the root causes, establishing performance measures, and holding responsible parties accountable for achieving the performance standards. Our work and VA's continuing initiatives to improve collections indicate that VA has not collected all third-party payments to which it is entitled. In this regard, it is important that VA develop a reliable estimate of uncollected dollars. VA also does not have a complete measure of its full collections costs. Consequently, VA cannot determine how effectively it supplements its medical care appropriation with third-party collections. Mr. Chairman, this concludes my prepared remarks. I will be pleased to answer any questions you or other members of the subcommittee may have. For further information regarding this testimony, please contact Cynthia A. Bascetta at (202) 512-7101. Michael T. Blair, Jr. and Michael Tropauer also contributed to this statement. Certain actions are mandated in the plan, that is, are required, but these actions are not legal or regulatory mandates. One action item was cancelled but its intended improvements will be incorporated into an automated financial system initiative. VA designated the electronic billing project, shown here as "17a," as completed. However, this indicated only partial completion of action 17, which includes an additional project. VA Health Care: Third Party Collections Rising as VA Continues to Address Problems in Its Collections Operations. GAO-03-145. Washington, D.C.: January 31, 2003. VA Health Care: VA Has Not Sufficiently Explored Alternatives for Optimizing Third-Party Collections. GAO-01-1157T. Washington, D.C.: September 20, 2001. VA Health Care: Third-Party Charges Based on Sound Methodology; Implementation Challenges Remain. GAO/HEHS-99-124. Washington, D.C.: June 11, 1999. 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 Department of Veterans Affairs (VA) collects health insurance payments, known as third-party collections, for veterans' health care conditions it treats that are not a result of injuries or illnesses incurred or aggravated during military service. In September 1999, VA adopted a new fee schedule, called "reasonable charges," that it anticipated would increase revenues from third-party collections. In January 2003, GAO reported on VA's third-party collection efforts and problems in collections operations for fiscal year 2002 as well as VA's initiatives to improve collections (VA Health Care: Third-Party Collections Rising as VA Continues to Address Problems in Its Collections Operations, ( GAO-03-145 , Jan. 31, 2003)). GAO was asked to discuss its findings and update third-party collection amounts and agency plans to improve collections. VA's fiscal year 2002 third-party collections rose by 32 percent over fiscal year 2001 collections, to $687 million, and available data for the first half of fiscal year 2003 show that $386 million has been collected so far. The increase in collections reflects VA's improved ability to manage the larger billing volume and more itemized bills required under its new fee schedule. VA managers in three regional health care networks attributed billings increases to a reduction of billing backlogs and improved collections processes, such as better medical documentation prepared by physicians, more complete identification of billable care by coders, and more bills prepared per biller. Although collections are increasing, operational problems, such as missed billing opportunities, persist and continue to limit the amount VA collects. VA has been implementing the action items in its Revenue Cycle Improvement Plan of September 2001 that are designed to address operational problems, such as unidentified insurance for some patients, insufficient documentation of services for billing, shortages of billing staff, and insufficient pursuit of accounts receivable. VA reported in April 2003 that 10 of 24 action items are complete; 7 are scheduled for implementation by the end of 2003; and the remaining actions will begin in 2004 with full implementation expected in 2005 or 2006. These dates are behind VA's original schedule. In addition, the Chief Business Office, established in May 2002, has developed a new approach that combines the action items with additional initiatives. Given the growing demand for care, especially from higher-income veterans, it is important that VA resolve its operational problems and sustain its commitment to maximizing third-party collections. It is also important for VA to develop a reliable estimate of uncollected dollars and a complete measure of its collections costs. Without this information, VA cannot evaluate its effectiveness in supplementing its medical care appropriation with third-party dollars.

The federal government buys a myriad of goods and services from contractors. Federal agency acquisitions must be conducted in accordance with a set of statutes and regulations designed to accomplish several objectives, including full and open competition and various social and economic goals, such as encouraging small business participation. In the late 1980s and early 1990s, some became convinced that the federal procurement system had become complex, unwieldy, and overwrought with tension between the basic goals of efficiency and fairness because of a proliferation of requirements governing almost every aspect of the acquisition process. In this environment, there were concerns about the government's ability to take full advantage of the opportunities offered by the commercial marketplace. In response to these concerns, Congress enacted two major pieces of reform legislation, FASA and Clinger-Cohen, aimed at creating a more efficient and responsive federal acquisition system. Concerns remain about whether the changes brought about by acquisition reform during the 1990s have come at the expense of placing small business at a disadvantage. The federal procurement process underwent many legislative and administrative changes during the 1990s, some of which have the potential to affect the ability of small businesses to obtain federal contracts. Other changes occurred during this time, such as reductions in the amount the government spent on goods and services and the size of its acquisition workforce, which agency officials believe have also encouraged procurement streamlining. These changes included the use of certain contract vehicles, such as MACs. In addition, reforms have modified the dollar range of contracts that are reserved for small businesses and encouraged the use of purchase cards, which are similar to corporate credit cards, for the use of certain purchases. Some organizations that represent small businesses are concerned that these changes could potentially erode the ability of small businesses to receive federal contracts. At the same time that acquisition reform legislation was enacted, other factors changed how much the federal government bought as well as the way it buys goods and services. During the 1990s, the federal government decreased the amount spent on goods and services and downsized the acquisition workforce. The total amount of goods and services that the government purchased, including those bought with purchase cards, declined by about 7 percent from an inflation-adjusted $224 billion in fiscal year 1993 to $209 billion in fiscal year 1999. Consequently, all businesses had to compete for a reduced total of federal contract expenditures. Figure 2 shows the trend in total federal procurement expenditures during this period. Federal agencies also reduced their acquisition workforce personnel from 165,739 in fiscal year 1990 to 128,649 in fiscal year 1998, or approximately 22 percent, during this time, with many of these reductions taking place at the Department of Defense (DOD). According to agency officials, contracting officials have sought ways to streamline procurement practices within the applicable statutes and regulations partly as a result of these workforce reductions; this includes the use of previously authorized contracting vehicles such as blanket purchase agreements (BPA), indefinite-delivery indefinite-quantity (IDIQ) contracts, and GSA federal supply schedule contracts. Appendix I provides a description of these contract vehicles. Contract bundling is an acquisition practice that received a lot of attention in the 1990s and is often associated with but, in fact, is not actually contained in acquisition reform legislation enacted during this period. Federal agencies combine existing contracts into fewer contracts as a means of streamlining as well as reducing procurement and contract administration costs, a practice generally referred to as "contract consolidation." A subset of consolidated contracts is "bundled contracts" that the Small Business Reauthorization Act of 1997 defines as the consolidation of two or more procurement requirements for goods or services previously provided or performed under separate, smaller contracts into a solicitation of offers for a single contract that is likely to be unsuitable for award to a small business concern due to the diversity, size, or specialized nature of the elements of the the aggregate dollar value of the anticipated award; the geographic dispersion of contract performance sites; or any combination of these three criteria. This act requires each federal agency, to the maximum extent practicable, to (1) promote participation of small businesses by structuring its contracting requirements to facilitate competition by and among small businesses and (2) avoid the unnecessary and unjustified bundling of contracts that are likely to be unsuitable for small business participation as prime contractors. Federal policy has also encouraged the use of governmentwide commercial purchase cards for micropurchases. The purchase card, issued to a broad range of authorized agency personnel to acquire and pay for goods and services, is similar in nature to a corporate credit card and is the preferred method for purchases of $2,500 or less. Some organizations that represent small businesses believe that the purchase card makes it easier for government personnel to make purchases from sources other than small businesses because that may be more convenient for the purchaser. Small businesses, as a group, have received the legislatively mandated goal for federal contract expenditures each fiscal year from 1993 to 1999. Between fiscal years 1993 and 1997, when the legislative goal was at least 20 percent, small businesses received between 24 and 25 percent of total federal contract expenditures. In both fiscal years 1998 and 1999, when the goal increased to 23 percent, small businesses received 23 percent of total federal contract expenditures. Focusing on expenditures for new contracts worth over $25,000, our analysis shows that small businesses have received between 25 and 28 percent of these expenditures during this period. In addition, focusing on the various categories of goods and services that the federal government purchases, small businesses received a higher share in fiscal year 1999 of expenditures in new contracts for most categories of goods and services than they did in fiscal year 1993. Several contract vehicles accounted for about one quarter of all governmentwide expenditures for contracts over $25,000 in fiscal year 1999, and small businesses received between 26 and 55 percent of expenditures for these contract vehicles in that year. We could not determine the amount or impact of contract bundling or the impact of the increased use of government purchase cards on small businesses. Although FASA requires that contracts over $2,500 up to $100,000 generally be reserved exclusively for small businesses, we could not determine the amount of expenditures for these contracts because, in some cases, information is reported to FPDC on contracts together with modifications. SBA and FPDC data indicate that federal agencies, as a whole, have met their annual governmentwide small business procurement goal from fiscal years 1993 to 1999. This legislative goal increased from at least 20 percent of total federal contract expenditures to 23 percent effective fiscal year 1998. Between fiscal years 1993 and 1997, when the legislative goal was at least 20 percent, small businesses received between 24 and 25 percent of total federal contract expenditures. In fiscal years 1998 and 1999, when the legislative goal increased to 23 percent, small businesses received 23 percent of total federal contract expenditures. Figure 3 shows the share of total federal contract expenditures going to small businesses for this period. Under the Small Business Act, SBA has authority to prescribe a method to measure the participation of small businesses in federal procurement. In calculating the actual achievement of small business procurement goals for individual federal agencies, SBA excludes certain categories of procurements from the base, or denominator. SBA has identified several categories of procurements that are excluded from the base because SBA officials believe that small businesses do not have a reasonable opportunity to compete for them, including (1) foreign military sales; (2) procurement awarded and performed outside the United States; (3) purchases from mandatory sources of supplies as listed in the Federal Acquisition Regulation; and (4) purchases for specific programs from the Departments of State, Transportation, and the Treasury. SBA's Office of Advocacy disagrees with SBA's approach of excluding categories of procurements in establishing the base. Adding back the categories of procurement that SBA excluded, the Office of Advocacy reported that small businesses received about 21 percent of total federal procurement in fiscal year 1998 (rather than the 23 percent that SBA reported) and that, therefore, the governmentwide goal for small business procurement was not met in fiscal year 1998. Some organizations that represent small businesses have expressed concerns that small businesses are at a disadvantage when competing for new federal contracts. Therefore, we analyzed the share of expenditures for new contracts going to small businesses. These data do not include modifications to existing contracts, which account for approximately half of all governmentwide procurement expenditures during this time. Our analysis of FPDS data of new contract expenditures shows that small businesses have received between 25 and 28 percent of such expenditures for contracts worth more than $25,000 between fiscal years 1993 and 1999. Figure 4 shows the results of our analysis. In calculating the share of total expenditures on new contracts going to small businesses from fiscal years 1993 to 1999, we used FPDC data on expenditures for new contracts worth more than $25,000 and did not exclude the types of expenditures that SBA excludes to calculate the small business procurement goal. As noted in figure 2, the federal government has been spending less money on goods and services since fiscal year 1993. The only categories of goods and services that experienced increases in governmentwide purchases on new contracts worth more than $25,000 between fiscal years 1993 and 1999 were real property and other services. Despite this overall decline in contract purchases, small businesses received a higher share in fiscal year 1999 than in fiscal year 1993 of expenditures on new contracts worth $25,000 or more than for 5 of the 8 categories of goods and services of government procurement: equipment, research and development, architect and engineering, automatic data processing services, and other services. Figure 5 shows governmentwide trends for purchases under new contracts of goods and services worth more than $25,000 and the share of these purchases going to small businesses. We analyzed FPDS data on the governmentwide use of certain contract vehicles for contracts over $25,000, including those that became popular during the 1990s. We found that these vehicles represent a small but growing share of federal procurement expenditures. Because FPDS only captures data for some of these contract vehicles, we had to limit our analysis to MACs, IDIQs, BPAs, and GSA schedules. Expenditures for the four types of contract vehicles we analyzed represented 25 percent of federal procurement expenditures on contracts over $25,000 in fiscal year 1999, compared with 16 percent in fiscal year 1994. Small businesses received 32 percent of expenditures for these contract vehicles in fiscal year 1999 compared with 24 percent in fiscal year 1994. For each of the four types of contract vehicles in our analysis, the share of expenditures going to small businesses was between 26 and 55 percent in fiscal year 1999, depending on the type of contract vehicle. For example, expenditures going to small businesses for MACs increased from $524 million in fiscal year 1994, or 8 percent of all expenditures for MACs, to $2 billion in fiscal year 1999, or 26 percent of all expenditures for MACs. Expenditures going to small businesses for IDIQs from fiscal years 1994 to 1999 remained relatively stable, near $7 billion. The percentage of total expenditures for IDIQs going to small businesses increased from 24 percent of total expenditures for IDIQs in fiscal year 1994 to 28 percent in 1999. The small business share of GSA schedules increased from 27 percent in fiscal year 1994 to 36 percent in fiscal year 1999, from $523 million to $3 billion. Finally, the small business share of BPAs fell from 97 percent in fiscal year 1994 to about 55 percent in fiscal year 1999, although the expenditures increased for small businesses from about $141 million in fiscal year 1994 to about $2 billion in fiscal year 1999. In conducting a review of contract bundling in 2000, we found that there are only limited governmentwide data on the extent of contract bundling and its actual effect on small businesses. Federal agencies do not currently report information on contract bundling to FPDC; therefore, FPDC does not have data on this topic. Our review of consolidated contracts worth $12.4 billion at 3 procurement centers showed that the number of contractors and the contract dollars were generally reduced due to consolidation as agencies sought to streamline procurement and reduce its associated administrative costs. SBA determined that the consolidation of the contracts we reviewed did not necessarily constitute bundling. In fact, 2 of the largest consolidated contracts involved only large businesses and the remaining 11 consolidated contracts were awarded to small businesses. We analyzed the total amount of governmentwide purchase-card expenditures for fiscal years 1993 to 1999 and found that in fiscal year 1999 such expenditures totaled $10 billion, or about 5 percent, of all federal procurement purchases. As figure 6 shows, these purchases have steadily increased since 1993, when the total amount bought with purchase cards was $527 million. These data include expenditures for all purchase-card transactions, both under and over $2,500. FASA permits purchases for goods or services up to $2,500 from any qualified suppliers. Since FPDS does not collect detailed data on purchase- card expenditures, we could not determine what share of such governmentwide expenditures are going to small businesses. We requested comments on a draft of this report from the Administrator of SBA, the Director of OMB, and the Administrator of GSA. SBA's Chief Operating Officer provided written comments in concurrence with our report. She pointed out that preliminary data for fiscal year 2000 show that federal agencies are finding it more difficult to meet the legislative goal of ensuring that 23 percent of the value of federal prime contracts go to small businesses. We did not include data for fiscal year 2000 in our review because these data are preliminary. Another area of concern was that since detailed data on purchase-card expenditures are not included in the FPDS database, trend analyses of these expenditures were not included in our report. As we note in our report, purchase-card expenditures have increased, but data are not available to determine the share of these purchases going to small businesses. In addition, SBA's Chief Operating Officer made several technical comments that we have reflected in this report, as appropriate. Officials from GSA's Offices of Enterprise Development and Governmentwide Policy provided technical comments that we have addressed in this report, as appropriate. OMB had no comments on our draft report. The comments we received from SBA are in appendix III. To identify procurement changes that could affect small business contractors, we reviewed FASA, the Clinger-Cohen Act, the Small Business Reauthorization Act of 1997, and the Federal Acquisition Regulation. We also identified other changes that occurred during the 1990s that might have an effect on small businesses by interviewing agency officials and representatives of industry associations, and by reviewing agency documents. We met with officials from GSA, SBA, OMB's Office of Federal Procurement Policy (OFPP), and the Procurement Executives Council. We also met with representatives of the U.S. Chamber of Commerce, Small Business Legislative Council, and Independent Office Products and Furniture Dealers Association. To determine the trends in federal procurement from small businesses, we analyzed data from the Federal Procurement Data Center's (FPDC) Federal Procurement Report for fiscal years 1993 through 1999 and other data we requested from FPDC and SBA for those same years. FPDC administers the Federal Procurement Data System (FPDS) within GSA. Since FPDC relies on federal agencies to report their procurement information, these data are only as reliable, accurate, and complete as the agencies report. In 1998, FPDC conducted an accuracy audit and reported that the average rate of accurate reporting in the FPDS database was 96 percent. Our analyses focused on total contract expenditures for federal procurement and the percentage of expenditures going to small businesses for new contracts and for certain contract vehicles. Unless otherwise noted, all expenditures were adjusted for inflation and represent constant fiscal year 1999 dollars. We conducted our review between March and October 2000 in accordance with generally accepted government auditing standards. A detailed discussion of our objectives, scope, and methodology is presented in appendix II. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report for 30 days. At that point, copies of this report will be sent to appropriate congressional committees and other interested Members of Congress; the Administrator of the Small Business Administration; the Administrator of the General Services Administration; the Director of the Office of Management and Budget; and other interested parties. We will also make copies available to others on request. Staff acknowledgements are listed in appendix IV. If you or your staff have any questions about this report, please contact me at (202) 512-8984 or Hilary Sullivan at (214) 777-5652. Indefinite-Delivery, Indefinite-Quantity Contract: This type of contract provides for an indefinite quantity, within stated limits, of goods or services during a fixed period of time. Agencies place separate task or delivery orders for individual requirements that specify the quantity and delivery terms associated with each order. The Federal Acquisition Regulation (FAR) expresses a preference for multiple awards of these contracts, which allows orders to be placed using a streamlined, commercial style selection process where consideration is limited to the contract awardees. The competition between the multiple awardees is designed to encourage better prices and responses than if the agency were negotiating with a single contractor. Contractors are to be afforded a fair opportunity to be considered for award of task and delivery orders but cannot generally protest the award of such orders. Indefinite-delivery, indefinite-quantity contracts include GWACs and GSA federal supply schedule contracts. Federal Supply Schedules: Under the schedule program, GSA enters into indefinite-delivery, indefinite-quantity contracts with commercial firms to provide commercial goods and services governmentwide at stated prices for given periods of time. Authorized buyers at agencies place separate orders for individual requirements that specify the quantity and delivery terms associated with each order, and the contractor delivers products or services directly to the agency. The program is designed to provide federal agencies with a simplified process for obtaining millions of commonly used commercial supplies and services at prices associated with volume buying. The program consists of single award schedules with one supplier and multiple award schedules, in which GSA awards contracts to multiple companies supplying comparable services and products, often at varying prices. When agency requirements are to be satisfied through the use of multiple award schedules, the small business provisions (such as the exclusive reservation for small businesses for contracts over $2,500 up to $100,000) of the FAR do not apply. Blanket Purchase Agreement: A simplified method of filling anticipated repetitive needs for supplies or services by establishing "charge accounts" with qualified sources of supply, and may include federal supply schedule contractors. Under such an agreement, the contractor and the agency agree to contract clauses applying to future orders between the parties during its term. Future orders would incorporate, by reference or attachment, clauses covering purchase limitations, authorized individuals, itemized lists of supplies or services furnished, date of delivery or shipments, billing procedures, and discounts. Under the FAR, the existence of a blanket purchase agreement does not justify purchasing from only one source or avoiding small business preferences. Our objectives were to identify (1) provisions in acquisition reform legislation enacted in the 1990s and other changes in procurement taking place during this time that could affect small business contractors and (2) trends that might indicate possible shifts in the ability of small businesses to obtain federal contracts in the 1990s. To achieve our first objective, we analyzed several pieces of legislation enacted in the 1990s, federal acquisition regulations, governmentwide procurement data, and interviewed federal officials at several agencies. We examined the Federal Acquisition Streamlining Act of 1994 (FASA), the Clinger-Cohen Act of 1996, the Small Business Reauthorization Act of 1997, and the Federal Acquisition Regulation. We analyzed governmentwide procurement data reported by GSA's Federal Procurement Data Center (FPDC) and data on the governmentwide acquisition workforce reported by GSA's Federal Acquisition Institute in its Report on the Federal Acquisition Workforce for fiscal years 1991 and 1998. We interviewed officials at GSA, OFPP, SBA, and the Procurement Executives Council. We also interviewed representatives of the U.S. Chamber of Commerce, Small Business Legislative Council, and Independent Office Products and Furniture Dealers Association. To achieve our second objective, we gathered governmentwide data on federal procurement from FPDC and SBA for fiscal years 1993 through 1999. We could not determine the direct impact of legislative changes and other trends on small businesses because of the numerous concurrent factors and the insufficiency of governmentwide data to directly measure the effect of these changes on small business contractors. Federal agencies report procurement data to FPDC in two categories, (1) contract awards of $25,000 or less each and (2) contract awards greater than $25,000. Each agency reports summary data on contracts worth $25,000 or less to FPDC and includes information such as type of contractor and procurement methods. Agencies report greater detail on each individual contract over $25,000 or more, including type of contract action, type of contractor, and product or service purchased. We analyzed aggregate data reported in FPDC's Federal Procurement Report for each of the years. We requested additional data from FPDC for contracts over $25,000 to include information on expenditures going to small businesses for new contracts; total expenditures going to small businesses, including for new contracts and contract modifications, for specific contract vehicles; and expenditures going to small businesses for new contracts for all products and services. The data on new contracts that FPDC provided includes expenditures on original contract actions, as opposed to expenditures on modifications to existing contracts. FPDC categorizes all federal contract expenditures into eight broad categories of products and services. According to FPDC officials, FPDS is updated constantly as federal agencies report updated procurement information. The data we received from FPDC are as of July 2000. In addition, we analyzed the summary information on government purchase- card transactions from the Federal Procurement Report for each year. We also collected data from SBA and FPDC on the achievement of the governmentwide federal procurement goal for small businesses. The SBA data on the achievement of this goal for fiscal years 1993 through 1997 are from The State of Small Business. Because the most recent version The State of Small Business was published in fiscal year 1997, we used FPDC data published in its annual Federal Procurement Report on the achievement of the legislative goal for fiscal years 1998 and 1999. As indicated earlier, SBA began using FPDS data to calculate the achievement of the small business legislative goal as of fiscal year 1998. Although FASA requires that contracts over $2,500 up to $100,000 be exclusively reserved for small businesses, we could not determine the amount of expenditures or share going to small businesses for these contracts because, in some cases, information is reported to FPDC on contracts commingled with modifications. Unless otherwise noted, we adjusted all dollar amounts using a gross domestic product price index from the Bureau of Economic Analysis using fiscal year 1999 as the base year. We did not independently verify FPDC or SBA data. FPDC relies on agencies to report their procurement information. Therefore, data are only as reliable, accurate, and complete as the agencies report. In 1998, however, FPDC conducted an accuracy audit of some of its data elements and reported that the average rate of accurate reporting in the FPDS database was 96 percent. We performed our work at SBA headquarters, OFPP, and GSA headquarters. We conducted our review between March and October 2000 in accordance with generally accepted government auditing standards. Jason Bair, William Chatlos, James Higgins, Maria Santos, Adam Vodraska, and Wendy Wilson made key contributions to this report. The first copy of each GAO report is free. Additional copies of reports are $2 each. A check or money order should be made out to the Superintendent of Documents. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. General Accounting Office P.O. 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This report focuses on the trends in federal procurement for small businesses during the 1990s. Some organizations that represent small businesses and others have expressed concerns over acquisition reforms in the mid-1990s that may have reduced the opportunities for small businesses to compete for federal government contracts. These reforms sought to streamline acquisition processes to help government acquire goods and services more efficiently. The reforms included provisions to facilitate greater use of some types of contracts. However, small business representatives believe that some of these reforms could make it difficult for small businesses to compete for federal contracts. For example, the Clinger-Cohen Act authorizes the use of multiagency contracts. These contracts could potentially consolidate agencies' requirements, which small businesses may not be able to meet. At the same time, some procurement reforms have benefited small businesses. The Federal Acquisition Streamlining Act, for example, increased the value of contracts set aside exclusively for small business participation. In addition, the Small Business Reauthorization Act of 1997 increased the percentage of federal contracts to be awarded to small businesses to 23 percent. Small Business Administration data indicate that federal agencies met the legislative goal for procurement from small businesses from fiscal years 1993 to 1999.

In June 1997, we reported on the results of our interviews with state WIC officials in 8 states that had unspent federal funds in fiscal year 1995 and 2 states that did not have unspent funds that year. These state officials identified a variety of reasons for having unspent federal WIC funds that were returned to the U.S. Department of Agriculture's (USDA) Food and Nutrition Service (FNS) for reallocation. In fiscal year 1996, the states returned about $121.6 million, or about 3.3 percent, of that year's $3.7 billion WIC grant for reallocation to the states in the next fiscal year. Some of the reasons cited by the WIC directors for not spending all available funds related to the structure of the WIC program. For example, the federal grant is the only source of funds for the program in most states. Some of these states prohibit agency expenditures that exceed their available funding. As a result, WIC directors reported that they must be cautious not to overspend their WIC grant. Because WIC grants made to some states are so large, even a low underspending rate can result in millions of returned grant dollars. For example, in fiscal year 1995, California returned almost $16 million in unspent WIC funds, which represented about 3 percent of its $528 million federal grant. Unlike California, New York State had no unspent grant funds in fiscal year 1995. New York was one of 12 states that supplemented its federal WIC grant with state funds that year and hence did not have to be as cautious in protecting against overspending its federal grant. Overall, the group of states that supplemented their WIC grants in fiscal year 1995 returned a smaller percentage of their combined WIC funds than did the states that did not supplement their federal grants. States also had unspent federal funds because the use of vouchers to distribute benefits made it difficult for states to determine program costs until the vouchers were redeemed and processed. Two features of the voucher distribution method can contribute to the states' difficulty in determining program costs. First, some portion of the benefits issued as vouchers may not be used, thereby reducing projected food costs. Participants may not purchase all of the food items specified on the voucher or not redeem the voucher at all. Second, because of the time it takes to process vouchers, states may find after the end of the fiscal year that their actual food costs were lower than projected. For example, most states do not know the cost of the vouchers issued for August and September benefits until after the fiscal year ends because program regulations require states to give participants 30 days to use a voucher and retailers 60 days after receiving the voucher to submit it for payment. The difficulty in projecting food costs in a timely manner can be exacerbated in some states that issue participants 3 months of vouchers at a time to reduce crowded clinic conditions. In such states, vouchers for August benefits could be provided as early as June but not submitted for payment until the end of October. Other reasons for states having unspent WIC funds related to specific circumstances that affect program operations within individual states. For example, in Texas the installation of a new computer system used to certify WIC eligibility and issue WIC food vouchers contributed to the state's having unspent funds of about $6.8 million in fiscal year 1996. According to the state WIC director, the computer installation temporarily reduced the amount of time that clinic staff had to certify and serve new clients because they had to spend time instead learning new software and operating procedures. As a result, they were unable to certify and serve a number of eligible individuals and did not spend the associated grant funds. In Florida, a hiring freeze contributed to the state's having unspent funds of about $7.7 million in fiscal year 1995. According to the state WIC director, although federal WIC funds were available to increase the number of WIC staff at the state and local agency level, state programs were under a hiring freeze that affected all programs, including WIC. The hiring freeze hindered the state's ability to hire the staff needed to serve the program's expanding caseload. Having unspent federal WIC funds did not necessarily indicate a lack of need for program benefits. WIC directors in some states with fiscal year 1995 unspent funds reported that more eligible individuals could have been served by WIC had it not been for the reasons related to the program's structure and/or state-specific situations or circumstances. On the basis of our nationwide survey of randomly selected local WIC agencies, we reported in October 1997 that these agencies have implemented a variety of strategies to increase the accessibility of their clinics for working women. The most frequently cited strategies--used by every agency--are scheduling appointments instead of taking participants on a first-come, first-served basis and allowing other persons to pick up participants' WIC vouchers. Scheduling appointments reduces participants' waiting time at the clinic and makes more efficient use of the agency staff's time. Allowing other persons, such as baby-sitters and family members, to pick up the food vouchers for participants can reduce the number of visits to the clinic by working women. Another strategy to increase participation by working women used by almost 90 percent of local agencies was issuing food vouchers for 2 or 3 months. As California state officials pointed out, issuing vouchers every 2 months, instead of monthly, to participants who are not at medical risk reduces the number of visits to the clinic. Three-fourths of the local WIC agencies had some provision for lunch hour appointments, which allows some working women to take care of their visit during their lunch break. Other actions to increase WIC participation by working women included reducing the time spent at clinic visits. We estimated that about 66 percent of local WIC agencies have taken steps to expedite clinic visits for working women. For example, a local agency in New York State allows working women who must return to work to go ahead of others in the clinic. The director of a local WIC agency in Pennsylvania allows working women to send in their paperwork before they visit, thereby reducing the time spent at the clinic. The Kansas state WIC agency generally requires women to participate in the program in the county where they reside, but it will allow working women to participate in the county where they work when it is more convenient for them. Other strategies adopted by some local WIC agencies include mailing vouchers to working women under special circumstances, thereby eliminating the need for them to visit the clinic (about 60 percent of local agencies); offering extended clinic hours of operation beyond the routine workday (about 20 percent of local agencies offer early morning hours); and locating clinics at or near work sites, including various military installations (about 5 percent of local agencies). Our survey found that about 76 percent of the local WIC agency directors believed that their clinics are reasonably accessible for working women. In reaching this conclusion, the directors considered their clinic's hours of operation, the amount of time that participants wait for service, and the ease with which participants are able to get appointments. Despite the widespread use of strategies to increase accessibility, 9 percent of WIC directors believe accessibility is still a problem for working women. In our discussions with these directors, the most frequently cited reason for rating accessibility as moderately or very difficult was the inability to operate during evenings or on Saturday because of lack of staff, staff's resistance to working schedules beyond the routine workday, and/or the lack of safety in the area around the clinic after dark or on weekends. Our survey also identified several factors not directly related to the accessibility of clinic services that serve to limit participation by working women. The factors most frequently cited related to how working women view the program. Specifically, directors reported that some working women do not participate because they (1) lose interest in the program's benefits as their income increases, (2) perceive a stigma attached to receiving WIC benefits, or (3) think the program is limited to those women who do not work. With respect to the first issue, 65 percent of the directors reported that working women lose interest in WIC benefits as their income rises. For example, one agency director reported that women gain a sense of pride when their income rises and they no longer want to participate in the program. Concerning the second issue, the stigma some women associate with WIC--how their participation in the program makes them appear to their friends and co-workers--is another significant factor limiting participation, according to about 57 percent of the local agency directors. Another aspect of the perceived stigma associated with WIC participation is related to the so-called "grocery store experience." The use of WIC vouchers to purchase food in grocery stores can cause confusion and delays for both the participant-shopper and the store clerk at the check-out counter. For example, Texas requires its WIC participants to buy the cheapest brand of milk, evaporated milk, and cheese available in the store. Texas also requires participants to buy the lowest-cost 46-ounce fluid or 12-ounce frozen fruit juices from an approved list of types (orange, grapefruit, orange/grapefruit, purple grape, pineapple, orange/pineapple, and apple) and/or specific brands. In comparing the cost of WIC-approved items, participants must also consider such things as weekly store specials and cost per ounce in order to purchase the lowest-priced items. While these restrictions may lower the dollar amount that the state pays for WIC foods, it may also make food selections more confusing for participants. According to Texas WIC officials, participants and cashiers often have difficulty determining which products have the lowest price. Consequently, a delay in the check-out process may result in unwanted attention for the WIC participant. Finally, more than half of the directors indicated that a major factor limiting participation is that working women are not aware that they are eligible to participate in WIC. Furthermore, local agency officials in California and Texas said that WIC participants who were not working when they entered the program but who later go to work often assume that they are then no longer eligible for WIC and therefore drop out of the program. In September 1997, we reported that the states have used a variety of initiatives to control WIC costs. According to the WIC agency directors in the 50 states and the District of Columbia we surveyed, two practices in particular are saving millions of dollars. These two practices are (1) contracting with manufacturers to obtain rebates on WIC foods in addition to infant formula and (2) limiting authorized food selections by, for example, requiring participants to select brands of foods that have the lowest cost. With respect to rebates, nine state agencies received $6.2 million in rebates in fiscal year 1996 through individual or multistate contracts for two WIC-approved foods--infant cereal and/or infant fruit juices. Four of these state agencies and seven other state agencies--a total of 11 states--reported that they were considering, or were in the process of, expanding their use of rebates to foods other than infant formula. In May 1997, Delaware, one of the 11 states, joined the District of Columbia, Maryland, and West Virginia in a multistate rebate contract for infant cereal and juices. Another state, California, was the first state to expand its rebate program in March 1997 to include adult juices. California spends about $65 million annually on adult juice purchases. California's WIC director told us that the state expects to collect about $12 million in annual rebates on the adult juices, thereby allowing approximately 30,000 more people to participate in the program each month. With respect to placing limits on food selections, all of the 48 state WIC directors responding to our survey reported that their agencies imposed limits on one or more of the food items eligible for program reimbursement. The states may specify certain brands; limit certain types of foods, such as allowing the purchase of block but not sliced cheese; restrict container sizes; and require the selection of only the lowest-cost brands. However, some types of restrictions are more widely used than others. For example, 47 WIC directors reported that their states' participants are allowed to choose only certain container or package sizes of one or more food items, but only 20 directors reported that their states require participants to purchase the lowest-cost brand for one or more food items. While all states have one or more food selection restrictions, 17 of the 48 WIC directors responding to our questionnaire reported that their states are considering the use of additional limits on food selection to contain or reduce WIC costs. Separately or in conjunction with measures to contain food costs, we found that 39 state agencies have placed restrictions on their authorized retail outlets (food stores and pharmacies allowed to redeem WIC vouchers--commonly referred to as vendors) to hold down costs. For example, the prices for WIC food items charged by WIC vendors in Texas must not exceed by more than 8 percent the average prices charged by vendors doing a comparable dollar volume of business in the same area. Once selected, authorized WIC vendors must maintain competitive prices. According to Texas WIC officials, the state does not limit the number of vendors that can participate in WIC. However, Texas' selection criteria for approving a vendor excludes many stores from the program. In addition, 18 WIC directors reported that their states restrict the number of vendors allowed to participate in the program by using ratios of participants to vendors. For example, Delaware used a ratio of 200 participants per store in fiscal year 1997 to determine the total number of vendors that could participate in the program in each WIC service area. By limiting the number of vendors, states can more frequently monitor vendors and conduct compliance investigations to detect and remove vendors from the program who commit fraud or other serious program violations, according to federal and state WIC officials. A July 1995 report by USDA's Office of Inspector General found that the annual loss to WIC as a result of vendor fraud in one state could exceed $3 million. The WIC directors in 2 of the 39 states that reported limiting the number of vendors indicated that they are planning to introduce additional vendor initiatives, such as selecting vendors on the basis of competitive food pricing. We also found that opportunities exist to substantially lower the cost of special infant formula. Special formula, unlike the regular formula provided by WIC, is provided to infants with special dietary needs or medical conditions. Cost savings may be achieved if the states purchase special infant formula at wholesale instead of retail prices. The monthly retail cost of these special formulas can be high--ranging in one state we surveyed from $540 to $900 for each infant. These high costs occur in part because vendors' retail prices are much higher than the wholesale cost. Twenty-one states avoid paying retail prices by purchasing the special formula directly from the manufacturers and distributing it to participants. For example, Pennsylvania turned to the direct purchase of special infant formula to address the lack of availability and high cost of vendor-provided formulas. It established a central distribution warehouse for special formulas in August 1996 to serve the less than 1 percent of WIC infants in the state--about 400--who needed special formula in fiscal year 1996. The program is expected to save about $100,000 annually. Additional savings may be possible if these 21 states are able to reduce or eliminate the authorization and monitoring costs of retail vendors and pharmacies that distribute only special infant formula. For example, by establishing its own central distribution warehouse, Pennsylvania plans to remove over 200 pharmacies from the program, resulting in significant administrative cost savings, according to the state WIC director. While the use of these cost containment practices could be expanded, our work found that a number of obstacles may discourage the states from adopting or expanding these practices. These obstacles include problems that states have with existing program restrictions on how additional funds made available through cost containment initiatives can be used and resistance from the retail community when states attempt to establish selection requirements or limit retail stores participating in the program. First, FNS policy requires that during the grant year, any savings from cost containment accrue to the food portion of the WIC grant, thereby allowing the states to provide food benefits to additional WIC applicants. None of the cost savings are automatically available to the states for support services, such as staffing, clinic facilities, voucher issuance sites, outreach, and other activities that are funded by WIC's NSA (Nutrition Services and Administration) grants. These various support activities are needed to increase participation in the program, according to WIC directors. As a result, the states may not be able to serve more eligible persons or they may have to carry a substantial portion of the program's support costs until the federal NSA grant is adjusted for the increased participation level--a process that can take up to 2 years, according to the National Association of WIC Directors. FNS officials pointed out that provisions in the federal regulations allow the states that have increased participation to use a limited amount of their food grant funds for support activities. However, some states may be reluctant to use this option because, as one director told us, doing so may be perceived as taking food away from babies. FNS and some state WIC officials told us that limiting the number of vendors in the program is an important aspect of containing WIC costs. However, they told us the retail community does not favor limits on the number of vendors that qualify to participate. Instead, the retail community favors the easing of restrictions on vendor eligibility thereby allowing more vendors that qualify to accept WIC vouchers. According to FNS officials, the amount that WIC spends for food would be substantially higher if stores with higher prices were authorized to participate in the program. To encourage the further implementation of WIC cost containment practices, we recommended in our September 1997 report that FNS work with the states to identify and implement strategies to reduce or eliminate such obstacles. These strategies could include modifying the policies and procedures that allow the states to use cost containment savings for the program's support services and establishing regulatory guidelines for selecting vendors to participate in the program. FNS concurred with our findings and recommendations. We will continue to monitor the agency's progress made in implementing strategies to reduce or eliminate obstacles to cost containment. Our survey also collected information on the practices that the states are using to ensure that program participants meet the program's income and residency requirements. The states' requirements for obtaining income documentation vary. Of the 48 WIC directors responding to our survey, 32 reported that their state agencies generally require applicants to provide documentation of income eligibility; 14 reported that their states did not require documentation and allowed applicants to self-declare their income; and 2 reported that income documentation procedures are determined by local WIC agencies. Of the 32 states requiring income documentation, 30 reported that their documentation requirement could be waived under certain conditions. Our review of state income documentation polices found that waiving an income documentation requirement can be routine. For example, we found that some states requiring documentation of income will waive the requirement and permit self-declaration of income if the applicants do not bring income documents to their certification meeting. While existing federal regulations allow the states to establish their own income documentation requirements for applicants, we are concerned that basing income eligibility on the applicants' self-declarations of income may permit ineligible applicants to participate in WIC. However, the extent of this problem is unknown because there has not been a recent study of the number of program participants who are not eligible because of income. Information from a study that FNS has begun should enable that agency to determine whether changes in states' requirements for income documentation are needed. Regarding residency requirements, we found that some states have not been requiring proof of residency and personal identification for program certification, as required by federal regulations. In our September 1997 report, we recommended that FNS take the necessary steps to ensure that state agencies require participants to provide identification and evidence that they reside in the states where they receive benefits. In February 1998, FNS issued a draft policy memorandum to its regional offices that is intended to stress the continuing importance of participant identification, residency, and income requirements and procedures to ensure integrity in the certification and food instrument issuance processes. Also, at the request of FNS, we presented our review's findings and recommendations at the EBT and Program Integrity Conference jointly sponsored by the National Association of WIC Directors and FNS in December 1997. The conference highlighted the need to reduce ineligible participation and explored improved strategies to validate participants' income and residency eligibility. FNS requires the states to operate a rebate program for infant formula. By negotiating rebates with manufacturers of infant formula purchased through WIC, the states greatly reduce their average per person food costs so that more people can be served. At the request of the Chairman of the House Budget Committee, we are currently reviewing the impacts that these rebates have had on non-WIC consumers of infant formula. Specifically, we will report on (1) how prices in the infant formula market changed for non-WIC purchasers and WIC agencies after the introduction of sole-source rebates, (2) whether there is any evidence indicating that non-WIC purchasers of infant formula subsidized WIC purchases through the prices they paid, and (3) whether the significant cost savings for WIC agencies under sole source rebates for infant formula have implications for the use of rebates for other WIC products. Thank you again for the opportunity to appear before you today. We would be pleased to respond to any questions you may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. 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Pursuant to a congressional request, GAO discussed its completed reviews of the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), focusing on the: (1) reasons that states had for not spending all of their federal grant funds; (2) efforts of WIC agencies to improve access to WIC benefits for working women; and (3) various practices states use to lower the costs of WIC and ensure that the incomes of WIC applicants' meet the program's eligibility requirements for participation. GAO noted that: (1) states had unspent WIC funds for a variety of reasons; (2) in fiscal year 1996, these funds totalled about $121.6 million, or about 3.3 percent of that year's $3.7 billion WIC grant; (2) some of these reasons were associated with the way WIC is structured; (3) virtually all the directors of local WIC agencies report that their clinics have taken steps to improve access to WIC benefits for working women; (4) the two most frequently cited strategies are: (a) scheduling appointments instead of taking participants on a first-come, first-served basis; and (b) allowing a person other than the participant to pick up food vouchers or checks, as well as nutrition information, and to pass these benefits on to the participant; (5) the states are using a variety of cost containment initiatives that have saved millions of dollars annually for WIC and enabled more individuals to participate in the program; and (6) some of these initiatives include obtaining rebates on WIC foods, limiting participants' food choices to lowest-cost items, and limiting the number of stores that participate in WIC.

USPS has a universal service obligation, part of which requires it to provide access to retail services. It is required to serve the public and provide a maximum degree of effective and regular postal services to rural areas, communities, and small towns where post offices are not self- sustaining. USPS is intended to be a financially self-sufficient entity that covers its expenses almost entirely through postal revenues. USPS receives virtually no annual appropriations but instead generates revenue through selling postage and other postal products and services. Retail alternatives are increasingly important to USPS; revenues from all retail alternatives--including self-service kiosks in post offices, USPS's website, and CPUs, among others--increased by about $1.6 billion from fiscal years 2007 to 2011 while post office revenues decreased by $3 billion. (See fig. 1.) During this same period, USPS's share of total retail revenues from all retail alternatives increased from about 24 percent to 35 percent. USPS projects that by 2020, retail alternatives will account for 60 percent of its retail revenues. Given this growing importance and USPS's planned-retail-network restructuring, we recommended in November 2011 that USPS implement a strategy to guide efforts to modernize its retail network that addresses both post offices and retail alternatives. According to USPS officials, USPS is currently in the process of finalizing its retail strategy. The retail alternatives most similar to post offices are CPUs. They are privately owned, operated, and staffed and are usually colocated with a primary business, such as a convenience store or supermarket. They provide most of the same products and services as post offices (see fig. 2) at the same prices. CPUs typically have a counter with prominently displayed official USPS signage, provided by USPS, giving the CPU the look of a post office. (See fig. 3.) According to USPS, CPUs offer potential service and financial benefits, and, as we have previously reported, some foreign posts have successfully used private partnerships similar to CPUs to realize such benefits. CPUs can enhance service by being located closer to customers' homes and workplaces and operating at hours when post offices may not be open. They can alleviate long lines at existing post offices and provide postal services to areas with rapid population growth or where opening new post offices may be cost prohibitive. Regarding financial benefits, USPS has reported that the costs it incurs for CPUs are less than those it incurs for post offices, relative to revenue earned. USPS estimated that in fiscal year 2011, it incurred $0.17 in costs for each dollar of revenue at CPUs and $0.51 in costs for each dollar of revenue at post Costs are lower, in part because CPU operators, and not USPS, offices.are responsible for their operating costs, such as rent, utilities, and wages for their employees. CPUs provide all their revenues from postal products and services to USPS, and USPS compensates CPUs for providing postal services under the terms of their contracts. The amount of compensation USPS pays to a CPU operator depends in large part on the type of contract the CPU operates under. Currently there are two basic types of contracts: fixed-price, under which USPS compensates the CPU a contractually determined amount regardless of sales, and performance-based, under which USPS compensates the CPU a contractually determined percentage of sales. USPS's compensation to CPUs--either the amount under a fixed-price contract or the percentage under a performance-based contract--is specific for each CPU contract and the result of negotiation between USPS and the CPU operator. CPU hours of service are also negotiated for each contract, although USPS guidance on CPUs, in line with USPS's goal for CPUs to provide increased access and convenience, states that their days and hours of service should exceed those at post offices. Other terms and conditions are standardized in all contracts. For example, all CPUs are required to offer the same basic set of products and services such as stamps, Priority Mail, Express Mail, and Certified Mail. In addition, all CPUs are contractually prohibited from selling services, including private mailboxes and others, that are competitive with USPS's products, and all CPU contracts specify USPS's rights to inspect the CPU at any time during operating hours. CPU contracts are valid for an indefinite period, but CPU contracts specify that the CPU operator or USPS can terminate a contract and close the CPU at any time with 120 days notice. USPS management and oversight of CPUs, including identifying and justifying the need for new CPUs, is done at the district and local levels. Staff at the district and local levels oversee day-to-day operations of CPUs and identify the need for new CPUs. When a district identifies the need for a new CPU, it approaches local businesses in the targeted area as potential partners and engages in a competitive application process. USPS has other partnerships with private entities to provide retail postal services, similar to CPUs. USPS launched a retail partnership called the Village Post Office in July 2011 in which existing small businesses provide a limited range of postal products and services in small communities where underutilized yet costly post offices may close, be consolidated with another nearby post office, or have their hours of service reduced. partnerships with national and regional retailers to provide postal services. These partnerships differ from CPUs in that they will not be subject to the same prohibitions as CPUs on selling competing services, and with them, USPS is attempting to expand access at a national or regional level as opposed to addressing specific local needs as CPUs do. Village Post Offices sell a more limited range of USPS products and services than CPUs do. Local USPS staff solicit a local business for a Village Post Office opportunity and a USPS contracting officer agrees to enter into a contract if they believe that the terms and conditions of that Village Post Office present a best value to USPS. USPS plans to launch these partnerships in test markets in early 2013 and will evaluate the effectiveness of these partnerships before making decisions whether to expand the program. Although total number of CPUs has decreased in recent years, USPS continues to use CPUs to provide customers with access to postal services at additional locations and for more hours of service. CPUs are located in a variety of locations, both urban and rural, and range from very close to far from post offices, demonstrating how USPS uses CPUs to provide customers with alternatives located near crowded post offices--which are often found in urban areas-- and to provide service where post offices are not conveniently located or may not be cost effective for USPS, often in rural areas. In addition, CPUs allow USPS to provide customer access at times often beyond the hours of service at post offices. According to USPS data, the number of CPUs fell from 5,290 in 2002 to 3,619 in 2011. During the past 5 fiscal years, USPS has opened new CPUs, but a higher number of CPUs have closed. (See table 1.) According to USPS headquarters officials who manage the CPU program, economic conditions forced many businesses that operated CPUs to close and declining mail volume and sales of postal products have been the primary factors behind the decrease in the number of CPUs. Although USPS does not track specific reasons for CPU closures in its contract postal unit technology (CPUT) database, retail managers in eight USPS districts that we met with cited specific local issues resulting in CPU closures, including the following: The CPU operator retired or otherwise stopped working. For example, an Indiana CPU operator closed his primary business and moved out of the area. The CPU operator moved the primary business to a new location and did not retain the CPU. For example, the operator of a CPU in Texas moved his primary business across the street, but the new space was too small to host a CPU. The CPU operator sold the primary business. For example, a California CPU operator sold his self-storage business, and the new operators were not interested in maintaining the CPU. The CPU operator chose to close for financial considerations. For example, a CPU operator in Virginia closed the CPU because he felt it did not help his primary business. USPS initiated the closure because the CPU failed to meet the terms of the contract or USPS determined that the CPU was not cost effective. For example, USPS determined that a Maryland CPU that operated out of a private residence no longer brought in enough revenue to justify USPS's compensation to the CPU, so USPS closed the CPU. Consistent with USPS's goal to use CPUs to absorb excess demand at post offices, our analysis of the distance between CPUs and post offices shows that more than 56 percent of CPUs are less than 2 miles from the nearest post office and 26 percent are less than 1 mile. (See table 2.) For example, USPS opened a CPU in Frederick, Maryland, to better meet demand and reduce customer wait times in lines at the local post office about one-half mile away. Conversely, about 14 percent of CPUs are located 5 miles or more from the nearest post office, showing how CPUs can be used to provide services where post offices are not conveniently located, such as a CPU in rural Vigo Park, Texas, that is located 16 miles from the nearest post office. Similarly, USPS opened a CPU in Aubrey, Texas, located about 5 miles from the nearest post office, in order to serve customers in a fast growing area. Consistent with the majority of CPUs' being within 2 miles of a post office, CPUs are also more likely to be in urban than rural areas, and recent CPU openings further demonstrate this pattern. As shown in figure 4, more than 60 percent of CPUs active as of March 30, 2012, were in urban areas, as defined by the Rural-Urban Commuting Area codes we used for this analysis.CPUs to reduce the time customers have to wait in line at a post office, more often in urban areas. Furthermore, more than three-fourths of new CPUs in fiscal year 2011 were in urban locations. This suggests that CPUs may be most viable in urban areas with higher populations and customer traffic. Our analysis shows that CPUs are rarer in suburban, large-town rural, and small-town rural locations. In recent years, USPS has intentionally shifted its means of compensating CPUs from fixed-price contracts--in which compensation to CPUs is a fixed amount regardless of sales--to performance-based contracts--under which compensation to CPUs is a percentage of the CPU's postal sales--resulting in potentially greater revenue and less financial exposure to USPS. (See fig. 7.) According to USPS officials, since 2002, USPS has entered into performance-based contracts for most new CPUs and has converted many fixed-price contracts to performance-based. The purpose of the shift is to incentivize CPU operators to market postal products and services to increase postal revenues. CPUs with fixed-price contracts have limited incentive to sell more postal products, since their compensation is the same regardless of their sales. Furthermore, since USPS compensates CPUs with performance-based contracts a percentage of the CPU's sales, USPS does not compensate these CPUs more than it receives in revenues, a situation that can happen with CPUs with fixed-price contracts. The total revenues USPS received from sales of postal products and services at CPUsyear 2007 to $611 million in fiscal year 2011, as shown in figure 8. However, as mentioned earlier, USPS's revenues from post offices declined about 22 percent during this period. The decline in CPU revenues is part because of the decrease in the number of CPUs, as average CPU revenues decreased only 2 percent during this time. The downward trend in mail volume was also a factor, according to USPS officials. Several CPUs we visited experienced declining sales in recent years. For example, a CPU in Cedar Lake, Indiana, saw CPU revenues decline 17 percent from fiscal year 2007 to 2011. Several USPS district retail managers cited CPUs that closed because of low sales. For example, a CPU in Texas closed because neither the CPU nor the primary business generated sufficient revenue for the operator to stay in business. Our analysis of USPS data found that CPUs with lower than declined about 9 percent from $672 million in fiscal average revenues were more likely to close than were those with higher revenues. On average, CPUs that closed from fiscal years 2008 to 2011 generated roughly 26 percent less revenue on average in the year prior to closure than the average CPU revenue for that year. Individual CPU revenues vary widely, as shown in figure 9. On average, USPS's revenue from individual CPUs averaged about $160,000 in revenue in fiscal year 2011, but a substantial number (41 percent) generated less than $50,000. Moreover, low revenue CPUs are more likely to be located in rural areas where population is sparse and demand for services is lower; 22 percent of small-town rural and large-town rural CPUs had revenues under $5,000 in fiscal year 2011. High-revenue CPUs--such as the 7 percent that earned $500,000 or more in fiscal year 2011--are mostly located in urban areas where demand is likely higher and post offices are more likely to have long wait times. For instance, we visited one CPU in downtown Los Angeles with $1.8 million in revenues in fiscal year 2011. The ability to generate high revenues at this CPU led it to increase capacity by adding postal windows to keep pace with demand. USPS compensation to CPUs increased about 6 percent from $75.4 million in fiscal year 2007 to $79.9 million in fiscal year 2011. However, USPS compensation to CPUs has decreased every fiscal year from 2008 to 2011. (See fig. 10). According to USPS officials, the increase in compensation from fiscal years 2007 and 2008 was because of larger numbers of performance-based contracts, fewer public service contracts, which are generally less expensive, individual CPUs' petitions for increased compensation because of increased cost of doing business, and economic conditions. The subsequent decline in USPS compensation to CPUs from fiscal years 2008 to 2011 was because of declining numbers of CPUs during the time. As with CPU revenues, USPS compensation to individual CPUs varies widely. (See fig. 11.) For example, 326 CPUs received no more than $100 in annual compensation in fiscal year 2011. On the other hand, that same year, 55 high-revenue CPUs with performance-based contracts received over $100,000 in compensation. In fiscal year 2011, USPS compensated CPUs an average of about $21,000, but compensated more than a quarter of CPUs less than $5,000. As USPS undertakes actions to achieve a sustainable cost structure, it will be important to understand the implications of CPUs for USPS's costs and revenues. Currently, USPS retains most of the revenues generated by CPUs, its major expense being compensation payments to CPU operators. As we described previously, in fiscal year 2011, USPS earned a total of $610.5 million in revenues from CPUs and, in return, compensated CPUs a total of $79.9 million, allowing USPS to retain $530.6 million in CPU revenues. Measured in another way, after compensating CPUs, USPS retained $0.87 of every dollar of CPU revenues. However, for individual CPUs, the amount of revenues USPS retains after compensating the CPU varies significantly. USPS's target for individual CPUs is to retain, after compensation, $0.80 for every dollar in revenues. percent of the roughly half of CPUs that have fixed-price contracts. (See fig. 12.) Moreover, for 23 percent of CPUs with fixed-price contracts in fiscal year 2011, USPS did not retain any revenues as it compensated the CPU an amount greater than the revenue USPS received from the CPU. Most of these CPUs were in rural areas. Forty-nine percent of small-town rural CPUs with fixed-price contracts generated less revenue for USPS than the compensation USPS provided in fiscal year 2011. According to USPS officials, while USPS does not retain any revenue from these CPUs after compensating them, operating a post office in the same locations would be more onerous from a cost perspective. Because USPS compensates the roughly 45 percent of CPUs with performance- based contracts with a percentage of their sales--usually between 9 and 12 percent--USPS's revenues from CPUs with performance-based contracts will, by definition, always be greater than the amount of USPS compensation to them. USPS officials said that they review CPUs in which USPS retains less than $0.80 per dollar of revenue and attempts to take action to decrease CPU compensation or terminate the CPU if necessary. USPS is embarking on a substantial makeover of its retail network, including reducing hours of service at thousands of underutilized post offices and expanding the use of retail alternatives through partnerships with national and regional retailers. According to USPS officials, at this time there are no plans to strategically increase the number of CPUs to help enhance service in the changing postal retail landscape. USPS officials said that they plan to continue to use CPUs to meet specific local needs identified by local and district officials. At the same time, pending legislation in the Senate would require USPS to consider opening CPUs as replacements for post offices that it closes.pared down its plans to close post offices by instead reducing their hours, to the extent that USPS closes post offices in the future, this requirement may put more pressure on USPS to open more CPUs. Furthermore, some district retail managers we spoke with said that they see a potentially larger role for CPUs in the future as USPS transforms its traditional retail network. However, we identified a number of challenges USPS might face in its future use of CPUs: Limited Potential Business Partners. USPS may face limited private interest in opening CPUs in certain areas. USPS planned to open thousands of Village Post Offices, which, similar to CPUs, involve partnerships with private businesses, by the end of 2012. However, as of August 20, 2012, USPS has opened only 41 Village Post Offices in part because of a lack of interested private parties. USPS officials said that this lack of interested parties is because in some rural areas, there may not be any businesses to host a Village Post Offices and in other rural areas, businesses may not want to partner with USPS in what some communities may perceive as a reduction in services they receive. In addition, some district retail managers told us there are a number of reasons that some interested businesses do not become CPUs, including financial instability and not wanting to meet the conditions of new CPU contracts, such as space requirements or prohibiting sales of competitors' products and services. As a result, district staff are not always able to open as many new CPUs as they would like. Limited Staff Resources in USPS Districts. As we have previously mentioned, local and district-level USPS officials identify and justify the need for new CPUs, determining when and where to approach businesses as potential CPU partners. Some USPS district retail managers we spoke with told us that although there are unmet needs for CPUs in their districts, compared to prior years, they now have fewer staff and less time to seek out opportunities for new CPUs. Given the resources required to seek opportunities and open new CPUs, USPS may be unable to meet all local needs for CPUs with existing resources. Risk of Service Disruptions from CPU Closures. Because CPUs can close at any time--unlike post offices, which must undergo a lengthy review process including a public comment period prior to closure--there is a risk in relying on CPUs to provide service, especially in underserved areas where there may be a limited number of potential CPU partners and other post office alternatives. As discussed earlier, CPU operators can decide to close their CPUs for a variety of reasons. Although CPU contracts require CPUs to provide 120 days notice to USPS before closing, some district retail managers we spoke with said that CPU operators often provide much less notice, often as little as one week. Given the other challenges in opening new CPUs, USPS may have trouble replacing the lost service from unexpectedly closed CPUs. CPUs can play an important role in helping USPS provide universal service as it cuts costs to improve its financial condition--at times two conflicting goals. CPUs can help USPS reach customers in convenient locations during convenient hours at a potentially lower cost than through post offices. USPS data show that an increasing proportion of retail revenue is generated through channels other than post offices, which indicates a growing level of customer acceptance of these non-traditional means of accessing postal services. While USPS plans to continue to use CPUs as one alternative to post offices to fill local needs for postal services, it is exploring planned national and regional partnerships to more broadly expand access to convenient retail alternatives nation-wide. As USPS develops these regional and national partnerships, reduces hours of service at many post offices, and continues to use CPUs to fill specific local needs, it is important for USPS to consider CPUs' continuing role in USPS's evolving national retail network. We recommended in November 2011 that USPS develop and implement a retail network strategy that would address USPS customer access to both post offices and retail alternatives.officials told us that as of July 2012, the agency is in the process of finalizing this retail strategy. We continue to believe, as we stated in November 2011, that it is important that such a strategy discuss how USPS plans to increase its use of retail alternatives--including CPUs-- while considering significant changes to its network of post offices and the means through which it provides access to USPS's customers. As USPS continues to develop this retail strategy, we believe that USPS can capitalize on growing acceptance of retail alternatives by using information about CPUs to inform its decisions. For example, by considering factors, such as the distance of CPUs to existing post offices, CPU hours and days of service, and USPS's costs of compensating CPUs, USPS could better inform its retail strategy in order to make better strategic use of CPUs in its future retail network, which will likely include reduced hours at thousands of post offices. We provided a draft of this report to USPS for review and comment. USPS provided a written response (see appendix III) in which they discussed USPS's efforts beyond CPUs to provide customers with sufficient and convenient access to its products and services through other types of partnerships and alternatives to post offices. We are sending copies of this report to the appropriate congressional committees, the Postmaster General, and other interested parties. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staffs have any questions regarding this report, please contact me at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. To determine how contract postal units (CPUs) supplement the U.S. Postal Service's (USPS's) network of post offices, we analyzed data from USPS's contract postal unit technology (CPUT) database. This database contains information for individual CPUs, including location, contract number, revenues, compensation, CPU contract type (fixed-price or performance-based), contract termination dates, and if the CPU is in active service. Location data for each CPU in CPUT includes a physical address including city, state, and ZIP+4 code. USPS provided us these data on March 30, 2012. In determining the number of active CPUs, we encountered some duplicate CPU records. To avoid double counting, we used the CPU contract number to keep the record for only the oldest contact associated with each CPU. Based on the physical address, including ZIP+4 code, we determined the location type for each CPU by using the Department of Agriculture's Economic Research Service's Rural-Urban Commuting Area (RUCA) codes. RUCA codes classify a given location based on patterns of urbanization, population density, and daily commuting patterns. We classified CPU locations as one of four types: urban, suburban, large-town rural, and small-town rural. We also determined how many CPUs were located in each state using the state data in CPUT. Based on data from CPUT, we identified which CPUs closed from fiscal years 2007 to 2011. We identified which CPUs opened during this time period based on contract start dates from USPS's Contract Authoring Management System (CAMS). Contract start dates generally do not match the date that a CPU opens because, according to USPS officials, it usually takes 4 to 6 months for a CPU to open after USPS initiates a solicitation. We determined this date to be a reasonable approximation of when a CPU opens. We determined the number of CPUs that opened or closed in each fiscal year by counting the number of contract start dates and closure dates for each year. In addition, we obtained data from USPS's facilities database (FDB) on all post office locations including physical street address, city, state, and ZIP+4. USPS provided us these data on December 19, 2011. We determined the distance between the list of active CPUs as of March 30, 2012, and post offices as of December 19, 2011, using the latitude and longitude for each CPU and each post office and measuring the straight- line distance between the two points. We then determined which post office was closest to each CPU and by what distance. We also counted the number of post offices in each state and, along with using data on the number of CPUs in each state, to determine the number of CPUs per 100 post offices in each state. We analyzed FDB data to determine the number of hours of service per day and per week for each CPU and post office, and how many locations are open at certain times, such as on Sundays. USPS provided these data for CPUs on June 7, 2012, and for post offices on June 27, 2012. We also visited 10 CPUs in the following regions: Chicago, Illinois; Dallas- Fort Worth, Texas; Southern California; and Washington, D.C. We selected those regions and the 10 CPUs to ensure diversity in geographic location, location type (urban, suburban, and rural), CPU revenue levels, and type of CPU contract (fixed-price and performance-based). We also selected locations close to GAO office locations in order to minimize the use of travel funds by GAO staff on this engagement. During our visits, we interviewed each CPU operator. We also interviewed district retail managers in each of the USPS districts responsible for managing these CPUs. During these interviews as well as interviews with USPS headquarters staff in charge of managing the CPU program, we discussed the reasons for and benefits from using CPUs, the reasons why CPUs have closed, and factors that affect CPU revenues and compensation. We also reviewed GAO reports and USPS documents detailing the CPU program, including USPS guidance on CPUs and standard CPU contracts. To determine USPS revenue from CPUs and USPS's compensation to them from fiscal years 2007 to 2011, we analyzed data from CPUT. We encountered numerous duplicate records for a single CPU address. To avoid double counting, we merged all financial data for a given contract number into a single record by summing up data for each unique contract number. As CPUT stores CPU revenue and compensation data on a monthly basis, we summed monthly data to determine the total revenues and USPS compensation for each CPU for each fiscal year. We determined the amount of revenues USPS retains after compensating CPUs in each fiscal year by subtracting CPU compensation from CPU revenues and dividing that by CPU revenues. Finally, we linked data from CAMS on contract start dates to this financial data from CPUT by using the contract number for each CPU. As a result, we were able to determine the revenues and USPS compensation to each CPU for CPUs that opened in each fiscal year. We did the same for closed CPUs by using CPU closure dates included in CPUT. We assessed the reliability of each of the data sources we used by interviewing responsible USPS officials about procedures for entering and maintaining the data and verifying their accuracy. We manually reviewed all data provided by USPS for any obvious outlying data. After reviewing this information, we determined that the CPUT data were sufficiently reliable for evaluating revenue and compensation trends, closure dates, and CPU locations. We did find that CPUT reported outlying data on revenues in certain months for four CPUs in fiscal year 2007. To address these outlying data, we averaged the revenues for each of the four CPU in the other months, where reported revenues seemed normal, and assumed that the CPU earned the average level of revenue in the outlying months. We determined that the CAMS data were sufficiently reliable for evaluating CPU start dates. We determined that the FDB post office and CPU hours-of-service data were sufficiently reliable for overall comparison purposes. As previously stated, the FDB included hours-of- service data for 3,320 CPUs as of June 27, 2012, 6.3 percent less than 3,542 CPUs indicated by our analysis of CPUT as of March 30, 2012. In discussing the discrepancy with USPS officials, we determined that there was no indication that the CPU records missing from the FDB differed from the general population and were therefore unlikely to affect the outcome of our analysis. To determine challenges USPS might face if it increases its use of CPUs, we reviewed relevant legislation, USPS documents related to managing CPUs, prior GAO reports, and USPS Office of Inspector General reports. We also interviewed USPS officials responsible for implementing the CPU program, CPU operators, and USPS district retail managers at the sites and districts discussed earlier regarding current CPU operations and challenges the CPU program might face going forward. Table 5 provides the number of Contract Postal Units (CPUs) and post offices in each state, as well as the number of CPUs per 100 post offices in each state as a measure of how reliant each state is on CPUs for providing access to postal services. Lorelei St. James, (202) 512-2834 or [email protected]. In addition to the individual named above, Heather Halliwell, Assistant Director; Patrick Dudley; John Mingus; Jaclyn Nelson; Joshua Ormond; Matthew Rosenberg; Amy Rosewarne; Kelly Rubin; and Crystal Wesco made key contributions to this report.

USPS's declining revenues have become insufficient to cover its costs. Its strategies to address losses include reducing hours of service at many post offices and expanding the use of post office alternatives, including CPUs.CPUs are independent businesses compensated by USPS to sell most of the same products and services as post offices at the same price. Although CPUs can provide important benefits, the number of CPUs has fallen from 5,290 in fiscal year 2002 to 3,619 in fiscal year 2011. As requested, this report discusses: (1) how CPUs supplement USPS's post office network, (2) USPS's revenue from CPUs and compensation to them from fiscal years 2007 to 2011, and (3) challenges USPS might face if it increases its use of CPUs. GAO analyzed USPS data on CPU locations, revenues, compensation, and hours of operation as well as on post office locations and hours of operation. GAO interviewed CPU owners and USPS staff in charge of managing CPUs. Although contract postal units (CPUs) have declined in number, their nationwide presence in urban and rural areas supplements the U.S. Postal Service's (USPS) network of post offices by providing additional locations and hours of service. More than 60 percent of CPUs are in urban areas where they can provide customers nearby alternatives for postal services when they face long lines at local post offices. Over one-half of CPUs are located less than 2 miles from the nearest post office. Urban CPUs are, on average, closer to post offices than rural CPUs. CPUs are also sometimes located in remote or fast-growing areas where post offices are not conveniently located or may not be cost effective. CPUs further supplement post offices by providing expanded hours of service. On average, CPUs are open 54 hours per week, compared to 41 hours for post offices. In addition, a greater proportion of CPUs than post offices are open after 6 p.m. and on Sundays. These factors are important as USPS considers expanding the use of post office alternatives to cut costs and maintain access to its products and services. Total USPS revenues from CPUs fell from fiscal years 2007 to 2011, while USPS's compensation to them increased during this period; nonetheless, CPUs generated high revenues relative to USPS's compensation to CPUs. Declines in mail volumes and the number of CPUs drove revenues down 9 percent, from $672 million to $611 million from fiscal years 2007 to 2011. USPS total compensation to CPUs increased 6 percent during this period, from $76 million to $80 million; however, after increasing from fiscal year 2007 to 2008, compensation decreased every fiscal year from 2008 to 2011. According to USPS officials, the overall increase was because of increased compensation to individual CPUs and decreasing numbers of less expensive CPUs. In fiscal year 2011, after compensating CPUs, USPS retained 87 cents of every dollar of CPU revenue. USPS has a target to retain 80 cents for every dollar in revenue for individual CPUs. USPS did not meet this target at many individual CPUs-- especially ones in rural areas. In fact, 49 percent of CPUs that USPS compensates a fixed amount regardless of their sales in small-town rural areas-- where CPUs may serve as the de facto post office--generated less postal revenue than the CPUs received in compensation from USPS. CPU revenues and compensation are important factors as USPS seeks a more sustainable cost structure. Limited interest from potential partners, competing demands on USPS staff resources, and changes to USPS's retail network may pose challenges to USPS's use of CPUs. USPS has no current plans to strategically increase the number of CPUs as part of its retail network transformation. However, a number of district USPS staff charged with identifying the need for CPUs told us they see a larger role for CPUs. Nevertheless, USPS may face limited interest from potential partners as many may not want to operate CPUs because of concerns over CPU contract requirements such as space requirements and prohibitions on selling products and services that compete with USPS. Many USPS district retail managers we spoke with in charge of opening CPUs said that finding partners to operate CPUs could be difficult. Furthermore, many of these managers said that they now have fewer staff and less time and, as a result, do not have the resources to manage opening CPUs to meet the need they have identified. GAO previously recommended that USPS develop and implement a plan to modernize its retail network. GAO is not making any new recommendations at this time, but believes that it is important for USPS to consider the role of CPUs as USPS works to develop and implement its retail network plan and control costs. In commenting on a draft of this report, USPS provided information on its efforts to provide convenient access to its products and services.

Through special use permits, the Forest Service authorizes a variety of rights-of-way across the lands it administers. These include commercial uses such as pipelines and power lines and noncommercial uses such as driveways, roads, and trails. In total, there are about 13,000 permits for all rights-of-way. This report focuses on three commercial uses--oil and gas pipelines, power lines, and communications lines. In 1995, there were about 5,600 permits for these uses, which generated about $2.2 million in fees to the government. According to federal law, 25 percent of the fees generated from these permits is returned to the states where they were generated. The remaining 75 percent goes to the U.S. Treasury. The Forest Service administers about 191.6 million acres of land--roughly the size of California, Oregon, and Washington combined. The networks of oil and gas pipelines, power lines, and communications lines that cross the nation frequently go through national forest lands. Where these lands are located near population centers, the demand for land is higher, which thereby increases the value of a right-of-way. In order to best serve their customers, businesses that operate oil and gas pipelines, power lines, and communications lines frequently need to gain access to many miles of land in strips usually 20 to 50 feet wide. These companies negotiate with numerous landowners--both public and private--to gain rights-of-way across their lands. The Federal Land Policy and Management Act (FLPMA) of 1976 and the Mineral Leasing Act (MLA) generally require federal agencies to obtain fair market value for the use of federal lands for rights-of-way. In addition, title V of the Independent Offices Appropriation Act of 1952, as amended in 1982, requires the federal government to levy fair fees for the use of its services or things of value. Under the Office of Management and Budget's (OMB) Circular A-25, which implements the act, the agencies are normally to establish user fees on the basis of market prices. While there are exceptions to this practice, they are generally reserved for federal, state, and local government agencies and nonprofit organizations. The Forest Service's current fees for commercial rights-of-way for oil and gas pipelines, power lines, and communications lines frequently do not reflect fair market value. Before 1986, the Forest Service used a variety of techniques to establish fees for rights-of-way. These fees were based on appraisals, negotiations, a small percentage of the permittees' investment in the land, or a small percentage of the estimated value of the land. However, in 1986 the Forest Service implemented a fee schedule to address the problems that the agency was having in administering the fees for rights-of-way. Agency officials told us that the 1986 fee schedule reflected land values representing the low end of the market. As a result, when the fee schedule was implemented, the fees for rights-of-way near some urban areas were significantly reduced from pre-1986 levels. Before 1986, the Forest Service did not have a consistent system to establish fees for oil and gas pipelines, power lines, or communications lines. The agency's field staff used different methods for developing the fees for rights-of-way. Some used a percentage of the estimated value of the land or a percentage of the permittees' investment in the land, while others used appraisals and negotiations with the permittees to set the fees. However, in addition to being inconsistent, these practices resulted in unpredictable fees and appraisals that were subject to an appeals process. At that time, agency officials thought that moving to a fee schedule based on fair market value would resolve these problems. To develop a fee schedule based on fair market value, Forest Service officials, as well as officials from the Department of the Interior's Bureau of Land Management (BLM), collected market data on raw land values throughout the country. On the basis of these data, the Forest Service and BLM produced a fee schedule in 1986 which charged annual per acre fees that were based on the location and type of the right-of-way. The rates in the fee schedule were indexed to the Implicit Price Deflator to account for future inflation. However, according to Forest Service officials, the agency's management and the industry viewed the rates as being too high. As a result, the fees in the 1986 schedule were reduced by 20 percent for oil and gas pipelines and 30 percent for power lines and communications lines. Before the reductions, the fees represented average raw land values for federal lands. These values did not consider several factors that are critical to establishing land values that reflect fair market value. Specifically, they did not reflect what the land was being used for, the "highest and best" use of the land, or the values of any urban uses. For example, if these factors are not considered, land located near a large metropolitan area, which might otherwise be used for a residential housing development, would be valued as if it were being used for livestock grazing--a use that would result in a considerably lesser value. As such, according to Forest Service officials, the data used to generate the land values used in the fee system represented the "bottom of the market" and did not reflect fair market value. Nonetheless, the fee schedule established in 1986 is the basis for current fees. The Forest Service officials in the agency's Lands Division, which is responsible for the rights-of-way program at a national level, estimated that many of the current fees for rights-of-way may be only about 10 percent of the fair market value--particularly for lands near large urban areas. However, agency officials acknowledged that this estimate is based on their professional judgment and program experience and that there are no national data to support it. Because the fee schedule did not reflect several critical factors for determining fair market value, the fees for many rights-of-way, especially in forests near urban areas, were reduced when the fee schedule was implemented in 1986. For example, in the San Bernardino National Forest near Los Angeles, the annual fee for a fiber-optic cable was $465.40 per acre before the fee schedule was implemented and $11.16 afterwards. In the same forest, the annual fee for a power line was $72.51 per acre before the fee schedule and $8.97 afterwards. While these examples are among the most notable, the fees at forests that were not near urban areas frequently were also reduced. For example, in the Lolo National Forest in Montana, the fees for a communications line right-of-way went from $19.88 per acre to $17.23 per acre. Overall, at four of the six national forests where we collected detailed information, we found examples of fees that were reduced when the agency moved to a fee schedule in 1986. The Forest Service and BLM use the same fee schedule for rights-of-way. In March 1995, the Department of the Interior's Inspector General issued a report which found that BLM's fee system did not collect fair market value for rights-of-way. In the report, the Inspector General estimated that BLM could be losing as much as $49 million (net present value ) during the terms of the current rights-of-way by charging less than fair market value. At the time of the report, the agency had authorized 30,600 rights-of-way subject to rental payments. To determine how the Forest Service's fees compare with those charged by nonfederal landowners, we collected and analyzed information on charges for rights-of-way by states and private landowners. We found that state and private landowners frequently charge higher fees than the Forest Service. However, because our analysis is based on a judgmental sample of forests, it is important to note that our findings may not be representative of the situation for the nation as a whole. To compare the Forest Service's fees with those charged by nonfederal landowners, we collected available data on fees charged by nonfederal landowners in the same states as the forests that we visited. These forests included the San Bernardino National Forest and Angeles National Forest in California, the Arapaho/Roosevelt National Forest in Colorado, the Lolo National Forest in Montana, the Washington/Jefferson National Forest in Virginia, and the Mount Baker/Snoqualmie National Forest in Washington. Our objective was to include forests from different parts of the country, some of which are near urban areas and some of which are in rural areas. Since most nonfederal landowners charge a one-time fee either in perpetuity or for an extended term, such as 30 years, we used a net present value analysis to convert the Forest Service's annual fees to an equivalent one-time fee, which could then be compared with the one-time fee charged by nonfederal landowners. Table 1 compares the Forest Service's fees at the six forests we sampled with those charged by nonfederal landowners in the general vicinity of that forest. As table 1 shows, the Forest Service's fees are frequently less than fees charged by nonfederal landowners for similar rights-of-way. This was the case in 16 of the 17 examples we found during our review. In over half (10) of the examples, the Forest Service's fees were over $500 per acre less than the fees charged by nonfederal landowners. For example, in 1993 a power company negotiated with a private landowner in Virginia to obtain a right-of-way to run a power line. The power company agreed to pay a one-time fee of $42,280 for 30.2 acres of land, or $1,400 per acre. The Forest Service's annual fee in 1993 for that part of Virginia was $22.01 per acre. Our use of net present value techniques showed that the right-of-way operator's annual payment to the Forest Service of $22.01 per acre was equivalent to a one-time payment of $546 per acre. Thus, the Forest Service's one-time fee was $854 per acre less than the fee charged by the private landowner. Another example from the table shows that in 1995, a natural gas pipeline in California paid a one-time fee of $130,726 per acre for a right-of-way on state land. As the table shows, the Forest Service's comparable fee is over $129,000 less than the state of California's fee. While this difference is atypical of other examples we found, it nonetheless demonstrates how a unique parcel of land can have a considerable value. Furthermore, it is an example of how difficult it is to design a fee schedule that can reflect the fair market value of all lands managed by the Forest Service. In addition to collecting comparable data on fees in the same states as the six national forests we visited, we also gathered examples of the rates paid to state and private landowners by the Bonneville Power Administration (BPA)--an electric utility operating in the northwestern United States. BPA runs power lines across hundreds of miles of land owned by the federal government, states, and private entities. We included BPA in our review because during the course of our work, we learned that this utility had extensive data on the rates it was paying for rights-of-way. Therefore, it was a good source of data on fees. The data in table 2 are based on a sample from a database of fees that BPA paid to state and private landowners. The table compares the rates BPA paid to state and private owners with the rates charged by the Forest Service in that area. As table 2 shows, in 12 out of 14 examples, the fees charged by nonfederal landowners were higher than those charged by the Forest Service and in most cases were significantly higher--$100 or more per acre. In 6 of the 14 examples, the fees charged by nonfederal landowners were over $1,000 per acre higher than the fees charged by the Forest Service in the area. For example, in 1990 BPA negotiated with a private landowner in Montana to gain a right-of-way for a power line. BPA and the landowner agreed to a one-time payment of $11,106 for 5.03 acres of land, or about $2,208 per acre. In comparison, in 1990 the Forest Service's fee schedule produced an annual fee of $14.88 per acre for land located in the same county as the private land. Our use of net present value techniques showed that the annual payment received by the Forest Service of $14.88 per acre was equivalent to a one-time payment of $369 per acre. Thus, the Forest Service's one-time fee was $1,839 per acre less than the fee charged by the private landowner. In order to meet the requirements of FLPMA, MLA, and OMB Circular A-25, the Forest Service needs to revise and update its current fee system to establish fees that more closely reflect fair market value. The way to accomplish this task is to develop a system that is based on data that reflect current land values. However, each of the several available options for developing such a system has costs and benefits that need to be considered. Many of the industry representatives we spoke with acknowledged that nonfederal landowners generally charge higher fees than the Forest Service. Furthermore, these representatives indicated that they would be willing to pay higher market-based fees if the Forest Service improves its administration of the program by using more market-like business practices. Both the industry representatives and Forest Service officials suggested several changes that, if implemented, could improve the efficiency of the program for both the Forest Service and the industry. The Forest Service has several options available to revise its fee system for rights-of-way to reflect fair market value. Among them are three basic options: (1) develop a new fee schedule based on recent appraisals and local market data; (2) develop a new fee schedule, as noted above, but allow agency staff the alternative of obtaining site-specific appraisals when the fee schedule results in fees that do not adequately reflect the fair market value of a right-of-way; or (3) eliminate the fee schedule and establish fees for each individual right-of-way based on a site-specific appraisal or local market data. The first option involves developing a new fee schedule based on recent appraisals and local market data. This option would include performing some site-specific appraisals of Forest Service rights-of-way and developing an inventory of the rates charged by nonfederal landowners for various types of rights-of-way in the area. These data would be used to formulate a new, more up-to-date fee schedule that would set annual fees for identified areas within a forest. The fee schedule would be used in the same way that the current schedule is used. In this way, the Forest Service could, for the most part, charge annual fees that broadly reflect the fair market value of a right-of-way for an area. The advantage of having a fee schedule, and one of the reasons the agency originally decided to use a fee schedule, is that it is both easy to use and generates fees that are consistent and predictable for the industry. The disadvantage of a fee schedule is that it does not take into account the unique characteristics that may affect the value of a particular parcel of land. Therefore, instances may arise when a fee schedule will charge fees that are significantly different from fair market value--as our analysis has shown. Furthermore, performing appraisals and collecting market data to develop a new fee schedule will cost the agency time and money. However, these additional costs may be offset by the additional revenue that would be generated from the increased fees. Another disadvantage of using a fee schedule is that it carries the administrative burden and cost of having to bill and collect fees every year. A second option available to the Forest Service is a variation of the first option. It too would involve developing a new fee schedule based on recent appraisals and market data. However, under this approach, the fees in the schedule would be used as minimum fees. When it appears that the fees from this schedule do not properly value a right-of-way, the agency would be permitted to obtain an individual site appraisal to determine the fair market value of the site. The fee would then be based on the appraisal instead of the fee in the schedule. This option would offer the ease of use provided by a fee schedule combined with an accounting of the unique characteristics of individual parcels of land as provided for in appraisals. If the agency decided to use this option in developing a new fee system, it would have to develop meaningful criteria for when field staff should seek an appraisal. Otherwise, agency field staff may not seek to obtain appraisals when they are justified. For example, the Forest Service's current fee schedule contains a provision that permits Forest Service field staff to obtain appraisals. However, basing a fee on an appraisal can only occur when fair market value is 10 times greater than the fee from the fee schedule. This "10-times" rule is viewed by Forest Service officials in headquarters and in the field as being too high and, as a result, serves as a disincentive to obtaining appraisals. In fact, Forest Service headquarters and field staff could recall only one occasion in the past 10 years when this 10-times rule was used. A third option available to the Forest Service is to eliminate the fee schedule and establish fees for each individual right-of-way based on a site-specific appraisal or local market data. Appraisals are a technique commonly used in the marketplace for determining fair market value. By performing site-specific appraisals, the Forest Service could charge fees reflective of the fair market value for each individual permit. The fees could also be based on local market data. This method would be the most appropriate when agency staff are familiar with the fees being charged for nonfederal lands or when recent appraisal data are available from nearby lands. The obvious advantage of obtaining site-specific appraisals is that the practice would result in fees that would accurately reflect the fair market value for each individual permit throughout the Forest Service. As such, it would meet the requirements of FLPMA, MLA, and OMB Circular A-25. Like the other options, the downside of using appraisals is that they could be costly and/or time-consuming and could likely be subject to appeals because of their inherent subjectivity. In addition, this approach could be more difficult to administer than a fee schedule because of the need to perform appraisals on thousands of right-of-way permits across the nation. However, to mitigate this burden, the agency could require the users of rights-of-way to pay for any needed appraisals--something the industry representatives we spoke to agreed with. Industry officials we talked to representing a large segment of the users of rights-of-way indicated that, from their perspective, the value of rights-of-way on Forest Service lands is generally less than the value of similar nonfederal lands because of the administrative problems the prospective permittees may encounter in obtaining Forest Service permits. However, most of the industry representatives we spoke with told us that if the Forest Service improves its administration of the rights-of-way program by using more market-like administrative practices, they would be willing to pay fair market value for rights-of-way on Forest Service lands. While revising its fee system, the Forest Service can do several things to improve the administration of permits for rights-of-way. These include (1) using a more market-like instrument, such as an easement instead of a permit, to authorize rights-of-way; (2) billing less frequently or one time over the term of an authorization instead of annually; (3) providing consolidated billing for operators that have more than one right-of-way permit in a forest or region; and (4) making more timely decisions when processing new authorizations. These improvements would both reduce the agency's cost of administering rights-of-way and bring about the use of industry practices commonly found in the market. The Forest Service has the authority to make most of these changes. However, MLA requires annual payments for rights-of-way for oil and gas pipelines. Thus, changing fee collection from an annual payment to a one-time payment would require legislative action from the Congress. Instead of employing special use permits to grant right-of-way authorizations, one improvement the Forest Service could make is to grant authorizations using an instrument, such as an easement, that is more commonly found in the market. Special use permits convey rights that are similar to those of easements but not equal to them. Special use permits are revocable. In other words, during the term of a permit, if the agency decides that a right-of-way is no longer consistent with management's goals for an area of a forest, the agency can revoke the permit and require the operator to remove his investment in the land and leave. Because of this situation, banks do not recognize a permit as granting a value in the land equivalent to that granted by an easement, which is not revocable but can be terminated if the operator breaches the terms and conditions of the easement. The constraint on special use permits affects the users of rights-of-way when they are trying to obtain financing for a project. With a permit, the permittee is also at risk if the Forest Service decides to trade or exchange the land that the right-of-way crosses. In such instances, the permittee must renegotiate a right-of-way with the new landowner. If the Forest Service is going to revise its fee system to reflect fair market value, then the agency also needs a comparable instrument that conveys rights similar to those commonly found in the marketplace. This comparability could best be achieved by issuing easements instead of permits. Permits have been viewed by agency officials as giving the Forest Service more flexibility because it can terminate them if the use is no longer consistent with management's objectives in a forest. In practice, agency officials indicated that rarely has this flexibility been used to revoke a permit. Another improvement available to the agency in administering rights-of-way is to revise its billing system to eliminate the annual billing of permit fees. Instead, the agency could bill only once for the 20- or 30-year term of an authorization, or perhaps reduce billing to every 5 or 10 years. The agency has the authority to make this change for power lines and communications lines, but it would need to seek authority to do so for oil and gas pipelines. In addition, the agency can consolidate billing for operators that have multiple permits within the same forest or region. One-time billing and consolidated billing would reduce costs to both the agency and the permittee. For example, the Forest Service estimates that it costs the agency an average of about $40 to mail a bill and collect payment for a permit. Over the life of a 30-year permit, the agency's costs would be $1,200. With 5,600 rights-of-way permits for oil and gas pipelines, power lines, and communications lines, the potential savings for the program could be substantial--roughly $6.7 million ($1,200 x 5,600 permits) over a 30-year term. (The potential savings of $6.7 million has a net present value of about $3.9 million.) If the agency moved to a one-time payment, it would substantially reduce the costs of processing bills in the future. These costs can be further reduced by consolidating billing for multiple permits issued to the same operator within a forest or region. While the agency has made progress in consolidating some bills into "master permits," industry officials indicated that there remain more opportunities for consolidation. Both one-time billing and consolidated billing are commonly found in the marketplace, and both are supported by industry representatives. Furthermore, moving to a one-time billing process has significant cost-savings implications if and when the Forest Service attempts to increase its fees to reflect fair market value. Specifically, if the Forest Service decides to move to site-specific appraisals to establish fees, as described in the third option, the agency would have to do thousands of appraisals to determine the fees for the current permits. As we noted, under current conditions, this additional workload could be both costly and time-consuming. However, if the agency moved to a one-time billing process and based its fees on site-specific appraisals, then the agency would need to perform an appraisal on each permit only once over a 20- to 30-year authorization period. While the agency would spend more of its resources on appraisals, agency officials indicated that the cost savings of moving to one-time billing would more than cover the additional appraisal costs. Furthermore, the agency can largely negate these costs by requiring the users to pay for any needed appraisals. The industry representatives that we spoke to had no problem with paying for the necessary appraisals as long as the agency also moved to easements and one-time billing. Another improvement to the agency's administration of rights-of-way is to reduce the time the agency takes to reach a decision on whether to approve a new right-of-way. Industry representatives indicated that it frequently takes months and occasionally years for the Forest Service to reach a decision on whether to approve an application for a new right-of-way permit. Generally, delays in approving applications are the result of a lack of agency staff to perform environmental studies and inconsistent requirements among Forest Service units. Forest Service headquarters officials acknowledged that applications for permits are not processed in a timely manner, and they are now trying to identify opportunities for streamlining the agency's practices to help address this issue. It is their view that the industry should assume a greater share of the costs of both processing applications for new rights-of-way and administering existing rights-of-way. Industry representatives we spoke with indicated a willingness to pay for application and administration costs. Both agency and industry representatives have been working together to implement and resolve this issue. The Forest Service needs to update its current fees to fair market value for rights-of-way used by operators of oil and gas pipelines, power lines, and communications lines. In most cases, nonfederal landowners charge higher fees for similar rights-of-way. In attempting to arrive at fees based on fair market value, the agency has several options. Each of these options has a number of advantages and disadvantages. The initial costs of developing a new fee system could be substantial because of the need to perform appraisals and collect the market data needed to establish fair market value. These costs could be mitigated, and in some cases negated, with some administrative improvements to the program. Given the tight budgets and resource constraints that all federal land management agencies are experiencing, one option appears to be the most advantageous--obtaining site-specific appraisals that are paid for by the users of rights-of-way. However, to implement this option, a number of other changes would have to be made to the program to make it more market-like and more efficient to administer. To meet the requirements of FLPMA, MLA, and OMB Circular A-25, we recommend that the Secretary of Agriculture direct the Chief of the Forest Service to develop a fee system that ensures that fair market value is obtained from companies that have rights-of-way to operate oil and gas pipelines, power lines, and communications lines across Forest Service lands. While there are a number of options available to accomplish this goal, the option of establishing fees based on local market data or site-specific appraisals paid for by the users of rights-of-way appears to be the most attractive because it collects fair market value for each right-of-way and also reduces the agency's administrative costs. We also recommend that the Secretary improve the administration of the program by (1) authorizing rights-of-way with a more market-like instrument--specifically, easements; (2) billing once during the term of an authorization or, at a minimum, reducing the frequency of the billing cycle; and (3) consolidating the billing of multiple permits issued to the same operator in a forest or region. To the extent that the agency needs additional authority to charge one-time fees, we recommend that the Secretary seek that authority from the Congress. In addition, we also recommend that the Forest Service continue its efforts to streamline its practices for processing applications for right-of-way authorizations. We provided a draft of this report to the Forest Service and the Western Utility Group--an industry group representing a large number of users of rights-of-way--for their review and comment. We met with officials from the Forest Service--including the Acting Director of the Division of Lands--and with officials from the Western Utility Group, including its Chairman. Both the agency and the Western Utility Group agreed with the factual content, conclusions, and recommendations in the report. While the Forest Service officials agreed with the report's recommendations, they noted that the recommendations should also include having the Forest Service (1) look for ways to operate more efficiently and (2) manage the rights-of-way program in a more business-like manner. We are not including these points because we believe they are already inherent in our recommendations. The Forest Service officials also stated that the industry should assume a greater share of the costs of both processing applications for new rights-of-way and administering existing rights-of-way. We have revised the report to reflect this comment. Officials from the Western Utility Group provided us with some clarifications on technical issues, which have been included in the report as appropriate. They also noted that while they currently pay nonfederal landowners higher fees for rights-of-way, it is their view that they get more from these landowners than they do from the Forest Service because nonfederal landowners (1) generally use easements, instead of permits, to authorize rights-of-way and (2) are more timely than the Forest Service in responding to requests for rights-of-way. We conducted our review from April 1995 through March 1996 in accordance with generally accepted government auditing standards. We performed our work at Forest Service headquarters and field offices. We also contacted nonfederal landowners and representatives of companies that operate oil and gas pipelines, power lines, and communications lines on federal lands. Appendix II contains further details on our objectives, scope, and methodology. 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 the Secretary of Agriculture, the Chief of the U.S. Forest Service, and the Director of the Office of Management and Budget. We will also make copies available to others on request. Should you have questions about this report or need more information, please call me at (202) 512-3841. Major contributors to this report are listed in appendix III. We were asked by the Chairman, Subcommittee on Oversight of Government Management and the District of Columbia, Senate Committee on Governmental Affairs, to determine (1) whether the fees currently charged to users of Forest Service rights-of-way that operate oil and gas pipelines, power lines, and communications lines reflect fair market value, (2) how the Forest Service's fees compare with fees charged by nonfederal landowners, and (3) what, if any, changes are needed to the Forest Service's fee system to ensure that fees reflect fair market value. Our review included rights-of-way managed by the U.S. Department of Agriculture's Forest Service. Our work addressed the major commercial users of rights-of-way: oil and gas pipelines, power lines, and communications lines. To determine how the Forest Service establishes fees for rights-of-way, we reviewed the laws and implementing regulations governing rights-of-way. Because the Forest Service and the Bureau of Land Management (BLM) worked together to develop the joint 1986 fee schedule for rights-of-way, we reviewed the methods these agencies used to develop the schedule. However, we did not verify the accuracy of the data or the computations used by the agencies in developing this fee schedule. To determine whether the current federal fees reflect fair market value, we reviewed applicable laws and regulations, along with the Department of Agriculture's requirements for obtaining fair market value on lands it administers. We interviewed representatives of nonfederal entities (states, counties, private companies, and private landowners) to obtain information on commonly accepted techniques for determining fair market value. We also interviewed officials at Forest Service headquarters and field locations. We reviewed rights-of-way in six national forests: the Angeles National Forest and the San Bernardino National Forest in California, the Arapaho/Roosevelt National Forest in Colorado, the Lolo National Forest in Montana, the Washington/Jefferson National Forest in Virginia, and the Mount Baker/Snoqualmie National Forest in Washington. We selected these sites to obtain broad geographical representation and to encompass a high volume of commercial rights-of-way. To determine how federal fees compare with fees charged on nonfederal land, we compared the fee determination methods used by the Forest Service and BLM to those used by states, counties, private companies, and private landowners. For example, we interviewed state and county officials responsible for rights-of-way agreements in California, Colorado, Montana, Virginia, and Washington. We also interviewed commercial land managers who manage private lands in Montana and Virginia. Furthermore, we reviewed the Bonneville Power Administration's (BPA) settlement records for rights-of-way in Montana and Washington states. In addition, state and county officials, private land managers, and BPA administrators told us what they charged and/or were charged for various types of rights-of-way agreements. Using net present value techniques, we compared these fees with those charged by the federal government. In order to compute the net present value of future payments to the Forest Service, we deflated future payments by 4.2 percent per year. We obtained this number by subtracting expected inflation from the 30-year government bond rate. As of March 21, 1996, the 30-year government bond rate was 6.65 percent, and the WEFA Group's forecast for inflation was 2.45 percent. (The WEFA Group is a commonly cited, private economic forecasting organization that produces estimates of the long-term economic outlook, including expected inflation.) To obtain views on potential changes to the Forest Service's fee schedule, we met with officials of the Western Utility Group. This organization represents over 25 major companies that operate oil and gas pipelines, power lines, and communications lines. These companies represent about 75 percent of the energy and communications business in 11 western states. About 74 percent of all the land in the Forest Service is within these 11 western states. (For a list of member organizations of the Western Utility Group, see app. I.) In addition, we interviewed private landowners and Forest Service personnel in each of the states we visited. Finally, we interviewed several BLM field staff to obtain their viewpoints on the fee schedule. Joseph D. Kile The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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Pursuant to a congressional request, GAO reviewed the Forest Service's issuance of rights-of-way on national forest lands, focusing on: (1) whether the fees collected for rights-of-way reflect fair market value; (2) how Forest Service fees compare with fees charged by private landowners; and (3) the changes needed to ensure that Forest Service fees reflect fair market value. GAO found that: (1) Forest Service fees for rights-of-way for oil and gas pipelines, power lines, and communications lines are typically below fair market value; (2) Forest Service fees for rights-of-way are generally less than those charged by nonfederal landowners; (3) options available to the Forest Service for revising its fee determination system include using a new fee schedule based on recent appraisals and local market data, using a new fee schedule with the flexibility to disregard it when its fees are below fair market value, and using site-specific appraisals only; and (4) many rights-of-way users would be willing to pay fair market value for Forest Service rights-of-ways if the Forest Service would improve the administration of its rights-of-way program.

Since 1996, Congress has taken important steps to increase Medicare program integrity funding and oversight, including the establishment of the Medicare Integrity Program. Table 1 summarizes several key congressional actions. CMS has made progress in strengthening provider enrollment provisions, but needs to do more to identify and prevent potentially fraudulent providers from participating in Medicare. Additional improvements to prepayment and postpayment claims review would help prevent and recover improper payments. Addressing payment vulnerabilities already identified could further help prevent or reduce fraud. PPACA authorized and CMS has implemented new provider enrollment procedures that address past weaknesses identified by GAO and HHS's Office of Inspector General (OIG) that allowed entities intent on committing fraud to enroll in Medicare. CMS has also implemented other measures intended to improve existing procedures. Specifically, to strengthen the existing screening activities conducted by CMS contractors, the agency added screenings of categories of provider enrollment applications by risk level, contracted with new national enrollment screening and site visit contractors, and began imposing moratoria on new enrollment of certain types of providers. Screening Provider Enrollment Applications by Risk Level: CMS and OIG issued a final rule in February 2011 to implement many of the new screening procedures required by PPACA. CMS designated three levels of risk--high, moderate, and limited--with different screening procedures for categories of Medicare providers at each level. Providers in the high-risk level are subject to the most rigorous screening. Based in part on our work and that of OIG, CMS designated newly enrolling home health agencies and suppliers of durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) as high risk, and designated other providers as lower risk levels. Providers at all risk levels are screened to verify that they meet specific requirements established by Medicare, such as having current licenses or accreditation and valid Social Security numbers. High- and moderate-risk providers are also subject to unannounced site visits. Further, depending on the risks presented, PPACA authorizes CMS to require fingerprint-based criminal history checks. Last month, CMS awarded a contract that will enable the agency to access Federal Bureau of Investigation information to help conduct those checks of high-risk providers and suppliers. PPACA also authorizes the posting of surety bonds for certain providers. CMS has indicated that the agency will continue to review the criteria for its screening levels and will publish changes if the agency decides to update the assignment of screening levels for categories of Medicare providers. Doing so could become important because the Department of Justice (DOJ) and HHS reported multiple convictions, judgments, settlements, or exclusions against types of providers not currently at the high-risk level, including community mental health centers and ambulance providers. CMS's implementation of accreditation for DMEPOS suppliers, and of a competitive bidding program, including in geographic areas thought to have high fraud rates, may be helping to reduce the risk of DMEPOS fraud. While continued vigilance of DMEPOS suppliers is warranted, other types of providers may become more problematic in the future. Specifically, in September 2012, we found that a range of providers have been the subjects of fraud investigations. According to 2010 data from OIG and DOJ, over 10,000 providers that serve Medicare, Medicaid, and Children's Health Insurance Program beneficiaries were involved in fraud investigations, including not only home health agencies and DMEPOS suppliers, but also physicians, hospitals, and pharmacies.In addition, the provider type constituting the largest percentage of subjects in criminal health care fraud investigations was medical facilities--including medical centers, clinics, or practices--which constituted almost a quarter of subjects in such investigations. DMEPOS suppliers make up a little over 16 percent of subjects. National Enrollment Screening and Site Visit Contractors: CMS contracted with two new types of entities at the end of 2011 to assume centralized responsibility for two functions that had been the responsibility of multiple contractors. One of the new contractors is conducting automated screenings to check that existing and newly enrolling providers and suppliers have valid licensure, accreditation, and a National Provider Identifier (NPI), and are not on the OIG list of providers and suppliers excluded from participating in federal health care programs. The second contractor conducts site visits of providers to determine whether sites are legitimate and the providers meet certain Medicare standards. implementation of the PPACA screening requirements, the agency had revoked over 17,000 suspect providers' ability to bill the Medicare program. Site visits for DMEPOS suppliers are to continue to be conducted by the contractor responsible for their enrollment. In addition, CMS at times exercises its authority to conduct a site visit or request its contractors to conduct a site visit for any Medicare provider or supplier. Moratoria on Enrollment of New Providers and Suppliers in Certain Areas: CMS suspended enrollment of new home health providers and ambulance suppliers in certain fraud "hot spots" and other geographic areas. In July 2013, CMS first exercised its authority granted by PPACA to establish temporary moratoria on enrolling new home health agencies in Chicago and Miami, and new ambulance suppliers in Houston. In January 2014, CMS extended its first moratoria and added enrollment moratoria for new home health agency providers in Fort Lauderdale, Detroit, Dallas, and Houston, and new ground ambulance suppliers in Philadelphia. These moratoria are scheduled to be in effect until July 2014, unless CMS extends or lifts them. CMS officials cited areas of potential fraud risk, such as a disproportionate number of providers and suppliers relative to beneficiaries and extremely high utilization as rationales for suspending new enrollments of home health providers or ground ambulance suppliers in these areas. We are currently examining the ability of CMS's provider enrollment system to prevent and detect the continued enrollment of ineligible or potentially fraudulent providers in Medicare. Specifically, we are assessing the process used to enroll and verify the eligibility of Medicare providers in Medicare's Provider Enrollment, Chain, and Ownership System (PECOS) and the extent to which CMS's controls are designed to prevent and detect the continued enrollment of ineligible or potentially fraudulent providers in PECOS. Although CMS has taken many needed actions, we and OIG have found that CMS has not fully implemented other enrollment screening actions authorized by PPACA. These actions could help further reduce the enrollment of providers and suppliers intent on defrauding the Medicare program. They include issuing a rule to implement surety bonds for certain providers, issuing a rule on provider and supplier disclosure requirements, and establishing the core elements for provider and supplier compliance programs. Surety Bonds: PPACA authorized CMS to require a surety bond for certain types of at-risk providers and suppliers. Surety bonds may serve as a source for recoupment of erroneous payments. DMEPOS suppliers are currently required to post a surety bond at the time of enrollment. CMS reported in April 2014 that it had not scheduled for publication a proposed rule to implement the PPACA surety bond requirement for other types of at-risk providers and suppliers--such as home health agencies and independent diagnostic testing facilities. In light of the moratoria that CMS has placed on enrollment of home health agencies in fraud "hot spots," implementation of this rule could help the agency address potential concerns for these at-risk providers across the Medicare program. Providers and Suppliers Disclosure: CMS has not yet scheduled a proposed rule for publication for increased disclosures of prior actions taken against providers and suppliers enrolling or revalidating enrollment in Medicare, as authorized by PPACA, such as whether the provider or supplier has been subject to a payment suspension from a federal health care program. Agency officials had indicated that developing the additional disclosure requirements has been complicated by provider and supplier concerns about what types of information will be collected, what CMS will do with it, and how the privacy and security of this information will be maintained. Compliance Program: CMS has not established the core elements of compliance programs for providers and suppliers, as required by PPACA. We previously reported that agency officials indicated that they had sought public comments on the core elements, which they were considering, and were also studying criteria found in OIG model plans for possible inclusion.had not yet scheduled a proposed rule for publication. Medicare uses prepayment review to deny claims that should not be paid and postpayment review to recover improperly paid claims. As claims go through Medicare's electronic claims payment systems, they are subjected to prepayment controls called "edits," most of which are fully automated; if a claim does not meet the criteria of the edit, it is automatically denied. Other prepayment edits are manual; they flag a claim for individual review by trained staff who determine whether it should be paid. Due to the volume of claims, CMS has reported that less than 1 percent of Medicare claims are subject to manual medical record review by trained personnel. Increased use of prepayment edits could help prevent improper Medicare payments. Our prior work found that, while use of prepayment edits saved Medicare at least $1.76 billion in fiscal year 2010, the savings could have been greater had prepayment edits been used more widely. Based on an analysis of a limited number of national policies and local coverage determinations (LCD), we identified $14.7 million in payments in fiscal year 2010 that appeared to be inconsistent with four national policies and therefore improper. We also found more than $100 million in payments that were inconsistent with three selected LCDs that could have been identified using automated edits. Thus we concluded that more widespread implementation of effective automated edits developed by individual Medicare administrative contractors (MAC) in other MAC jurisdictions could also result in savings to Medicare. CMS has taken steps to improve the development of other types of prepayment edits that are implemented nationwide, as we recommended. For example, the agency has centralized the development and implementation of automated edits based on a type of national policy called national coverage determinations. CMS has also modified its processes for identifying provider billing of services that are medically unlikely to prevent circumvention of automated edits designed to identify an unusually large quantity of services provided to the same patient. We also evaluated the implementation of CMS's Fraud Prevention System (FPS), which uses predictive analytic technologies as required by the Small Business Jobs Act of 2010 to analyze Medicare fee-for-service (FFS) claims on a prepayment basis. FPS identifies investigative leads for CMS's Zone Program Integrity Contractors (ZPIC), the contractors responsible for detecting and investigating potential fraud. Implemented in July 2011, FPS is intended to help facilitate the agency's shift from focusing on recovering potentially fraudulent payments after they have been made, to detecting aberrant billing patterns as quickly as possible, with the goal of preventing these payments from being made. However, in October 2012, we found that, while FPS generated leads for investigators, it was not integrated with Medicare's payment-processing system to allow the prevention of payments until suspect claims can be determined to be valid. As of April 2014, CMS reported that while the FPS functionality to deny claims before payment had been integrated with the Medicare payment processing system in October 2013, the system did not have the ability to suspend payment until suspect claims could be investigated. In addition, while CMS directed the ZPICs to prioritize alerts generated by the system, in our work examining the sources of new ZPIC investigations in 2012, we found that FPS accounted for about 5 percent of ZPIC investigations in that year. A CMS official reported last month that ZPICs are now using FPS as a primary source of leads for fraud investigations, though the official did not provide details on how much of ZPICs' work is initiated through the system. Our prior work found that postpayment reviews are critical to identifying and recouping overpayments. The use of national recovery audit contractors (RAC) in the Medicare program is helping to identify underpayments and overpayments on a postpayment basis. CMS began the program in March 2009 for Medicare FFS. CMS reported that, as of the end of 2013, RACs collected $816 million for fiscal year 2014. PPACA required the expansion of Medicare RACs to Parts C and D. CMS has implemented a RAC for Part D, and CMS said it plans to award a contract for a Part C RAC by the end of 2014. Moreover, in February 2014, CMS announced a "pause" in the RAC program as the agency makes changes to the program and starts a new procurement process for the next round of recovery audit contracts for Medicare FFS claims. CMS said it anticipates awarding all five of these new Medicare FFS recovery audit contracts by the end of summer 2014. Other contractors help CMS investigate potentially fraudulent FFS payments, but CMS could improve its oversight of their work. CMS contracts with ZPICs in specific geographic zones covering the nation. We recently found that the ZPICs reported that their actions, such as stopping payments on suspect claims, resulted in more than $250 million in savings to Medicare in calendar year 2012. However, CMS lacks information on the timeliness of ZPICs' actions--such as the time it takes between identifying a suspect provider and taking actions to stop that provider from receiving potentially fraudulent Medicare payments--and would benefit from knowing whether ZPICs could save more money by acting more quickly. Thus, in October 2013, we recommended that CMS collect and evaluate information on the timeliness of ZPICs' investigative and administrative actions. CMS did not comment on our recommendation. We are currently examining the activities of the CMS contractors, including ZPICs, that conduct postpayment claims reviews. Our work is reviewing, among other things, whether CMS has a strategy for coordinating these contractors' postpayment claims review activities. CMS has taken steps to improve use of two CMS information technology systems that could help analysts identify fraud after claims have been paid, but further action is needed. In 2011, we found that the Integrated Data Repository (IDR)--a central data store of Medicare and other data needed to help CMS program integrity staff and contractors detect improper payments of claims--did not include all the data that were planned to be incorporated by fiscal year 2010, because of technical obstacles and delays in funding. As of March 2014, the agency had not addressed our recommendation to develop reliable schedules to incorporate all types of IDR data, which could lead to additional delays in making available all of the data that are needed to support enhanced program integrity efforts and achieve the expected financial benefits. However, One Program Integrity (One PI)--a web-based portal intended to provide CMS staff and contractors with a single source of access to data contained in IDR, as well as tools for analyzing those data--is operational and CMS has established plans and schedules for training all intended One PI users, as we also recommended in 2011. However, as of March 2014, CMS had not established deadlines for program integrity contractors to begin using One PI, as we recommended in 2011. Without these deadlines, program integrity contractors will not be required to use the system, and as a result, CMS may fall short in its efforts to ensure the widespread use and to measure the benefits of One PI for program integrity purposes. Having mechanisms in place to resolve vulnerabilities that could lead to improper payments, some of which are potentially fraudulent, is critical to effective program management, but our work has shown weaknesses in CMS's processes to address such vulnerabilities. Both we and OIG have made recommendations to CMS to improve the tracking of vulnerabilities. In our March 2010 report on the RAC demonstration program, we found that CMS had not established an adequate process during the demonstration or in planning for the national program to ensure prompt resolution of vulnerabilities that could lead to improper payments in Medicare; further, the majority of the most significant vulnerabilities identified during the demonstration were not addressed. In December 2011, OIG found that CMS had not resolved or taken significant action to resolve 48 of 62 vulnerabilities reported in 2009 by CMS contractors specifically charged with addressing fraud. We and OIG recommended that CMS have written procedures and time frames to ensure that vulnerabilities were resolved. CMS has indicated that it is now tracking vulnerabilities identified from several types of contractors through a single vulnerability tracking process, and the agency has developed some written guidance on the process. We recently examined that process and found that, while CMS informs MACs about vulnerabilities that could be addressed through prepayment edits, the agency does not systematically compile and disseminate information about effective local edits to address such vulnerabilities. Specifically, we recommended that CMS require MACs to share information about the underlying policies and savings related to their most effective edits, and CMS generally agreed to do so. In addition, in 2011, CMS began requiring MACs to report on how they had addressed certain vulnerabilities to improper payment, some of which could be addressed through edits. We also recently made recommendations to CMS to address the millions of Medicare cards that display beneficiaries' Social Security numbers, In August which increases beneficiaries' vulnerability to identity theft.2012, we recommended that CMS (1) select an approach for removing Social Security numbers from Medicare cards that best protects beneficiaries from identity theft and minimizes burdens for providers, beneficiaries, and CMS and (2) develop an accurate, well-documented cost estimate for such an option. In September 2013, we further recommended that CMS (1) initiate an information technology project for identifying, developing, and implementing changes for the removal of Social Security numbers and (2) incorporate such a project into other information technology initiatives. HHS concurred with our recommendations and agreed that removing the numbers from Medicare cards is an appropriate step toward reducing the risk of identity theft. However, the department also said that CMS could not proceed with changes without agreement from other agencies, such as the Social Security Administration, and that funding was also a consideration. Thus, CMS has not yet taken action to address these recommendations. We are currently examining other options for updating and securing Medicare cards, including the potential use of electronic-card technologies. In addition, we and others have identified concerns with CMS oversight of fraud, waste, and abuse in Medicare's prescription drug program, Part D, including the contractors tasked with this work. To help address potential vulnerabilities in that program, we are examining practices for promoting prescription drug program integrity, and the extent to which CMS's oversight of Medicare Part D reflects those practices. Although CMS has taken some important steps to identify and prevent fraud, the agency must continue to improve its efforts to reduce fraud, waste, and abuse in the Medicare program. Identifying the nature, extent, and underlying causes of improper payments, and developing adequate corrective action processes to address vulnerabilities, are essential prerequisites to reducing them. As CMS continues its implementation of PPACA and Small Business Jobs Act provisions, additional evaluation and oversight will help determine whether implementation of these provisions has been effective in reducing improper payments. We are investing resources in a body of work that assesses CMS's efforts to refine and improve its fraud detection and prevention abilities. Notably, we are currently assessing the potential use of electronic-card technologies, which can help reduce Medicare fraud. We are also examining the extent to which CMS's information system can help prevent and detect the continued enrollment of ineligible or potentially fraudulent providers in Medicare. Additionally, we have a study underway examining CMS's oversight of fraud, waste, and abuse in Medicare Part D to determine whether the agency has adopted certain practices for ensuring the integrity of that program. We are also examining CMS's oversight of some of the contractors that conduct reviews of claims after payment. These studies are focused on additional actions for CMS that could help the agency more systematically reduce potential fraud in the Medicare program. Chairman Brady, Ranking Member McDermott, and Members of the Subcommittee, this concludes my prepared remarks. I would be pleased to respond to any questions you may have at this time. For further information about this statement, please contact Kathleen M. King 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 statement. Karen Doran, Assistant Director; Stephen Robblee; Lisa Rogers; Eden Savino; and Jennifer Whitworth were key contributors to this statement. Medicare: Second Year Update for CMS's Durable Medical Equipment Competitive Bidding Program Round 1 Rebid. GAO-14-156. Washington, D.C.: March 7, 2014. Medicare Program Integrity: Contractors Reported Generating Savings, but CMS Could Improve Its Oversight. GAO-14-111. Washington, D.C.: October 25, 2013. Medicare Information Technology: Centers for Medicare and Medicaid Services Needs to Pursue a Solution for Removing Social Security Numbers from Cards. GAO-13-761. Washington, D.C.: September 10, 2013 Health Care Fraud and Abuse Control Program: Indicators Provide Information on Program Accomplishments, but Assessing Program Effectiveness Is Difficult. GAO-13-746. Washington, D.C.: September 30, 2013. Medicare Program Integrity: Increasing Consistency of Contractor Requirements May Improve Administrative Efficiency. GAO-13-522. Washington, D.C.: July 23, 2013. Medicare Program Integrity: Few Payments in 2011 Exceeded Limits under One Kind of Prepayment Control, but Reassessing Limits Could Be Helpful. GAO-13-430. Washington, D.C.: May 9, 2013. 2013 Annual Report: Actions Needed to Reduce Fragmentation, Overlap, and Duplication and Achieve Other Financial Benefits. GAO-13-279SP. Washington, D.C.: April 9, 2013. Medicare Fraud Prevention: CMS Has Implemented a Predictive Analytics System, but Needs to Define Measures to Determine Its Effectiveness. GAO-13-104. Washington, D.C.: October 15, 2012. Medicare Program Integrity: Greater Prepayment Control Efforts Could Increase Savings and Better Ensure Proper Payment. GAO-13-102. Washington, D.C.: November 13, 2012. Medicare: CMS Needs an Approach and a Reliable Cost Estimate for Removing Social Security Numbers from Medicare Cards. GAO-12-831. Washington, D.C.: August 1, 2012. Health Care Fraud: Types of Providers Involved in Medicare, Medicaid, and the Children's Health Insurance Program Cases. GAO-12-820. Washington, D.C.: September 7, 2012. Program Integrity: Further Action Needed to Address Vulnerabilities in Medicaid and Medicare Programs. GAO-12-803T. Washington, D.C.: June 7, 2012. Follow-up on 2011 Report: Status of Actions Taken to Reduce Duplication, Overlap, and Fragmentation, Save Tax Dollars, and Enhance Revenue. GAO-12-453SP. Washington, D.C.: February 28, 2012. Medicare: The First Year of the Durable Medical Equipment Competitive Bidding Program Round 1 Rebid. GAO-12-733T. Washington, D.C.: May 9, 2012. Medicare: Review of the First Year of CMS's Durable Medical Equipment Competitive Bidding Program's Round 1 Rebid. GAO-12-693. Washington, D.C.: May 9, 2012. Medicare: Important Steps Have Been Taken, but More Could Be Done to Deter Fraud. GAO-12-671T. Washington, D.C.: April 24, 2012. Medicare Program Integrity: CMS Continues Efforts to Strengthen the Screening of Providers and Suppliers. GAO-12-351. Washington, D.C.: April 10, 2012. Improper Payments: Remaining Challenges and Strategies for Governmentwide Reduction Efforts. GAO-12-573T. Washington, D.C.: March 28, 2012. 2012 Annual Report: Opportunities to Reduce Duplication, Overlap and Fragmentation, Achieve Savings, and Enhance Revenue. GAO-12-342SP. Washington, D.C.: February 28, 2012. Fraud Detection Systems: Centers for Medicare and Medicaid Services Needs to Expand Efforts to Support Program Integrity Initiatives. GAO-12-292T. Washington, D.C.: December 7, 2011. Medicare Part D: Instances of Questionable Access to Prescription Drugs. GAO-12-104T. Washington, D.C.: October 4, 2011. Medicare Part D: Instances of Questionable Access to Prescription Drugs. GAO-11-699. Washington, D.C.: September 6, 2011. Medicare Integrity Program: CMS Used Increased Funding for New Activities but Could Improve Measurement of Program Effectiveness. GAO-11-592. Washington, D.C.: July 29, 2011. Improper Payments: Reported Medicare Estimates and Key Remediation Strategies. GAO-11-842T. Washington, D.C.: July 28, 2011. Fraud Detection Systems: Additional Actions Needed to Support Program Integrity Efforts at Centers for Medicare and Medicaid Services. GAO-11-822T. Washington, D.C.: July 12, 2011. Fraud Detection Systems: Centers for Medicare and Medicaid Services Needs to Ensure More Widespread Use. GAO-11-475. Washington, D.C.: June 30, 2011. Improper Payments: Recent Efforts to Address Improper Payments and Remaining Challenges. GAO-11-575T. Washington, D.C.: April 15, 2011. Medicare and Medicaid Fraud, Waste, and Abuse: Effective Implementation of Recent Laws and Agency Actions Could Help Reduce Improper Payments. GAO-11-409T. Washington, D.C.: March 9, 2011. Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington, D.C.: March 1, 2011. Improper Payments: Progress Made but Challenges Remain in Estimating and Reducing Improper Payments. GAO-09-628T. Washington, D.C.: April 22, 2009. Medicare: Thousands of Medicare Providers Abuse the Federal Tax System. GAO-08-618. Washington, D.C.: June 13, 2008. Medicare: Competitive Bidding for Medical Equipment and Supplies Could Reduce Program Payments, but Adequate Oversight Is Critical. GAO-08-767T. Washington, D.C.: May 6, 2008. Improper Payments: Status of Agencies' Efforts to Address Improper Payment and Recovery Auditing Requirements. GAO-08-438T. Washington, D.C.: January 31, 2008. Improper Payments: Federal Executive Branch Agencies' Fiscal Year 2007 Improper Payment Estimate Reporting. GAO-08-377R. Washington, D.C.: January 23, 2008. Medicare: Improvements Needed to Address Improper Payments for Medical Equipment and Supplies. GAO-07-59. Washington, D.C.: January 31, 2007. Medicare: More Effective Screening and Stronger Enrollment Standards Needed for Medical Equipment Suppliers. GAO-05-656. Washington, D.C.: September 22, 2005. Medicare: CMS's Program Safeguards Did Not Deter Growth in Spending for Power Wheelchairs. GAO-05-43. Washington, D.C.: November 17, 2004. Medicare: CMS Did Not Control Rising Power Wheelchair Spending. GAO-04-716T. Washington, D.C.: April 28, 2004. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

GAO has designated Medicare as a high-risk program, in part because the program's size and complexity make it vulnerable to fraud, waste, and abuse. In 2013, Medicare financed health care services for approximately 51 million individuals at a cost of about $604 billion. The deceptive nature of fraud makes its extent in the Medicare program difficult to measure in a reliable way, but it is clear that fraud contributes to Medicare's fiscal problems. More broadly, in fiscal year 2013, CMS estimated that improper payments--some of which may be fraudulent--were almost $50 billion. This statement focuses on the progress made and important steps to be taken by CMS and its program integrity contractors to reduce fraud in Medicare. These contractors perform functions such as screening and enrolling providers, detecting and investigating potential fraud, and identifying improper payments and vulnerabilities that could lead to payment errors. This statement is based on relevant GAO products and recommendations issued from 2004 through 2014 using a variety of methodologies. In April 2014, GAO also received updated information from CMS on its actions related to the laws, regulations, and guidance discussed in this statement. Additionally, GAO updated information by examining public documents and relevant policies and procedures. The Centers for Medicare & Medicaid Services (CMS)--the agency within the Department of Health and Human Services (HHS) that oversees Medicare--has made progress in implementing several key strategies GAO identified in prior work as helpful in protecting Medicare from fraud; however, important actions that could help CMS and its program integrity contractors combat fraud remain incomplete. Provider Enrollment : The Patient Protection and Affordable Care Act (PPACA) authorized, and CMS has implemented, actions to strengthen provider enrollment that address past weaknesses identified by GAO and HHS's Office of Inspector General. For example, CMS has hired contractors to determine whether providers and suppliers have valid licenses and are at legitimate locations. CMS also recently contracted for fingerprint-based criminal history checks for high-risk providers and suppliers. CMS could further strengthen provider enrollment by issuing a rule to require additional provider and supplier disclosures of information and establishing core elements for provider and supplier compliance programs, as authorized by PPACA. Prepayment and Postpayment Claims Review : Medicare uses prepayment review to deny claims that should not be paid and postpayment review to recover improperly paid claims. GAO has found that increased use of prepayment edits could help prevent improper Medicare payments. For example, prior GAO work identified millions of dollars of payments inconsistent with selected coverage and payment policies and therefore improper. Postpayment reviews are also critical to identifying and recouping payments. GAO recommended better oversight of both the information systems analysts use to identify claims for postpayment review, in a 2011 report, and the contractors responsible for these reviews, in a 2013 report. CMS has addressed some of these recommendations. Addressing Identified Vulnerabilities : Having mechanisms in place to resolve vulnerabilities that could lead to improper payments is critical to effective program management and could help address fraud. However, GAO work has shown weaknesses in CMS's processes to address such vulnerabilities, placing the Medicare program and its beneficiaries at risk. For example, GAO has made multiple recommendations to CMS to remove Social Security numbers from beneficiaries' Medicare cards to help prevent identity theft, and, while HHS agreed with these recommendations, the department also reported that CMS could not proceed with the changes for a variety of reasons, including funding limitations. Thus, to date, CMS has not taken action on these recommendations. GAO has work underway addressing these key strategies, including assessing the potential use of electronic-card technologies to help reduce Medicare fraud. GAO is also examining the extent to which CMS's information system can prevent and detect the continued enrollment of ineligible or potentially fraudulent providers in Medicare. Additionally, GAO is studying CMS's oversight of program integrity efforts for prescription drugs and is examining CMS's oversight of some of the contractors that conduct reviews of claims after payment. These studies are focused on additional actions for CMS that could help the agency more systematically reduce potential fraud in the Medicare program.

In recent years, a number of factors have led to growing concern about the protection of privacy when personally identifiable information is collected and maintained by the federal government. Recent data breaches of personal information at government agencies, such as the data breach at the Department of Veterans Affairs, which exposed the personal information of 26.5 million veterans and active duty members of the military in May 2006, have raised concerns about identity theft. In addition, increasingly sophisticated analytical techniques employed by federal agencies, such as data mining, also raise concerns about how personally identifiable information is used and what controls are placed on its use. Concerns such as these have focused attention on the structures agencies have instituted to ensure privacy protections are in place. The major requirements for privacy protection by federal agencies come from two laws, the Privacy Act of 1974 and the E-Gov Act of 2002. The Privacy Act places limitations on agencies' collection, disclosure, and use of personal information maintained in systems of records. The act describes a "record" as any item, collection, or grouping of information about an individual that is maintained by an agency and contains his or her name or another personal identifier. It also defines "system of records" as a group of records under the control of any agency from which information is retrieved by the name of the individual or by an individual identifier. The Privacy Act requires that when agencies maintain a system of records, they must notify the public by a system-of-records notice: that is, a notice in the Federal Register identifying, among other things, the type of data collected, the types of individuals about whom information is collected, the intended "routine" use of the data, and procedures that individuals can use to review and correct personal information. The act also requires agencies to define and limit their use of covered personal information. In addition, the act requires that to the greatest extent practicable, personal information should be collected directly from the subject individual when it may affect an individual's rights or benefits under a federal program. The E-Gov Act of 2002 also assigns agencies significant responsibilities relating to privacy. The E-Gov Act strives to enhance protection for personal information in government information systems or information collections by requiring that agencies conduct PIAs. A PIA is an analysis of how personal information is collected, stored, shared, and managed in a federal system. Furthermore, according to OMB guidance, a PIA is an analysis of how information is handled. Specifically, a PIA is to (1) ensure that handling conforms to applicable legal, regulatory, and policy requirements regarding privacy; (2) determine the risks and effects of collecting, maintaining, and disseminating information in identifiable form in an electronic information system; and (3) examine and evaluate protections and alternative processes for handling information to mitigate potential privacy risks. Agencies must conduct PIAs (1) before developing or procuring information technology that collects, maintains, or disseminates information that is in a personally identifiable form or (2) before initiating any new data collections involving personal information that will be collected, maintained, or disseminated using information technology if the same questions are asked of 10 or more people. To the extent that PIAs are made publicly available, they provide explanations to the public about such things as the information that will be collected, why it is being collected, how it is to be used, and how the system and data will be maintained and protected. OMB is tasked with providing guidance to agencies on how to implement the provisions of these two acts and has done so, beginning with guidance on the Privacy Act, issued in 1975. The guidance provides explanations for the various provisions of the law as well as detailed instructions on how to comply. OMB's guidance on implementing the privacy provisions of the E- Gov Act of 2002 identifies circumstances under which agencies must conduct PIAs and explains how to conduct them. We have previously reported on the role of senior privacy officials in the federal government. In 2006, we testified that the elevation of privacy officers to senior positions reflected the growing demands that these individuals faced in addressing privacy challenges on a day-to-day basis. The challenges we identified included ensuring compliance with relevant privacy laws, such as the Privacy Act and the E-Gov Act, and controlling the collection and use of personal information obtained from commercial sources. Additionally, in 2007 we reported that the DHS Privacy Office had made significant progress in carrying out its statutory responsibilities under the Homeland Security Act and its related role in ensuring E-Gov Act compliance, but noted that more work remained to be accomplished. We recommended that DHS designate privacy officers at key DHS components, implement a department wide process for reviewing Privacy Act notices, establish a schedule for the timely issuance of privacy reports, and ensure that the Privacy Office's annual reports to Congress contain a specific discussion of complaints of privacy violations. In response, DHS included a discussion of privacy complaints in its most recent annual report; however, the other recommendations have not yet been implemented. Laws and guidance set a variety of requirements for senior privacy officials at federal agencies. For example, agencies have had a long standing requirement under the Paperwork Reduction Act to assign agency CIOs overall responsibility for privacy policy and compliance with the Privacy Act. In recent years, additional laws have been enacted that also address the roles and responsibilities of senior officials with regard to privacy. Despite much variation, all of these laws require agencies to assign overall responsibility for privacy protection and compliance to a senior agency official. In addition, OMB guidance has directed agencies to designate senior officials with overall responsibility for privacy. These laws and guidance set specific privacy responsibilities for these agency officials. These responsibilities can be grouped into six broad categories: (1) conducting PIAs; (2) Privacy Act compliance; (3) reviewing and evaluating the privacy implications of agency policies, regulations, and initiatives; (4) producing reports on the status of privacy protections; (5) ensuring that redress procedures are in place; and (6) ensuring that employees and contractors receive appropriate training. The laws and guidance vary in how they frame requirements in these categories and which agencies must adhere to them. Numerous laws assign privacy responsibility to senior agency officials. The earliest of these laws is the Paperwork Reduction Act of 1980, which, as amended, directs agency heads to assign a CIO with responsibility for carrying out the agency's information resources management activities to improve agency productivity, efficiency, and effectiveness. The act directs agency CIOs to undertake responsibility for implementing and enforcing applicable privacy policies, procedures, standards, and guidelines, and to assume responsibility and accountability for compliance with and coordinated management of the Privacy Act of 1974 and related information management laws. As concerns about privacy have increased in recent years, Congress has enacted additional laws that include provisions addressing the roles and responsibilities of senior officials with regard to privacy. Despite variations, a common thread among these laws, as well as relevant OMB guidance, is that they all require agencies to assign overall responsibility for privacy protection and compliance to a senior agency official. Relevant laws include the following: The Homeland Security Act of 2002 directed the secretary of DHS to designate a senior official with primary responsibility for privacy policy. The Intelligence Reform and Terrorism Prevention Act of 2004 required the Director of National Intelligence to appoint a Civil Liberties Protection Officer and assigned this individual specific privacy responsibilities. The Violence Against Women and Department of Justice Reauthorization Act of 2005 instructed the Attorney General to designate a senior official with primary responsibility for privacy policy. The Transportation, Treasury, Independent Agencies and General Government Appropriations Act of 2005 directed each agency whose appropriations were provided by the act, including the Departments of Transportation and Treasury, to designate a CPO with primary responsibility for privacy and data protection policy. The Implementing Recommendations of the 9/11 Commission Act of 2007 instructed the heads of Defense, DHS, Justice, Treasury, Health and Human Services, and State, as well as the Office of the Director of National Intelligence and the Central Intelligence Agency to designate no less than one senior officer to serve as a privacy and civil liberties officer. Specific privacy provisions of these laws are summarized in appendix II. A number of OMB memorandums have also addressed the roles and responsibilities of senior privacy officials. In 1999, OMB required agencies to designate a senior official to assume primary responsibility for privacy policy. OMB later reiterated this requirement in its guidance on compliance with the E-Gov Act, in which it directed agency heads to designate an appropriate senior official with responsibility for the coordination and implementation of OMB Web and privacy policy and to serve as the agency's principal contact for privacy policies. Most recently, in 2005, OMB directed agencies to designate an SAOP with agency wide responsibility for information privacy issues and with responsibility for specific privacy functions, including ensuring agency compliance with all federal privacy laws, playing a central policy-making role in the development of policy proposals that implicate privacy issues, and ensuring that contractors and employees are provided with adequate privacy training. Beginning in 2005, OMB has also issued guidance significantly enhancing longstanding requirements for agencies to report on their compliance with privacy laws. OMB's 2005 guidance directed agencies to add a new section addressing privacy to their annual reports under the Federal Information Security Management Act (FISMA). SAOPs were assigned responsibility for completion of this section, in which they were to report on such things as agency policies and procedures for the conduct of PIAs, agency policies for ensuring adequate privacy training, as well as their own involvement in agency regulatory and policy decisions. In 2006, OMB issued further guidance requiring agencies to include as part of their FISMA reports a section addressing measures for protecting personally identifiable information. This guidance also required that agencies provide OMB with quarterly privacy updates and report all incidents relating to the loss of or unauthorized access to personally identifiable information. Most recently, OMB directed agencies in 2007 to include in their FISMA reports additional items, such as their breach notification policies, plans to eliminate unnecessary use of Social Security numbers, and plans for reviewing and reducing their holdings of personally identifiable information. These laws and guidance set a variety of requirements for senior officials to carry out specific privacy responsibilities. These responsibilities can be grouped into the following six key functions: Conduct of PIAs: A PIA is an analysis of how personal information is collected, stored, shared, and managed in a federal system, and is required before developing or procuring information technology that collects, maintains, or disseminates information that is in a personally identifiable form. Several laws assign privacy officials at covered agencies responsibilities that are met in part by performing PIAs on systems that collect, process, or store personally identifiable information. This includes the requirements for several agencies to ensure that "technologies sustain and do not erode privacy protections." Furthermore, OMB guidance requires agency SAOPs to ensure compliance with federal laws, regulations, and policies relating to information privacy, such as the E-Gov Act, which spells out agency PIA requirements. Privacy Act compliance: As previously discussed, the Privacy Act sets a variety of requirements for all federal agencies regarding privacy protection. For example, the act requires that when agencies establish or make changes to a system of records, they must notify the public by a notice in the Federal Register , identifying, among other things, the type of data collected, the types of individuals about whom information is collected, the intended "routine" use of the data, and procedures that individuals can use to review and correct personal information. Several other laws explicitly direct agency privacy officials to ensure that the personal information contained in their Privacy Act systems of records is handled in compliance with fair information practices as set out in the act. Further, OMB guidance assigns agency SAOPs with responsibility for ensuring Privacy Act compliance. Policy consultation: Relevant laws direct senior privacy officials to actively participate in the development and evaluation of privacy-sensitive agency policy decisions. Several specifically task the SAOP with evaluating legislative and regulatory proposals or periodically reviewing agency actions affecting privacy. As agencies develop new policies, senior officials responsible for privacy issues play a key role in identifying and mitigating potential privacy risks prior to finalizing a particular policy decision. Moreover, OMB directed agency SAOPs to undertake a central role in the development of policy proposals that implicate privacy issues. Privacy reporting: Agency senior privacy officials are often required to prepare periodic reports to ensure transparency about their activities and compliance with the law. Many laws reviewed required agencies to produce periodic privacy reports to agency stakeholders and Congress. OMB also requires agency SAOPs to report on their privacy activities as part of their annual FISMA reports, including such measures as their total numbers of systems of records, the number of written privacy complaints they have received, and whether a senior official has responsibility for all privacy-related activities. Redress: With regard to federal agencies, the term "redress" generally refers to an agency's complaint resolution process, whereby individuals may seek resolution of their concerns about an agency action. Specifically, in the privacy context, redress refers to processes for handling privacy inquiries and complaints as well as for allowing citizens who believe that agencies are storing and using incorrect information about them to gain access to and correct that information. The Privacy Act requires that all agencies, with certain exceptions, allow individuals access to their records and the ability to have inaccurate information corrected. Several recent laws also direct senior privacy officials at specific agencies to provide redress by ensuring that they have adequate procedures for investigating and addressing privacy complaints by individuals. Several laws also provide for attention to privacy in a broader context of civil liberties protection. Privacy training: Privacy training is critical to ensuring that agency employees and contractor personnel follow appropriate procedures and take proper precautions when handling personally identifiable information. For example, The Transportation, Treasury, Independent Agencies and General Appropriations Act of 2005 requires senior privacy officials at covered agencies to ensure that employees have adequate privacy training. OMB also requires agency SAOPs to ensure that employees and contractors receive privacy training. In addition to performing key privacy functions, requirements in laws include responsibilities to ensure adequate security safeguards to protect against unauthorized access, use, disclosure, and destruction of sensitive personal information. Generally, this is provided through agency information security programs established under FISMA, and overseen by agency CIOs and chief information security officers (CISO). Moreover, OMB has issued guidance instructing agency heads to establish appropriate administrative, technical, and physical safeguards to ensure the security and confidentiality of records. Figure 1 shows the extent to which laws have requirements that specifically address each privacy function and to which agencies these requirements apply. Agencies have varying organizational structures to address privacy responsibilities. For example, of the 12 agencies we reviewed, 2 had statutorily designated CPOs who also served as SAOPs, 5 designated their agency CIOs as their senior officials, and the others designated a variety of other officials, such as the general counsel or assistant secretary for management. Further, not all of the agencies we reviewed had given their designated senior officials full oversight over all privacy-related functions. While 6 agencies had these officials overseeing all key privacy functions, 6 others relied on other organizational units not overseen by the designated senior official to perform certain key privacy functions. The fragmented way in which privacy functions have been assigned to organizational units in these agencies is at least partly the result of evolving requirements in law and guidance. As requirements have evolved, organizational responsibilities have been established incrementally to meet them. However, without oversight and involvement in all key privacy functions, SAOPs may be unable to effectively serve as agency central focal points for privacy. Agencies have taken varied approaches to designating senior agency officials with privacy responsibilities. Two of the 12 agencies we reviewed had separate CPOs that were also designated as the senior officials for privacy. Five agencies assigned their agency CIOs as SAOPs, and 1 agency assigned its CISO. Lastly, 4 agencies assigned another high-level official, such as a general counsel or assistant secretary for management, as the SAOP. In addition to varying in how they designated senior officials for privacy, agencies also varied in the way they assigned privacy responsibilities to organizational units. Four of the 12 agencies we reviewed (Transportation, DHS, State, and U.S. Agency for International Development) had one organization primarily responsible for all of the six key privacy functions outlined in the previous section. The remaining 8 agencies (Social Security Administration, Veterans Affairs, Defense, Commerce, Labor, Justice, Treasury, and Health and Human Services) relied on more than one organizational unit to perform privacy functions. Figure 2 summarizes the organizational structures in place at agencies to address the six key privacy functions, including the specific organizational units responsible for carrying out each of the key privacy functions. Six of the agencies (DHS, State, Social Security Administration, Transportation, U.S. Agency for International Development, and Veterans Affairs) established privacy structures in which the SAOP oversaw all key privacy functions. For example, DHS's Privacy Office performed these functions under the direction of the CPO, who was also the department's SAOP. Similarly, U.S. Agency for International Development's CISO (also the SAOP) oversaw the agency's privacy office, which was responsible for all key functions. While more than one organizational unit carried out privacy functions in two cases (Veterans Affairs and the Social Security Administration), all such units were overseen by the senior agency official for privacy. However, six other agencies (Commerce, Health and Human Services, Labor, Transportation, Defense, and Treasury) had privacy management structures in which the SAOP did not oversee all key privacy functions. For two agencies--Justice and Treasury--the SAOP had oversight over all key functions except for redress, which was handled by individual component organizations. For the other four agencies, key functions were divided among two or more organizations, and the senior privacy official did not have oversight of all of them. For example, key privacy functions at Labor were being performed not only by the office of the CIO (who is also the SAOP) but also by the Office of the Solicitor, who is independent of the CIO. Likewise, the senior official at Commerce was responsible for overseeing conduct of PIAs, policy consultation, and privacy training, while a separate Privacy Act Officer was responsible for Privacy Act compliance. Without full oversight of key privacy functions, SAOPs may be limited in their ability to ensure that privacy protections are administered consistently across the organization. The fragmented way in which privacy functions have been assigned to organizational units in several agencies is at least partly the result of evolving requirements in law and guidance. As requirements have evolved, organizational responsibilities have been established incrementally to meet them. For example, although the Privacy Act does not specify organizational structures for carrying out its provisions, many agencies established Privacy Act officers to address the requirements of that act and have had such positions in place for many years. In some cases, agencies designated their general counsels to be in charge of ensuring that the Privacy Act's requirements were met. More recently, the responsibility to conduct PIAs under the E-Gov Act frequently has been given to another office, such as the Office of the CIO, because the E-Gov Act's requirements apply to information technology, which is generally the purview of the CIO. If an SAOP was designated in such agencies without reassigning these responsibilities, that official may not have oversight and involvement in all key privacy activities. Uneven implementation of the Paperwork Reduction Act also may have contributed to fragmentation of privacy functions. As previously discussed, the Paperwork Reduction Act requires agency CIOs to take responsibility for privacy policy and compliance with the Privacy Act, and thus agencies could ensure they are in compliance with the Paperwork Reduction Act by designating their CIOs as SAOPs. However, 7 out of the 12 agencies we reviewed did not designate their CIOs as SAOPs. Further, if CIOs were designated as agency SAOPs but did not have responsibility for compliance with the Privacy Act--as was the case at Commerce, Labor, and Health and Human Services--the SAOPs would be left without full oversight of key privacy functions. Agencies that have more than one internal organization carrying out privacy functions run the risk that those organizations may not always provide the same protections for personal information if they are not overseen by a central authority. Thus, unless steps are taken to ensure that key privacy functions are under the oversight of the SAOP, agencies may be limited in their ability to ensure that information privacy protections are implemented consistently across their organizations. While agencies have had the responsibility for many years to establish management structures to ensure coordinated implementation of privacy policy and compliance with the Privacy Act, recent laws and guidance have significantly changed requirements for privacy oversight and management. These laws and guidance vary in scope and specificity, but they all require the designation of a senior agency official with overall responsibility for privacy protection and compliance with statutory requirements. In adopting varied assignments for key privacy functions, not all agencies gave their SAOPs responsibility for all key privacy functions. As a result, agencies may not be implementing privacy protections consistently. While the particulars of privacy management may vary according to the size of the agency and the sensitivity of its mission, agencies generally would likely benefit from having SAOPs that serve as central focal points for privacy matters and have oversight of all key functions, as required by law and guidance. Such focal points can help ensure that agency activities provide consistent privacy protections. In order to ensure that their SAOPs function effectively as central focal points for privacy management, we recommend that the Attorney General and the Secretaries of Commerce, Defense, Health and Human Services, Labor, and Treasury take steps to ensure that their SAOPs have oversight over all key privacy functions. We provided a draft of this report to OMB and to the departments and agencies we reviewed: the Departments of Commerce, Defense, Health and Human Services, Homeland Security, Justice, Labor, State, Treasury, Transportation, and Veterans Affairs, as well as the Social Security Administration and the U.S. Agency for International Development, for review and comment. Five agencies provided no comments on this draft. In comments provided via email, the Associate Deputy Assistant Secretary for Privacy and Records Management at Veterans Affairs and the Audit Management Liaison at the Social Security Administration concurred with our assessment and recommendations and provided technical comments, which we incorporated in the final report as appropriate. In oral comments, the Acting Branch Chief of the Information Policy and Technology Branch at OMB also concurred with our assessment and recommendations and provided technical comments, which we incorporated in the final report as appropriate. Commerce and Defense provided written comments that did not state whether they agreed or disagreed with our recommendations; however, both agencies stated that their privacy management structures were adequate. Their comments are reprinted in appendixes II and III respectively. Justice, Labor, and Treasury provided written comments and disagreed with our characterization of their agency SAOPs as not having oversight of all key privacy functions. Their comments are reprinted in appendixes IV, V, and VI respectively. The Chief Information Officer of the Department of Commerce stated that the department agreed with our characterization of the fragmentation that has resulted from recent laws and guidance that have significantly changed requirements for privacy oversight and management. However, she stated that applicable law does not require that the administration of the Privacy Act be consolidated with other privacy functions under the Office of the Chief Information Officer. Law and OMB guidance direct agencies to have a senior agency official, the CIO in the case of the Paperwork Reduction Act, serving as a focal point for privacy and ensuring compliance with the Privacy Act. Clearly establishing a senior official as a focal point for departmental privacy functions aligns with direction provided by law and OMB and would help ensure that the agency provides consistent privacy protections. The Senior Agency Official for Privacy at the Department of Defense stated that, while privacy responsibilities are divided among the Defense Privacy Office, the CIO, and agency components, the current privacy management structure at Defense has proven to be successful over time. We did not assess the effectiveness of the privacy management structures we reviewed. However, establishing an agency official that serves as a central focal point for departmental privacy functions aligns with direction provided by law and OMB and would help ensure that the agency provides consistent privacy protections. The Acting Chief Privacy and Civil Liberties Officer at Justice disagreed with our assessment that the department's SAOP did not have oversight of redress procedures. He stated that the Chief Privacy and Civil Liberties Officer has statutory authority under the Violence Against Women and Department of Justice Reauthorization Act to assume primary responsibility for privacy policy and to ensure appropriate notifications regarding the department's privacy policies and privacy-related inquiry and complaint procedures. We agree that the Chief Privacy and Civil Liberties officer has the statutory authority and responsibility for the oversight of privacy functions at Justice, including redress. However, our analysis of agency policies and procedures showed that the Chief Privacy and Civil Liberties Officer did not have an established role in oversight of redress procedures. Clearly defining the role of the Chief Privacy and Civil Liberties Officer in the departmental redress procedures would help ensure that the SAOP has oversight of this key privacy function. In its comments, the department noted that the Office of Privacy and Civil Liberties was undertaking a review of its orders and guidance to clarify and, as appropriate, strengthen existing authorities to ensure that the department implements thoroughly the Chief Privacy and Civil Liberties Officer authorities. The Chief Information Officer at Labor disagreed with our assessment that the SAOP did not have full oversight of all key privacy functions. He stated that Privacy Act compliance, redress, and training were addressed jointly by his office and the Office of the Solicitor. However, our review of Labor's policies and procedures relating to privacy management showed that a joint oversight management structure had not been established. Rather, we found that while the CIO was responsible for three key privacy functions, the Office of the Solicitor was responsible for the remaining three functions. Clearly defining the role of the SAOP in Privacy Act compliance, redress, and training would help ensure that the SAOP has oversight of all key privacy functions. The Assistant Secretary for Management at Treasury agreed that the SAOP should have overall responsibility for privacy protection and compliance with statutory requirements and that agencies generally would likely benefit from having SAOPs that serve as central focal points for privacy matters and have oversight of all key functions. The Assistant Secretary noted that as of March 2008, the department had implemented a new privacy management structure to emphasize the importance of protecting privacy at its highest levels. However, Treasury disagreed with a statement in our draft report that it had realigned its organization in order to ensure that the SAOP had oversight of privacy functions. We recognize that privacy functions, with the exception of redress, were under the oversight of the SAOP prior to the reorganization and accordingly have deleted this statement from the final report. Treasury also disagreed that its SAOP did not have full oversight of agency redress processes, stating that the department has longstanding regulations that provide departmentwide and bureau-specific policies and procedures relating to redress. While we agree that such redress policies are in place, they do not establish a role for the SAOP. Clearly defining the role of the SAOP in the departmental redress procedures would help ensure that the SAOP has oversight of this key privacy function. Lastly, Treasury stated it submits quarterly reports to Congress on privacy complaint and redress activities. We agree that reporting is an important privacy function; however, it is separate from redress and does not constitute oversight of Treasury redress activities. 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 Attorney General; the Secretaries of Commerce, Defense, Health and Human Services, Homeland Security, State, Treasury, Labor, Transportation, and Veterans Affairs; the Commissioner of the Social Security Administration; and the Administrator of the U.S. Agency for International Development as well as other interested congressional committees. Copies will be made available at no charge on our Web site, www.gao.gov. If you have any questions concerning this report, please call me at (202) 512-6240 or send e-mail to [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. Our objectives were to (1) describe laws and guidance that set requirements for senior privacy officials within federal agencies, and (2) describe the organizational structures used by agencies to address privacy requirements and assess whether senior officials have oversight over key functions. We did not evaluate agency compliance with these laws and guidance. To address our first objective, we reviewed and analyzed relevant laws and guidance to determine privacy responsibilities for privacy officials at agencies. We reviewed relevant laws, including the Implementing Recommendations of the 9/11 Commission Act of 2007, the Homeland Security Act of 2002, and others (see app. II for a full listing), which designate senior privacy officials and assign them privacy responsibilities. We also analyzed the Paperwork Reduction Act, which has long-standing privacy requirements assigned to agency chief information officers (CIO), and the Office of Management and Budget (OMB) guidance relating to the designation of senior agency officials with privacy responsibilities, such as Memorandum M-05-08. We also analyzed the specific privacy responsibilities identified in these laws and guidance and categorized the key privacy functions they represented. To address our second objective, we identified 12 agencies (Departments of Commerce, Defense, Health and Human Services, Homeland Security, Justice, Labor, State, Treasury, Transportation, and Veterans Affairs; the Social Security Administration, and the U.S. Agency for International Development) that either have a statutorily designated privacy officer, have a central mission for which privacy protection is a critical component, or have implemented a unique organizational privacy structure. We analyzed policies and procedures at these agencies, and interviewed senior agency privacy officials to identify the privacy management structures used at each of these agencies and the roles and responsibilities of senior privacy officials. We also compared the varying management structures at these agencies to identify the differences and similarities across agencies in their implementation of these structures. Further, we analyzed agency management structures to determine whether senior privacy officials at each of these agencies had full oversight over all key functions. We conducted our work from September 2007 to May 2008, in Washington, D.C., in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The following are recent laws and their major provisions regarding privacy protection responsibilities at federal agencies. Section 222 of the Homeland Security Act of 2002, as amended, instructed the secretary of DHS to appoint a senior official with primary responsibility for privacy policy, including the following: ensuring that technologies sustain, and do not erode, privacy protections; ensuring that personal information contained in Privacy Act systems of records is handled in full compliance with fair information practices as set out in the act; evaluating legislative and regulatory proposals and conducting privacy impact assessments of proposed rules; coordinating functions with the Officer for Civil Rights and Civil Liberties; preparing an annual report to Congress (without prior comment or amendment by agency heads or OMB); and having authority to investigate and having access to privacy-related records, including through subpoena in certain circumstances. Section 1011 of this act required the Director of National Intelligence to appoint a Civil Liberties Protection Officer and gave this officer the following functions: ensuring that the protection of civil liberties and privacy is appropriately incorporated into the policies and procedures of the Office of the Director of National Intelligence and the elements of the intelligence community within the National Intelligence Program; overseeing compliance by the Office of the Director of National Intelligence with all laws, regulations, and guidelines relating to civil liberties and privacy; reviewing complaints about abuses of civil liberties and privacy in Office of the Director of National Intelligence programs and operations; ensuring that technologies sustain, and do not erode, privacy protections; ensuring that personal information contained in a system of records subject to the Privacy Act is handled in full compliance with fair information practices as set out in that act; conducting privacy impact assessments when appropriate or as required performing such other duties as may be prescribed by the Director of National Intelligence or specified by law. Section 1174 of the Violence Against Women and Department of Justice Reauthorization Act of 2005 instructed the Attorney General to designate a senior official to assume primary responsibility for privacy policy, which included responsibility for advising the Attorney General in the following areas: appropriate privacy protections for the department's existing or proposed information technology and systems; privacy implications of legislative and regulatory proposals; implementation of policies and procedures, including training and auditing, to ensure compliance with privacy-related laws and policies; that adequate resources and staff are devoted to meeting the department's privacy-related functions and obligations; appropriate notifications regarding privacy policies and inquiry and complaint procedures; and privacy-related reports from the department to Congress and the President, including an annual report to Congress on activities affecting privacy. Section 522 of this act directed each agency with appropriations provided by the act to designate a chief privacy officer with primary responsibility for privacy and data protection policy, including ensuring that technology sustains, and does not erode, privacy and that technology used to collect or process personal information allows for continuous auditing of compliance with stated privacy policies and practices; ensuring that personal information contained in Privacy Act systems of records is handled in full compliance with fair information practices as defined in the Privacy Act; evaluating legislative and regulatory proposals and conducting privacy impact assessments of proposed rules; preparing an annual report to Congress on activities affecting privacy; ensuring the protection of personal information and information systems from unauthorized access, use, disclosure, or destruction, providing employees with privacy training; and ensuring compliance with privacy and data protection policies. This law amended the National Intelligence Reform Act of 2004 to require the heads of covered agencies to designate no less than one senior officer to serve as a privacy and civil liberties officer. This act applies to the Departments of Defense, Homeland Security, Justice, Treasury, Health and Human Services, and State, as well as the Office of the Director of National Intelligence, and the Central Intelligence Agency. The act requires the senior privacy official to perform the following functions: assisting the agency head in considering privacy and civil liberties issues with regard to anti-terrorism efforts; investigating and reviewing agency actions to ensure adequate consideration of privacy and civil liberties; ensuring that the agency has adequate redress procedures, considering privacy and civil liberties when deciding to retain or enhance coordinating activities, when relevant, with the agency Inspector General; preparing periodic reports, not less than quarterly, to the agency head, Congress, and the Privacy and Civil Liberties Oversight Board. Agencies covered under this act are also required to establish a direct reporting relationship between the senior privacy official and the agency head. Major contributors to this report were John de Ferrari, Assistant Director; Idris Adjerid; Shaun Byrnes; Matt Grote; David Plocher; Jamie Pressman; and Amos Tevelow.

Government agencies have a long-standing obligation under the Privacy Act of 1974 to protect the privacy of individuals about whom they collect personal information. A number of additional laws have been enacted in recent years directing agency heads to designate senior officials as focal points with overall responsibility for privacy. GAO was asked to (1) describe laws and guidance that set requirements for senior privacy officials within federal agencies, and (2) describe the organizational structures used by agencies to address privacy requirements and assess whether senior officials have oversight over key functions. To achieve these objectives, GAO analyzed the laws and related guidance and analyzed policies and procedures relating to key privacy functions at 12 agencies. Federal laws set varying roles and responsibilities for senior agency privacy officials. Despite much variation, all of these laws require covered agencies to assign overall responsibility for privacy protection and compliance to a senior agency official. In addition, Office of Management and Budget guidance directs agencies to designate a senior agency official for privacy with specific responsibilities. The specific privacy responsibilities defined in these laws and guidance can be grouped into six broad categories: (1) conducting privacy impact assessments (which are intended to ensure that privacy requirements are addressed when personal information is collected, stored, shared, and managed in a federal system), (2) complying with the Privacy Act, (3) reviewing and evaluating the privacy implications of agency policies, (4) producing reports on the status of privacy protections, (5) ensuring that redress procedures to handle privacy inquiries and complaints are in place, and (6) ensuring that employees and contractors receive appropriate training. The laws and guidance vary in how they frame requirements in these categories and which agencies must adhere to them. Agencies also have varying organizational structures to address privacy responsibilities. For example, of the 12 agencies we reviewed, 2 had statutorily designated chief privacy officers who also served as senior agency officials for privacy, 5 designated their agency chief information officers as their senior privacy officials, and the others designated a variety of other officials, such as the general counsel or assistant secretary for management. Further, not all of the agencies we reviewed had given their designated senior officials full oversight over all privacy-related functions. While 6 agencies had these officials overseeing all key privacy functions, 6 others relied on other organizational units not overseen by the designated senior official to perform certain key privacy functions. The fragmented way in which privacy functions were assigned to organizational units in these agencies is at least partly the result of evolving requirements in law and guidance. However, without oversight of all key privacy functions, designated senior officials may be unable to effectively serve as agency central focal points for information privacy.

FECA is administered by Labor's Office of Workers' Compensation Programs (OWCP) and currently covers more than 2.7 million civilian federal employees from more than 70 different agencies. FECA benefits are paid to federal employees who are unable to work because of injuries sustained while performing their federal duties. Under FECA, workers' compensation benefits are authorized for employees who suffer temporary or permanent disabilities resulting from work-related injuries or diseases. FECA benefits include payments for (1) loss of wages when employees cannot work because of work-related disabilities due to traumatic injuries or occupational diseases; (2) schedule awards for loss of, or loss of use of, a body part or function; (3) vocational rehabilitation; (4) death benefits for survivors; (5) burial allowances; and (6) medical care for injured workers. Wage-loss benefits for eligible workers with temporary or permanent total disabilities are generally equal to either 66-2/3 percent of salary for a worker with no spouse or dependent, or 75 percent of salary for a worker with a spouse or dependent. Wage-loss benefits can be reduced based on employees' wage-earning capacities when they are capable of working again. OWCP provides wage-loss compensation until claimants can return to work in either their original positions or other suitable positions that meet medical work restrictions. Each year, most federal agencies reimburse OWCP for wage-loss compensation payments made to their employees from their annual appropriations. If claimants return to work but do not receive wages equal to that of their prior positions--such as claimants who return to work part-time--FECA benefits cover the difference between their current and previous salaries. Currently, there are no time or age limits placed on the receipt of FECA benefits. With the passage of the Federal Employees' Compensation Act of 1916, members of Congress raised concerns about levels of benefits and potential costs of establishing a program for injured federal employees. As Congress debated the act's provisions in 1916 and again in 1923, some congressional members were concerned that a broad interpretation threatened to make the workers' compensation program, in effect, a general pension. The 1916 act granted benefits to federal workers for work-related injuries. These benefits were not necessarily granted for a lifetime; they could be suspended or terminated under certain conditions. Nevertheless, the act placed no age or time limitations on injured workers' receipt of wage compensation. The act did contain a provision allowing benefits to be reduced for older beneficiaries. The provision stated that compensation benefits could be adjusted when the wage-earning capacity of the disabled employee would probably have decreased on account of old age, irrespective of the injury. While the 1916 act did not specify the age at which compensation benefits could be reduced, the 1949 FECA amendments established 70 as the age at which a review could occur to determine if a reduction were warranted. In 1974, Congress again eliminated the age provision. Typically, federal workers participate in one of two retirement systems which are administered by the Office of Personnel Management (OPM): the Civil Service Retirement System (CSRS), or the Federal Employees' Retirement System (FERS). Most civilian federal employees who were hired before 1984 are covered by CSRS. Under CSRS, employees generally do not pay Social Security taxes or earn Social Security benefits. Federal employees first hired in 1984 or later are covered by FERS. All federal employees who are enrolled in FERS pay Social Security taxes and earn Social Security benefits. Federal employees enrolled in either CSRS or FERS also may contribute to the Thrift Savings Plan (TSP); however, only employees enrolled in FERS are eligible for employer matching contributions to the TSP. Under both CSRS and FERS, the date of an employee's eligibility to retire with an annuity depends on his or her age and years of service. The amount of the retirement annuity is determined by three factors: the number of years of service, the accrual rate at which benefits are earned for each year of service, and the salary base to which the accrual rate is applied. In both CSRS and FERS, the salary base is the average of the highest three consecutive years of basic pay. This is often called "high-3" pay. According to CRS, an injured employee cannot contribute to Social Security or to the TSP while receiving workers' compensation because Social Security taxes and TSP contributions must be paid from earnings, and workers' compensation payments are not classified as earnings under either the Social Security Act or the Internal Revenue Code. As a result, the employee's future retirement income from Social Security and the TSP may be reduced. Legislation passed in 2003 increased the FERS basic annuity from 1 percent of the individual's high-3 average pay to 2 percent of high-3 average pay while an individual receives workers' compensation, which would help replace income that may have been lost from lower Social Security benefits and reduced income from TSP. Concerns that beneficiaries remain in the FECA program past retirement age have led to several proposals to change the program. Under current rules, an age-eligible employee with 30 years of service covered by FERS could accrue pension benefits that are 30 percent of their average high-3 pay and under CSRS could accrue almost 60 percent of their high-3 average pay. Under both systems benefits can be taxed. FECA beneficiaries can receive up to 75 percent of their preinjury income, tax- free, if they have dependents and 66-2/3 percent without dependents. Because returning to work could mean giving up a FECA benefit for a reduced pension amount, concerns have been raised by some that the program may provide incentives for beneficiaries to continue on the program beyond retirement age. In 1996, we reported on two alternative proposals to change FECA benefits once beneficiaries reach the age at which retirement typically occurs: (1) converting FECA benefits to retirement benefits, and (2) changing FECA wage-loss benefits to a newly established FECA annuity. The first proposal would convert FECA benefits for workers who are injured or become ill to regular federal employee retirement benefits at retirement age. In 1981, the Reagan administration proposed comprehensive FECA reform, including a provision to convert FECA benefits to retirement benefits at age 65. The proposal included certain employee protections, one of which was calculating retirement benefits on the basis of the employee's pay at time of injury (with adjustments for regular federal pay increases). According to proponents, this change would improve agencies' operations because their discretionary budgets would be decreased by FECA costs, and, by reducing caseload, it would allow Labor to better manage new and existing cases for younger injured workers. A bill recently introduced in Congress includes a similar provision, requiring FECA recipients to retire upon reaching retirement age as defined by the Social Security Act. The second proposal, based on proposals that several agencies developed in the early 1990s, would convert FECA wage-loss compensation benefits to a FECA annuity benefit. These agency proposals would have reduced FECA benefits by a set percentage two years after beneficiaries reached civil service retirement eligibility. Proponents of this alternative noted that changing to a FECA annuity would be simpler than converting FECA beneficiaries to the retirement system, would result in consistent benefits, and would allow benefits to remain tax-free. Proponents also argued that a FECA annuity would keep the changed benefit within the FECA program, thereby avoiding complexities associated with converting FECA benefits under CSRS and FERS. For example, converting to retirement benefits could be difficult for some employees who currently are not participating in a federal retirement plan. Also, funding future retirement benefits could be a problem if the FECA recipient has not been making retirement contributions. Labor recently suggested a change to the FECA program that would reduce wage-loss benefits for Social Security retirement-aged recipients to 50 percent of their gross salary at the date of injury, but would still be tax-free. Labor's proposal would still keep the changed benefit within the FECA program. In our 1996 report, however, we identified a number of issues with both alternative proposals. For example, some experts and other stakeholders we interviewed noted that age discrimination posed a possible legal challenge and that some provisions in the law would need to be addressed with new statutory language. Others noted that benefit reductions would cause economic hardships for older beneficiaries. Some noted that without the protections of the workers' compensation program, injured employees who have few years of service or are ineligible for retirement might suffer large reductions in benefits. Moreover, opponents to change also viewed reduced benefits as breaking the workers' compensation promise. Another concern was that agencies' anticipation of reduced costs for workers' compensation could result in fewer incentives to manage claims or to develop safer working environments. We also discussed in our 1996 report a number of issues that merit consideration in crafting legislation to change benefits for older beneficiaries. Going forward, Congress may wish to consider the following questions as it assesses and considers current reform proposals: (1) How would benefits be computed? (2) Which beneficiaries would be affected? (3) What criteria, such as age or retirement eligibility, would initiate changed benefits? (4) How would other benefits, such as FECA medical and survivor benefits, be treated and administered? (5) How would benefits, particularly retirement benefits, be funded? The retirement conversion alternative raises complex issues, arising in part from the fact that conversion could result in varying retirement benefits, depending on conversion provisions, retirement systems, and individual circumstances. A key issue is whether or not benefits would be adjusted. The unadjusted option would allow for retirement benefits as provided by current law. The adjusted option would typically ensure that time on the FECA rolls was treated as if the beneficiary had continued to work. This adjustment could (1) credit time on FECA for years of service or (2) increase the salary base (for example, increasing salary from the time of injury by either an index of wage increases or inflation, assigning the current pay of the position, or providing for merit increases and possible promotions missed due to the injury). Determining the FECA annuity would require deciding what percentage of FECA benefits the annuity would represent. Under previous proposals benefits would be two-thirds of the previous FECA compensation benefits. Provisions to adjust calculations for certain categories of beneficiaries also have been proposed. Under previous proposals, partially disabled individuals receiving reduced compensation would receive the lesser of the FECA annuity or the current reduced benefit. FECA annuity computations could also be devised to achieve certain benchmarks. For example, the formula for a FECA annuity could be designed to approximate a taxable retirement annuity. One issue concerning a FECA annuity is whether it would be permanent once set, or whether it would be subject to adjustments based on continuing OWCP reviews of the beneficiary's workers' compensation claim. Currently most federal employees are covered by FERS, but conversion proposals might have to consider differences between FERS and CSRS participants, and participants in any specialized retirement systems. Other groups that might be uniquely affected include injured workers who are not eligible for federal retirement benefits, individuals eligible for retirement conversion benefits, but not vested; and individuals who are partially disabled FECA recipients but active federal employees. With regard to vesting, those who have insufficient years of service to be vested might be given credit for time on the FECA rolls until vested. There is also the question of whether changes will focus on current or future beneficiaries. Exempting current beneficiaries delays receipt of full savings from FECA cost reductions to the future. One option might be a transition period for current beneficiaries. For example, current beneficiaries could be given notice that their benefits would be changed after a certain number of years. Past proposals have used either age or retirement eligibility as the primary criterion for changing benefits. If retirement eligibility is used, consideration must be given to establishing eligibility for those who might otherwise not become retirement eligible. This would be true for either the retirement conversion or the annuity option. At least for purposes of initiating the changed benefit, time on the FECA rolls might be treated as if it counted for service time toward retirement eligibility. Deciding on the criteria that would initiate change in benefits might require developing benchmarks. For example, if age were the criteria, it might be benchmarked against the average age of retirement for federal employees, or the average age of retirement for all employees. Another question is whether to use secondary criteria to delay changed benefits in certain cases. The amount of time one has received FECA benefits is one possible example of secondary criteria. Secondary criteria might prove important in cases where an older, injured worker may face retirement under the retirement conversion option even when recovery and return to work is almost assured. In addition to changing FECA compensation benefits, consideration should be given to whether to change other FECA benefits, such as medical benefits or survivor benefits. For example, the 1981 Reagan administration proposal would have ended survivor benefits under FECA for those beneficiaries whose benefits were converted to the retirement system. Another issue to consider is who will administer benefits if program changes shift responsibilities--OPM administers retirement annuity benefits for federal employees, and Labor currently administers FECA benefits. Although it may be advantageous to consolidate case management in one agency, such as OPM, if the retirement conversion alternative were selected, the agency chosen to manage the case might have to develop an expertise that it does not currently possess. For example, OPM might have to develop expertise in medical fee schedules to control workers' compensation medical costs. For the retirement conversion alternative, another issue is the funding of any retirement benefit shortfall. Currently, agencies and individuals do not make retirement contributions if an individual receives FECA benefits; thus, if retirement benefits exceed those for which contributions have been made, retirement funding shortfalls would occur. Retirement fund shortfalls can be funded through payments made by agencies at the time of conversion or prior to conversion. First, lump-sum payment could be made by agencies at the time of the conversion. This option has been criticized because the start-up cost was considered too high. Second, shortfalls could be covered on a pay-as-you-go basis after conversion. In this approach, agencies might make annual payments to cover the shortfall resulting from the conversions. Third, agencies' and employees' contributions to the retirement fund could continue before conversion, preventing shortfalls at conversion. Proposals for the FECA annuity alternative typically keep funding under the current FECA chargeback system. This is an annual pay-as-you-go system with agencies paying for the previous year's FECA costs. In total, these five questions provide a framework for considering proposals to change the program. In conclusion, FECA continues to play a vital role in providing compensation to federal employees who are unable to work because of injuries sustained while performing their duties. However, continued concerns that the program provides incentives for beneficiaries to remain on the program at, and beyond, retirement age have led to calls for the program to be reformed. Although FECA's basic structure has not significantly been amended for many years, there continues to be interest in reforming the program. Proposals to change benefits for older beneficiaries raise a number of important issues, with implications for both beneficiaries and federal agencies. These implications warrant careful attention to outcomes that could result from any changes. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the committee may have at this time. For further information about this testimony, please contact Daniel Bertoni at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. In addition to the individual named above, key contributors to this testimony include Patrick Dibattista, H. Brandon Haller, Michelle Bracy, Tonnye Conner-White, James Rebbe, Kathleen van Gelder, and Melinda Bowman. Federal Workers' Compensation: Better Data and Management Strategies Would Strengthen Efforts to Prevent and Address Improper Payments. GAO-08-284. Washington, D.C.: February 26, 2008. Postal Service Employee Workers' Compensation Claims Not Always Processed Timely, but Problems Hamper Complete Measurement. GAO-03-158R. Washington, D.C.: December 20, 2002. Oversight of the Management of the Office of Workers' Compensation Programs: Are the Complaints Justified. GAO-02-964R. Washington, D.C.: July 19, 2002. U.S. Postal Service: Workers' Compensation Benefits for Postal Employees. GAO-02-729T. Washington, D.C.: May 9, 2002. Office of Workers' Compensation Programs: Further Actions Are Needed to Improve Claims Review. GAO-02-725T. Washington, D.C.: May 9, 2002. Federal Employees' Compensation Act: Percentages of Take-Home Pay Replaced by Compensation Benefits. GGD-98-174. Washington, D.C.: August 17, 1998. Federal Employees' Compensation Act: Issues Associated With Changing Benefits for Older Beneficiaries. GGD-96-138BR. Washington, D.C.: August 14, 1996. Workers' Compensation: Selected Comparisons of Federal and State Laws. GGD-96-76. Washington, D.C.: April 3, 1996. Federal Employees' Compensation Act: Redefining Continuation of Pay Could Result in Additional Refunds to the Government. GGD-95-135. June 8, 1995. 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 possible changes to the Federal Employees' Compensation Act (FECA) program, a topic that we have reported on in the past. At the end of chargeback year 2010, the FECA program, administered by the Department of Labor (Labor) paid more than $1.88 billion in wage-loss compensation, impairment, and death benefits, and another $898.1 million for medical and rehabilitation services and supplies. Currently, FECA benefits are paid to federal employees who are unable to work because of injuries sustained while performing their federal duties, including those who are at or older than retirement age. Concerns have been raised that federal employees on FECA receive benefits that could be more generous than under the traditional federal retirement system and that the program may have unintended incentives for beneficiaries to remain on the FECA program beyond the traditional retirement age. Over the past 30 years, there have been various proposals to change the FECA program to address this concern. Recent policy proposals to change the way FECA is administered for older beneficiaries share characteristics with past proposals we have discussed in prior work. In August 1996, we reported on the issues associated with changing benefits for older beneficiaries. Because FECA's benefit structure has not been significantly amended in more than 35 years, the policy questions raised in our 1996 report are still relevant and important today. This statement will focus on (1) previous proposals for changing FECA benefits for older beneficiaries and (2) questions and associated issues that merit consideration in crafting legislation to change benefits for older beneficiaries. This statement is drawn primarily from our 1996 report in which we solicited views from selected federal agencies and employee groups to identify questions and associated issues with crafting benefit changes. In that report, we also reviewed relevant laws and analyzed previous studies and legislative proposals that would have changed benefits for older FECA beneficiaries.. In summary, we have reported that the perception that many retirement-age beneficiaries were receiving more generous benefits on FECA had generated two alternative proposals to change benefits once beneficiaries reach the age at which retirement typically occurs: (1) converting FECA benefits to retirement benefits and, (2) changing FECA wage-loss benefits by establishing a new FECA annuity. We also discussed a number of issues to be considered in crafting legislation to change benefits for older beneficiaries. Going forward, Congress may wish to consider the following questions in assessing current proposals for change: (1) How would benefits be computed? (2) Which beneficiaries would be affected? (3) What criteria, such as age or retirement eligibility, would initiate changed benefits? (4) How would other benefits, such as FECA medical and survivor benefits, be treated and administered? (5) How would benefits, particularly retirement benefits, be funded?

The National Defense Authorization Act for Fiscal Year 2013 required that DOD develop a detailed implementation plan for carrying out its health care system reform of creating the DHA, and provide the plan to the congressional defense committees in three separate submissions in fiscal year 2013. In October 2013, DOD established the DHA to assume management responsibility for numerous functions of its medical health care system, support the services in carrying out their medical missions, manage the military's health plan, oversee the medical operations within the National Capital Region, and provide 10 shared services, including oversight of medical education and training. According to DOD, a "shared services concept" is a combination of common services performed across the medical community with the goal of achieving cost savings. The DHA's Education and Training Directorate, a shared service, is scheduled to begin operations in August 2014 and, according to DOD officials, when operational, will constitute the first instance of oversight of medical education and training at the Office of the Secretary of Defense level. While the services establish training requirements, operate their own service-specific training institutions, and provide manpower to conduct the training at tri-service institutions, such as METC, the Directorate plans to provide administrative support; academic review and policy oversight; and professional development, sustainment, and program management to the military departments' medical services, the combatant commands, and the Joint Staff. See figure 1 below for the organizational chart of the DHA. Medical personnel receive training throughout their careers to develop and enhance their skills. Examples of the types of medical training they can receive include 1. initial training for enlisted servicemembers, which results in a new 2. sustainment training for enlisted servicemembers, which does not result in a new occupational classification but refreshes or augments initial training; 3. operational or readiness skills training, which provides training to perform in operational situations throughout the world and includes such training as burn and trauma care as well as emergency and Chemical, Biological, Radiological, Nuclear, and Explosive preparedness; and 4. executive skills training for enlisted servicemembers, officers, and civilians, which provides military health care leaders with executive management and professional administrative skills. These training courses can be presented in shared or service-specific settings that involve varying degrees of a consolidated approach to course curricula, faculty instruction, equipment, and facilities. Figure 2 depicts the locations of this training and whether it is shared ("tri-service") or service-specific training. Four DOD institutions offer medical training to servicemembers from all three services. These institutions vary in size and subject matter, and include the following: Uniformed Services University of the Health Sciences (USUHS): DOD-funded medical school in Bethesda, Maryland, with a fiscal year 2015 budget estimate of about $146 million. This university provides medical training to health professionals dedicated to a career as a physician, dentist, or nurse in DOD or the U.S. Public Health Service. Medical Education and Training Campus (METC): Provides initial skills training to most medical enlisted servicemembers in about 50 areas such as pharmacy, laboratory, and dental technology; combat medics, basic hospital corpsmen, basic medical technicians; and a number of advanced medical training courses. METC resulted from a 2005 BRAC recommendation to establish a medical education and training complex that collocated medical enlisted training being conducted at five different locations by each of the military services into one location at Fort Sam Houston, Texas. (See fig. 3.) Since first becoming operational in 2010, METC has created 14 new consolidated courses while 22 of its courses were consolidated prior to METC's creation. METC trains, on average, about 20,000 students annually and is estimated to cost almost $27 million in fiscal year 2015. See appendix I for a list of courses taught at METC and course participants. Defense Medical Readiness Training Institute (DMRTI): Tri-service organization that is staffed by servicemembers from the Army, the Navy, and the Air Force as well as Department of the Army civilians and according to officials, had a $1.4 million budget in fiscal year 2013. This organization offers resident and nonresident joint medical readiness training courses as well as professional medical programs that enable military medical personnel, both active duty and reserve, to better perform a wide range of medical and health support missions they face throughout the world. Courses include trauma care, burn care, public health emergency preparedness, humanitarian assistance, and emergency response to chemical, biological, nuclear, and other events. During fiscal year 2013, approximately 3,600 students participated in 122 course iterations in 51 different locations. According to officials, besides providing medical readiness training to U.S. servicemembers, DMRTI has provided this training to officials in 38 countries at the request of a combatant command. Joint Medical Executive Skills Institute (JMESI): Tri-service organization that provides military health care leaders with executive management skill programs, products, and services that are designed to enhance their performance as managers and leaders in the military healthcare environment. The training JMESI provides centers on the Core Curriculum which is a collection of 35 executive administrative competencies required of a military hospital commander that tri- service senior leaders are responsible for reviewing and updating every 3 years. Each year approximately 200 managers graduate from JMESI's Healthcare Management Seminar and MHS Capstone Symposium, and nearly 20,000 students participate in its online, distance learning program. In addition to tri-service training, each of the services operates its own education and training entities that provide additional training to their medical servicemembers. The Army and Navy education and training entities are constituent commands of the Army Medical Command and the Bureau of Medicine and Surgery, respectively, which are headed by Surgeons General. The Air Force education and training entities conduct a wide variety of training, including nonmedical training, and do not report directly to the Air Force Surgeon General. These organizations include the following: Army Medical Department Center and School (AMEDD C&S): Army training headquarters located at Fort Sam Houston, Texas. The center formulates the Army Medical Department's medical organization, tactics, doctrine, and equipment. The school educates and trains Army medical personnel. More specifically, the Academy of Health Sciences is the "school" and is part vocational institution, part community college, and part major university. The Academy of Health Sciences includes 361 programs of instructions, with 41 of them taught at METC; 2 levels of officer leader development programs; 6 Masters Degree programs; 7 Doctoral Degree programs; 94 professional postgraduate programs; as well as pre-deployment training within three main centers and a graduate school. First, the Center for Health Education and Training consists of 10 departments whose primary mission is to instruct advanced or specialty courses enhancing and building upon the initial training that enlisted soldiers receive from METC and officers receive after finishing their basic courses. Second, the Center for Pre-Deployment Medicine analyzes, designs, and develops individual pre-deployment training courses and products and provides professional expertise and pre-deployment training to increase the technical and tactical abilities of physicians, nurses, and other healthcare professionals. Third, the Leader Training Center provides professional education, doctrinal, and individual leadership training to execute Army missions across a full spectrum of military operations. Additionally, aviation medicine classes are taught at the US Army School of Aviation Medicine, in Fort Rucker, Alabama, and forward surgical teams preparing for overseas deployment go through training at the Army Trauma Training Center in Miami, Florida. Navy Medicine Education and Training Command (NMETC): Consists of four centers that provide education, training, and support for Navy medical personnel. The first center is the Navy Medicine Professional Development Center headquartered in Bethesda, Maryland, which offers educational programs such as the Naval Postgraduate Dental School as well as leadership and specialty courses that focus on the practice and business of military medicine in both the operational and hospital settings delivered via in-person classes and online. The second center is the Navy Medicine Training Support Center headquartered in San Antonio, Texas. It serves as the Navy's component command for METC students and instructors to provide administrative and operational control of Navy personnel assigned to METC. The third center is the Navy Medicine Operational Training Center, which is headquartered in Pensacola, Florida, and consists of six detachments and nine training centers at 14 locations throughout the country that teach such areas of Navy medicine as undersea, aviation, expeditionary, special operations, and survival training. Fourth, another section of the NMETC provides medical education and training to the reserve components. Air Force: There is no specific Air Force organization focused exclusively on medical training. The Air Force Surgeon General assists Air Force leadership in developing policies, plans, and programs, establishing requirements, and providing resources to the Air Force Medical Service, while the Air Force's Air Education and Training Command (AETC) and the Air Force Material Command (AFMC) provide medical training. AETC, which is headquartered at Joint Base San Antonio--Randolph, Texas, oversees a wide variety of medical and nonmedical training. AETC is responsible for 114 medical-related courses: 35 initial skills courses conducted mostly at METC; 73 sustainment or skills progression courses conducted at METC and other various locations; and 6 medical readiness courses taught at a military training site near San Antonio, Texas. AFMC, which is headquartered at Wright-Patterson Air Force Base, Ohio, includes the Air Force School of Aerospace Medicine (USAFSAM). USAFSAM is a center for aerospace medical education and training, and offers a series of courses comprising the initial qualification training for flight surgeons, including hyperbaric medicine, occupational medicine, aviation mishap prevention, and other unique aeromedical issues pertinent to the flight environment. The school trains 6,000 students annually. DOD has outlined the areas of responsibility for its Education and Training Directorate, including consolidation and management of a number of activities currently performed by the services. However, in its plans, DOD has not demonstrated through a fully developed business case analysis how creating a shared service for education and training will result in cost savings. According to DOD's third submission to Congress on its plans for the implementation of the DHA in October 2013, DOD proposed a number of projects or "product lines" for its shared service Education and Training Directorate. Specifically, DOD identified three product lines for the directorate, which involve (1) management of professional development, sustainment, and related programs, including the METC, the Defense Medical Readiness and Training Institute, and the Joint Medical Executive Skills Institute; (2) academic review and policy oversight functions, including management of online courses and modeling and simulation programs; and (3) management of academic and administrative support functions, such as training and conference approval processes. According to DOD's second submission to Congress, the overall purpose and core measure of success for all shared services is the achievement of cost savings. This focus differentiates the objective of establishing shared services from the six other objectives outlined in DOD's plans for the implementation of the DHA. However, in its plans, DOD has not demonstrated how its Education and Training Directorate projects will result in cost savings through a fully developed business case analysis, including an analysis of benefits, costs, and risks. In its third submission to Congress on its implementation plans for DHA, DOD presented estimates of costs and cost savings for two "sub-product lines" concerning modeling and simulation and online learning. However, these projects do not represent the core of the directorate's mission, but rather a portion of the academic review and policy oversight project. Further, these projects overlap with DHA's contracting and information technology shared services. Specifically, while cost savings for modeling and simulation are allocated to the Education and Training Directorate, implementation costs are to be incurred by the DHA contracting shared service. In addition, the savings for the online learning project are found within the DHA information technology shared service portfolio. Aside from these projects, DOD did not present information concerning the cost savings of its other shared service projects within the Education and Training Directorate. GAO's Business Process Reengineering Assessment Guide states that a business case begins with (1) measuring performance and identifying problems in meeting mission goals, which is then addressed through (2) the development and selection of a new process. As noted above, the primary stated purpose of the DHA's shared service projects is to achieve cost savings. The Guide further states that as a project matures, the business case should be enlarged and updated to present a full picture of the benefits, costs, and risks involved in moving to a new process. Such analysis is to provide a sound basis to proceed with the reengineering process. DOD's own process for developing its shared services, outlined in its second submission on implementation of the DHA, states that after an assessment of the current state of performance and measures of effectiveness have been identified, performance improvement and cost reduction opportunities should be identified. It also states that new processes and initiatives are to be developed to address these challenges, along with associated implementation costs. Further, the National Defense Authorization Act for Fiscal Year 2013 required DOD to develop business case analyses for its shared service proposals as part of its submissions on its plans for the implementation of the DHA, including, among other things, the purpose of the shared service and the anticipated cost savings. DOD does not have a fully developed business case analysis for medical education and training because it has not yet completed the first step of that analysis, which is to identify specific problems, which, given the stated purpose of shared services, should be directed toward the achievement of cost savings. Several of DOD's other shared service projects present a clear linkage between (1) a stated problem, (2) proposed process changes, and (3) an estimate of benefits, costs, and risks. For example, DOD's third submission on the implementation of DHA, states that the pharmacy shared service will address rising costs due to variation in drug purchasing, staffing, and formulary management (the problem) through the introduction of MHS-wide standards and business rules (the new processes), which will result in cost savings. Similarly, the plan states that the contracting shared services will address rising costs due to fragmentation in its acquisition strategy (the problem) through a common approach to acquisition planning, program management, contract execution, management, and administration (the new processes). In contrast, DOD listed the new processes the Directorate will employ, but it did not explain the problem its proposed new processes will address, and how they will achieve cost savings. DOD officials stated that they believe that a central problem for the Directorate to address is unnecessary variation of practice between the services, and they believe that efficiencies could be generated through the consolidation of training. However, in its official plans for the Directorate, DOD has not identified this issue or any other challenge related to cost savings as the problem its shared service will address. DOD also lacks the information to assess its current performance to then identify a problem. Specifically, DOD officials stated that they lack data on the cost of DOD's education programs and potential redundancy within its portfolio of courses, which would allow them to identify a problem and develop processes to address these challenges. In fact, officials stated they have identified the need for developing a baseline of current medical education and training courses and associated spending as a goal for the Directorate, and therefore have acknowledged the lack of such information. In addition, some officials cast doubt on the potential cost savings that could be achieved. Several DOD officials told us that the creation of the Directorate represents a logical step in the course of further cooperation among the services in the area of medical training. However, senior service officials stated that the Directorate was unlikely to achieve significant savings and that its creation serves more as a functional realignment than a cost savings endeavor. For example, officials stated that the Directorate provides an opportunity to assign a parent agency to METC, JMESI, and DMRTI, which they described as "orphan" agencies that lack a parent organization. Officials made similar comments during our 2012 review, in which we found that DOD was not able to demonstrate potential financial savings from the creation of METC, but agency officials stated at the time that they believed combining several training sites into the formation of METC had saved money and that other efficiencies had been achieved. GAO-14-49. particular, given that DOD continues to lack an understanding of how the establishment of the DHA will affect staff levels, its challenges in identifying cost savings and a clear mission for its education reforms could result in increases in staff levels without any savings. As we noted in our reviews of DOD's plans for the implementation of the DHA, DOD's submissions did not include critical information necessary to help ensure that DOD achieves the goals of its reform of the MHS. Accordingly, in a recent report, the House Committee on Armed Services has expressed concern regarding DHA's staffing requirements, cost estimates, performance metrics, and medical education and training shared service. Without a business case analysis that links (1) a stated problem, (2) proposed process changes, and (3) an estimate of benefits, costs, and risks, the role of the Directorate remains ambiguous, and it is unclear how DOD will measure its accomplishments and hold the Directorate accountable for achieving cost savings by sharing training and education services. Without such information, the Directorate also potentially risks increasing staff levels without achieving any cost savings. DOD established METC as part of the 2005 BRAC process to provide interservice training for enlisted service members and to achieve cost savings. However, DOD is unable to determine whether the consolidation of medical education and training for enlisted personnel at METC has resulted in cost savings because it did not establish a baseline for spending on education and training prior to METC's establishment. METC has designed processes to assess the effectiveness of its training and is taking action to improve them. DOD cannot demonstrate whether the consolidation of training at METC has resulted in cost savings. However, officials stated that while they could not document cost savings, they believe that the consolidation of training at METC has led to cost savings because of (1) increased equipment sharing; (2) personnel reductions; and (3) cost avoidances, such as those associated with the closure of medical education facilities that were service-specific. In contrast, officials also identified areas where the consolidation of training at METC may have resulted in cost increases because of, for example, (1) the construction of new facilities; (2) relocation of students to METC; and (3) replacement of personnel within their organizations who had been transferred to METC. To fund training at METC, the services transferred funding to a single METC budget managed by the Air Force over 3 years from fiscal year 2010 through fiscal year 2012. The services continue to fund compensation for military instructors at METC. Civilian funding was transferred to the Air Force, and officials told us that this funding is likely to be transferred to the DHA. When METC was established, the services transferred funding for their enlisted medical programs being consolidated at METC into a single METC budget. However, some officials stated they are unsure whether the services' transfers were representative of their true costs for the transferred programs prior to the creation of METC. Additionally, the funding transfers from the services were not sufficient to fund training at METC, and the Office of the Assistant Secretary of Defense for Health Affairs provided additional funding to cover this shortfall. For instance, of the total METC budget of $26.6 million in fiscal year 2012, Health Affairs provided 28 percent; the Air Force, 22 percent; the Army, 36 percent; and the Navy, 14 percent. Table 1 shows the funding amounts transferred by each service to fund METC, from fiscal year 2010, the first year in which the services transferred funds, until fiscal year 2012, when the services completed a permanent transfer of their funds to METC. GAO's Business Process Reengineering Assessment Guide states that performance measures are a critical part of a comprehensive implementation process to ensure that a new process is achieving the desired results. Additionally, through our prior work on performance metrics, we have identified several important attributes of these assessment tools, including the need to develop a baseline and trend data to identify, monitor, and report changes in performance and to help ensure that performance is viewed in context. By tracking and developing a performance baseline for all measures, agencies can better evaluate progress made and whether goals are being achieved, such as cost savings targets. DOD did not establish and monitor baseline cost information as part of its metrics to assess performance to ensure that the establishment of METC provided costs savings. Officials told us that their focus in establishing METC was to ensure that DOD met the BRAC recommendation to co- locate enlisted medical training, not to ensure that this consolidation led to cost savings. However, the METC business plan, developed in response to the BRAC recommendation, noted that the intent of establishing METC was to reduce costs while leveraging best practice training programs of the three services. We found in April 2012 that DOD was unable to provide documented savings associated with the establishment of METC. We recommended that DOD employ key management practices in order to show the financial and nonfinancial outcomes of its reform efforts, and DOD concurred with our recommendation. DOD noted that it would employ key management practices in order to identify those outcomes; however, as of June 2014, DOD officials have not documented the financial outcome of the establishment of METC. DOD justified its request for the 2005 BRAC round in part based on anticipated savings. For example, DOD submitted to the 2005 BRAC Commission a recommendation for the consolidation of 26 military installations operated by individual military services into 12 joint bases to take advantage of opportunities for efficiencies arising from such consolidation and elimination of similar support services on bases located close to one another. However, we found in 2012 that DOD did not have a plan for achieving cost savings. For example, during our review of DOD's effort to implement this BRAC recommendation, joint base officials provided us with anecdotal examples of efficiencies that had been achieved at joint bases, but it was unclear whether DOD had achieved any significant cost savings to date, due in part to weaknesses in such areas as DOD's approach to tracking costs and estimated savings. Specifically, it did not establish quantifiable and measurable implementation goals for how to achieve cost savings or efficiencies through joint basing. We recommended that DOD develop and implement a plan that provides measurable goals linked to achieving savings and efficiencies at the joint bases and provide guidance to the joint bases that directs them to identify opportunities for cost savings and efficiencies. DOD did not concur with our recommendation, and we noted that this position contradicts DOD's position that joint basing would realize cost savings. Similarly, the co-location and consolidation of training at METC was, in part, premised on the achievement of cost savings, but DOD did not establish baseline costs as part of its metrics for assessing performance. It is now likely not possible to develop baseline cost information for fiscal year 2009 to determine the extent to which the establishment of METC resulted in cost savings. However, without developing baseline cost information before undergoing future course consolidation of training at METC and within the Education and Training Directorate, DOD will be unable to accurately assess cost savings in the future. METC has designed quality assurance processes to provide continuous, evaluative feedback related to improvements in education and training support, and is taking action to address issues regarding course accreditation and the post-graduation survey process. Certification Rates: METC monitors the national certification exam pass rates of its students, both to meet national requirements and to make comparisons with national averages. According to METC officials, certification rates are generally higher since the consolidation of training at METC. Currently, certification rates for seven programs exceed the national average. Internal Metrics: According to METC officials, METC regularly monitors a number of internal metrics, such as attrition, course repetition, and graduation rates. To manage performance information for all of their courses, officials produce a monthly snapshot of these data to track trends in performance over time. Additionally, all of METC's courses are to be reviewed through a comprehensive program review process conducted by the Health Care Interservice Training Office.ensure, for example, that all service and accreditation requirements are met; that faculty meet all required qualifications; and that internal and external surveys are conducted, analyzed, reported, and acted on according to policy. This office is to review 30 specific standards to help Accreditation Standards: METC is institutionally accredited by the Council on Occupational Education and is officially an affiliated school within the Community College of the Air Force (CCAF). Most METC courses are accredited by a relevant external accrediting body, such as the American Council on Education (ACE) or the CCAF. Surveys: The METC Memorandum of Agreement states that METC and the services will conduct external evaluations to document program efficacy and to facilitate curriculum review, by gathering feedback to measure whether the training received was relevant and to determine whether the graduates are proficient in their job duties. METC solicits this feedback through surveys sent by the services to the supervisors of METC graduates at the gaining commands to gauge satisfaction with the training they received at METC. These surveys ask such questions as whether the graduates have the cognitive skills necessary to do their jobs, whether they have met the entry-level practice requirements of their organizations, and whether any job tasks should be added to the METC curriculum for their programs of study. METC officials told us that some training courses were awarded fewer recommended credits by the ACE than similar service-run courses had received prior to METC's consolidation. Officials also stated that the consolidation of service-run curricula into single programs at METC was conducted by a contractor, and that these consolidated curricula could be improved. METC officials further noted that the ACE review of METC's consolidated curricula occurred after a change to that body's process for recommending credits, and that they are unaware whether the decrease in the number of recommended credits was due to the consolidated curricula or changes to ACE's process. METC officials told us that they are attempting to improve their programs through their regular process of curriculum review ahead of future ACE reviews of recommended credits for their courses. METC officials also told us that the post-graduate survey process has been ongoing since before METC was established; however, these surveys have historically exhibited low response rates. For instance, one sample survey provided by METC officials had a 14 percent student response rate and a 0 percent supervisor response rate. To improve the level of feedback received from these surveys, METC officials have begun a pilot process to conduct their own post-graduation surveys, using an online survey program that can be sent directly to the students' and supervisors' personal email addresses. Depending on the success of the pilot, METC officials plan to extend the process throughout all of METC. DHA's Education and Training Directorate is scheduled to begin operations in August 2014 to oversee medical education and training reform, but DOD does not have key information necessary to assess its progress in realizing the reform effort's goal of achieving cost savings. When DOD responded to the 2005 BRAC recommendation to relocate some medical education and training programs for enlisted servicemembers at METC, DOD similarly did not have key information necessary to determine whether the consolidation of training there had resulted in cost savings. Although DOD's plans for the implementation of the DHA acknowledge the benefits of conducting business case analyses, it has not done so for its medical education and training reforms. DOD's inability to demonstrate that cost savings had resulted from the consolidation of training at METC risks being repeated on a larger scale in the reform effort of the DHA's Education and Training Directorate. Specifically, absent analysis demonstrating how the Directorate's efforts will result in cost savings, the creation of the Directorate could increase costs by increasing staff levels without achieving any cost savings. In addition, without baseline cost information prior to future course consolidation of training at METC and within the Education and Training Directorate, DOD will be unable to assess potential cost savings. The risk of cost growth also exists for any future consolidations of training at METC, which could require significant investment of time and resources without any long-term efficiencies. To help realize the reform effort's goal of achieving cost savings, we recommend that the Assistant Secretary of Defense for Health Affairs direct the Director of the DHA to conduct a fully developed business case analysis for the Education and Training Directorate's reform effort. In this analysis the Director should identify the cost-related problem that it seeks to address by establishing the Education and Training Directorate, explain how the processes it has identified will address the cost- related problem, and conduct and document an analysis of benefits, costs, and risks. To help ensure that DOD has the necessary information to determine the extent to which cost savings result from any future consolidation of training within METC or the Education and Training Directorate, we recommend that Assistant Secretary of Defense for Health Affairs direct the Director of the DHA to develop baseline cost information as part of its metrics to assess achievement of cost savings. We provided a draft of this product to DOD for comment. The Acting MHS Chief Human Capital Officer provided DOD's comments in an email dated July 21, 2014. In that email, DOD concurred with the draft report's findings, conclusions, and recommendations. Additionally, noted in the email was that Medical Education and Training is the only shared service that has never had any type of oversight by the Office of the Assistant Secretary of Defense for Health Affairs or the pre-DHA TRICARE Management Activity. Further, in that email, DOD noted that that much credit goes to the sub-working group which has worked numerous hours over the past 2 years to put this shared service together so the MHS can realize efficiencies and garner maximum value, exploit best practices from the services, and achieve standardization where it makes sense. We are sending copies of this report to the appropriate congressional committees; the Secretary of Defense; the Assistant Secretary of Defense for Health Affairs; the Director, DHA; and the Surgeons General of the Army, the Navy, and the Air Force. In addition, the report is available at no charge on GAO's website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3604 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 included in appendix II. The Medical Education and Training Campus (METC) is the result of the 2005 Base Realignment and Closure (BRAC) Commission legislation that required the bulk of enlisted medical training in the Army, Air Force, and the Navy to be co-located at Fort Sam Houston, Texas. As a result, four major learning institutions for Navy and Air Force relocated to Fort Sam Houston, where the Army was already training its enlisted medical force under the Army Medical Department Center & School's (AMEDD C&S) Academy of Health Sciences. The Naval School of Health Sciences in San Diego, California; Naval School of Health Sciences in Portsmouth, Virginia; Navy Hospital Corps School in Great Lakes, Illinois; and the 882nd Training Group (now the 937th Training Group) at Sheppard Air Force Base moved to Fort Sam Houston, Texas. METC is now the largest military medical education and training facility in the world. METC started operating on June 30, 2010. Its initial training course was radiography specialist. Other courses were phased in throughout the rest of the year and into 2011. METC became fully operational on September 15, 2011. The longest program offered is cytology, which is the study of cells, at 52 weeks; and the shortest, at 4 weeks, is patient administration. METC offers about 50 medical training programs, which are listed in table 2 along with the course participants. In addition to the contact named above, Lori Atkinson, Assistant Director; Rebecca Beale; Jeffrey Heit; Mae Jones; Carol Petersen; Michael Silver; Adam Smith; and Sabrina Streagle made key contributions to this report. Military Health System: Sustained Senior Leadership Needed to Fully Develop Plans for Achieving Cost Savings. GAO-14-396T. Washington, D.C.: February 26, 2014. Defense Health Care Reform: Additional Implementation Details Would Increase Transparency of DOD's Plans and Enhance Accountability. GAO-14-49. Washington, D.C.: November 6, 2013. Defense Health Care: Additional Analysis of Costs and Benefits of Potential Governance Structures Is Needed. GAO-12-911. Washington, D.C.: September 26, 2012. Defense Health Care: Applying Key Management Practices Should Help Achieve Efficiencies within the Military Health System. GAO-12-224. Washington, D.C.: April 12, 2012. 2012 Annual Report: Opportunities to Reduce Duplication, Overlap and Fragmentation, Achieve Savings, and Enhance Revenue. GAO-12-342SP. Washington, D.C.: February 28, 2012. Follow-up on 2011 Report, Status of Actions Taken to Reduce Duplication, Overlap, and Fragmentation, Save Tax Dollars, and Enhance Revenue. GAO-12-453SP. Washington, D.C.: February 28, 2012. Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington, D.C.: March 1, 2011. Military Personnel: Enhanced Collaboration and Process Improvements Needed for Determining Military Treatment Facility Medical Personnel Requirements. GAO-10-696. Washington, D.C.: July 29, 2010. Defense Health Care: DOD Needs to Address the Expected Benefits, Costs, and Risks for Its Newly Approved Medical Command Structure. GAO-08-122. Washington, D.C.: October 12, 2007.

To help address DOD's escalating health care costs, in 2013 DOD established the DHA to, among other things, combine common medical services such as medical education and training. DOD trains its servicemembers for a wide variety of medical positions, such as physicians, nurses, therapists, and pharmacists. DHA's Education and Training Directorate is to oversee many aspects of DOD's medical education and training and is now expected to begin operations in August 2014. GAO was mandated to review DOD's efforts to consolidate medical education and training. GAO examined the extent to which DOD has (1) conducted analysis to reform medical education and training to achieve cost savings and (2) determined whether the consolidation of training at METC has resulted in cost savings and designed processes to assess its effectiveness. GAO compared DHA implementation plans and METC budget information from fiscal years 2010 through 2012 with best practices and interviewed officials from the DHA, METC, and military services' Surgeons General offices. In its 2013 plans for the implementation of the Defense Health Agency (DHA), the Department of Defense (DOD) outlined the responsibilities of a new Education and Training Directorate, but has not demonstrated how its proposed reforms will result in cost savings. The National Defense Authorization Act for Fiscal Year 2013 required DOD to develop business case analyses for its shared service proposals as part of its submissions on its plans for the implementation of DHA, including, among other things, the purpose of the shared service and the anticipated cost savings. Although DOD has stated that the Directorate is a shared service that combines common services and that it will result in cost savings, DOD has not fully developed the required business case analysis for the medical education and training reforms. This is because DOD has not yet completed the first step of the process, which includes identifying the specific problems that the reform is intended to address and thereby achieve cost savings. Unlike the medical education and training reforms, other DOD shared service projects present a clear linkage between (1) a stated problem, (2) proposed process changes, and (3) an estimate of benefits, costs, and risks. For the Directorate, DOD has identified the new processes it will employ, but has not identified the concerns the proposed new processes are intended to address and how they will achieve cost savings. In addition, some officials are unconvinced that the potential cost savings will be achieved, and stated that the creation of the Directorate serves more as a functional realignment than a cost savings endeavor. Without a fully developed business case analysis, it is unclear how DOD will measure any accomplishments and hold the Directorate accountable for achieving cost savings. DOD is unable to determine whether the consolidation of training at the Medical Education and Training Campus (METC) resulted in cost savings; however, DOD is taking action to improve some of the processes for evaluating the effectiveness of training at METC. DOD co-located medical training for enlisted medical servicemembers at METC as part of the 2005 Base Realignment and Closure Commission (BRAC) process to achieve cost savings, and subsequently, the services decided to consolidate their training. However, some officials stated they were unsure whether all funds were transferred to METC. Furthermore, due to a shortage of military service funds, the Office of the Assistant Secretary of Defense for Health Affairs provided funding for METC in addition to the services' transfers. DOD is unable to determine whether the consolidation of training at METC resulted in cost savings because it did not develop baseline cost information as part of its metrics to assess METC's success. Baseline cost information is a key characteristic of performance metrics critical to ensuring that processes achieve the desired results. Without baseline cost information prior to future course consolidation of training at METC and within the Education and Training Directorate, DOD will be unable to assess potential cost savings. DOD has designed processes to evaluate the quality of training at METC--including processes related to certification rates, accreditation, and surveys. Further, DOD has taken action to improve some processes. For example, to improve the level of feedback received from METC surveys, METC officials have begun a pilot process to conduct their own post-graduation surveys. GAO recommends that DOD conduct a fully developed business case analysis for the Education and Training Directorate and develop baseline cost information as part of its metrics to assess cost savings for future consolidation efforts. In comments to a draft of this report, DOD concurred with each of GAO's recommendations.

Federal agencies can use a variety of different approaches to purchase office supplies. For relatively small purchases, generally up to $3,000, authorized users can use their government purchase cards. For larger purchases, agencies may use other procedures under the Federal Acquisition Regulation, such as awarding a contract. Alternatively, GSA provides federal agencies with a simplified method for procuring office supplies through its Federal Supply Schedule program, also known as the Multiple Award Schedules (MAS) or schedules program. Under the schedules program, the federal government's largest interagency contracting program, GSA awards contracts to multiple vendors for a wide range of commercially available goods and services. The schedules program can leverage the government's significant aggregate buying power. Also, under the schedules program, to ensure the government is getting the most value for the taxpayer's dollar, GSA seeks to obtain price discounts equal to those that vendors offer their "most favored customers." In November 2007, GSA initiated another approach for buying office supplies by creating blanket purchase agreements (BPA) under the schedules program. BPAs are a simplified method of fulfilling repetitive needs for supplies and services that also provide an opportunity to seek reduced pricing from vendors' schedule prices. The approach was part of the government's Federal Strategic Sourcing Initiative (FSSI). GSA officials acknowledged they could have done a better job promoting this initiative. Ultimately, GSA determined that the initiative did not meet its expectations and initiated a second strategic sourcing initiative known as FSSI Office Supplies II (OS II) in 2010. By July 2010, GSA competitively awarded 15 BPAs to 13 small businesses and 2 other businesses to support the OS II initiative. The GSA study on office supply purchases reviewed 14 categories of mostly consumable office supplies, ranging from paper and writing instruments to calendars and filing supplies. The report did not include non-consumable items such as office furniture and computers because they are not part of the standard industry definition of office supplies. The GSA report estimated that the 10 agencies with the highest spending on office supplies accounted for about $1.3 billion, about 81 percent of the total $1.6 billion spent governmentwide on the 14 categories of office supplies during fiscal year 2009. The amounts spent by the top 10 agencies are shown in figure 1. The report found that about 58 percent of office supply purchases were made outside of the GSA schedules program, mostly at retail stores. The report also found that agencies often paid more--a price premium--than they would have by using the GSA schedules program or OS II. On average, GSA found that agencies paid 75 percent more than schedule prices and 86 percent more than OS II prices for their retail purchases. Table 1 shows the 14 categories of office supplies, the number of different items in each of the categories, and the retail price premiums that GSA calculated for each category when compared to schedule prices. The report also concluded that buyers engaged in at least some level of price comparisons before making purchasing decisions. More specifically, the report stated that buyers may compare prices across different vendors when ordering through an electronic medium, or across available items when purchasing directly through a vendor's online or retail store. GSA used several sources of data to analyze and compare the prices paid for 219 items across 14 categories of office supplies through various purchasing options. The GSA report acknowledged some limitations with the data, but we identified additional data and other limitations that lead us to question the magnitude of some of GSA's reported price premiums. We were not able to fully quantify the impact of these limitations. Other agencies also questioned the study's specific findings related to price premiums, but their own studies of price premiums support GSA's conclusion that better prices can be obtained through consolidated, leveraged purchasing. The GSA study also concluded that buyers compared prices before making purchases, but this conclusion was not based on information from actual purchase card holders. Purchasing of office supplies is highly decentralized with about 270,000 purchase cardholders and others across the government making purchases in fiscal year 2009. Because of this, GSA obtained data for its study from multiple government sources, and purchase card information provided by the commercial banks that issue the government purchase cards. To determine the funds spent on office supplies and to conduct related analyses, GSA sorted through data from these various sources, which included about 7 million purchase transactions involving over 12 million items. GSA took a number of steps to clean the data prior to using them. For example, because a single purchase might have been reported in more than one data source, GSA removed duplicate purchases prior to its analysis. The data were further cleaned to remove items and their related costs that did not meet GSA's definition of office supplies. To determine retail price premiums, GSA focused its analyses on 219 office supply items that were purchased in 2009 from retailers and the GSA schedules. In its report, GSA acknowledged that the data used to analyze governmentwide purchases of office supplies in 2009 had limitations, in part due to the decentralized data sources for office supply purchases and the limited time GSA had to conduct its study. A significant issue GSA faced was attempting to control for variation in quantities; in other words, GSA tried to ensure that when comparing prices, it was using transactions that involved identical quantities. A purchase of pens, for example, could involve a single pen, a package of three pens, a box of a dozen, or any other quantity. GSA officials told us that the primary means they used to control for quantities was the use of the manufacturer's part number. They explained that they searched available databases to identify items with identical part numbers. They told us that when they found large variations in retail prices for apparently identical items, they excluded transactions they considered to be outliers. This approach, however, may not have been adequate to account for variations in quantity. When we contacted a national organization representing manufacturers, a senior staff director told us that there is no consistent approach among manufacturers for assigning part numbers. Some manufacturers may assign one part number to individual items and different part numbers to packages of those same items containing different quantities, while other manufacturers may assign the same part number both to individual items and to packages of items. In addition, when we reviewed some of the individual transaction data GSA obtained for retail purchases, we identified substantial price variations for a number of drawing and graphic arts supplies and writing instruments that carried the same manufacturer's part number. Specifically, when we reviewed GSA's retail transaction data for 10 items within the writing instruments category, we found that retail prices for 6 of the 10 items varied by more than 300 percent. For instance, for one item involving black Rollerball pens, GSA's retail transaction data showed prices ranging from $9.96 to $44.96 for items listed with the same part number. These transactions were all with the same nationwide retailer. When asked about such substantial price differences for items with the same part number, GSA officials acknowledged that the purchase card data they used for retail prices did not always accurately identify the quantity of items involved in each transaction. The existence of substantial price differences for a number of items indicates that GSA's attempts to compare prices may not have adequately controlled for variations in quantities. We also identified a weakness with the clarity of the GSA report with regard to how price premium estimates were calculated. Specifically, GSA's study described a specific formula that was used to calculate the price premiums, but our review of the study's supporting documents found that the GSA actually used a different formula to calculate price premiums for 10 of the 14 office supply categories. In a discussion with GSA officials, they agreed that the study did involve the use of two different formulas. When we used the formula described in the study to recalculate the retail price premiums for those 10 categories of office supplies, we found the price premiums would have changed from what GSA reported by less than 5 percentage points for all categories except drawing and graphic arts supplies. For that category, the recalculated price premium was 68 percent, as compared to the 278 percent reported in the study. The use of this unreported formula did not have a substantial impact on the retail price premium calculations for most categories of office supplies or the overall conclusions of the study, but the GSA report could have been more complete had it fully disclosed all the formulas used for all categories of office supplies. On the basis of their own studies, Air Force, Army, Navy, and DHS officials also questioned the specific price premiums and savings reported by GSA. Officials from these agencies told us they believed that the price premiums reported by GSA when buying outside the GSA schedule were overstated. However, the agencies agreed with GSA's overall conclusion that better prices can be obtained through leveraged buys. In addition, all four agencies in our review found that the prices available through the new OS II BPAs were better than the prices available from their existing agency BPAs. For example, a DHS study found savings of about 20 percent when analyzing the prices associated with a mix of 348 items. The Air Force determined that the OS II BPAs could save about 7 percent in a study of the 125 most commonly purchased items. On the basis of this analysis, the Air Force decided to let its existing office supply contracts expire. Similarly, the Navy's comparison of 71 items found that using the OS II BPAs could save about 6 percent, which led Navy officials to move purchasing to the OS II BPAs. Army officials did not provide study results, but they told us their analysis found lower price premiums than reported by GSA. An Army official said they plan to continue using existing BPA's while they transition to OS II. GSA interviewed senior-level acquisition officials to determine how office supply purchasing decisions were made within their respective agencies and concluded that purchase cardholders compared costs at some level prior to making a purchase. While these officials may have had a broad understanding of agency procurement policies and practices based on their positions in their respective agencies, they were not representative of the approximately 270,000 credit cardholders making the purchasing decisions. The GSA report did not identify or collect any data about price comparisons conducted by the cardholders. Collecting information from buyers, even through interviews or a survey of government purchase cardholders who actually made the purchases, could have provided another perspective on buyer behavior, including the extent to which price comparisons were made. GSA officials said that, given the reporting timeframe for the study, they did not have the resources or time that would have been needed to conduct a study that would have included a representative sample of the 270,000 purchase card holders. According to initial available data, GSA's new OS II BPAs have produced savings. The OS II initiative, more so than past efforts, is demonstrating that leveraged buying can produce greater savings and has provided improvements for managing ongoing and future strategic sourcing initiatives. GSA is using a combination of agency and vendor involvement to identify key requirements and cost drivers, increase the ease of use, and obtain the data necessary to manage the program. For example, a key aspect of the initiative is that participating vendors provide sales and other information to GSA to help monitor prices, savings, and vendor performance. On the basis of the sales data provided by OS II vendors, GSA estimates the federal government saved $16 million from June 2010 through August 2011 by using these BPAs. These savings were estimated by comparing the lowest prices of a set of over 400 items available on GSA's schedules program contracts before OS II with prices and discounts being offered for the same items on the OS II BPAs. Importantly, and unlike GSA's report, GSA's conclusions about savings realized under OS II are based on data from vendors--which they are required to collect and provide in the normal course of business--and not on data collected after the fact from sources not designed to produce information needed to estimate savings. GSA's comparison of the market basket of best schedule prices against the OS II BPA vendors' prices found that the BPA vendors offered prices that were an average of 8 percent lower, and the average savings is expected to fluctuate somewhat as the OS II initiative continues to be implemented. The expected fluctuation is based on anticipated changes in the mix of vendors, products, and agencies. For example, GSA found the savings, as a percentage, declined slightly as agencies with historically strong office supplies management programs increased their use of OS II. Conversely, they expect the savings percentage to increase as agencies without strong office supplies management programs increase their use. In addition to the savings from the BPAs, GSA representatives told us that they are also seeing prices decrease on schedules program contracts as vendors that were not selected for the OS II program react to the additional price competition created by the OS II initiative by reducing their schedule prices. After the first year the OS II BPAs were in use, GSA extended the BPAs for an additional year after negotiating additional price discounts. As a result of these discussions, 13 of the 15 BPA vendors decreased their prices by an additional 3.9 percent on average. Additionally, the BPAs included tiered discounts, which apply when specific sales volume thresholds are met. Sales realized by one of the BPA vendors reached the first tier discount level in September 2011, and the vendor has since adjusted its prices to provide the corresponding price discounts. GSA anticipates additional vendor sales to exceed the first tier discount threshold in the first option year, which will trigger additional discounts. GSA expects that OS II will result in lower government-wide costs for office supplies as more agencies move from their agency-specific BPAs for office supplies to the OS II BPAs. Many agencies that had their own BPAs for office supplies did not renew their BPAs and have opted to use the OS II instead. As these agencies move to OS II, their contract management costs should decrease. For example, according to Air Force officials, instead of having personnel in every agency administer their own BPAs for office supplies, personnel at GSA will administer the OS II program on behalf of other agencies. While this may create some additional burden for GSA, officials believe the overall government costs to administer office supply purchases should decrease. GSA has incorporated a range of activities representative of a strategic procurement approach into the OS II initiative, including aspects of managing the suppliers. These activities range from obtaining a better picture of spending on services, to taking an enterprisewide approach, to developing new ways of doing business. All of these activities involve some level of centralized oversight and management. In addition, this approach involves activities associated with the management of the supply chain, which includes planning and managing all activities involved in sourcing and procurement decisions, as well as logistics management activities. These include coordination and collaboration with stakeholders, such as suppliers or vendors, intermediaries sometimes referred to as resellers, third party service providers, and customers or buying agencies. As part of the planning process for OS II, GSA assessed its schedules program office supply vendor pool and determined a sufficient number of vendors could meet its critical requirements. As part of the overall strategy, in addition to savings, GSA through its commodity council also identified five overarching goals for the OS II initiative, to facilitate overall management, as shown in table 2. As part of preparing for the competition for OS II, GSA obtained input from the interested vendors before issuing the request for quotations by holding an industry day. For example, based on vendor input that identified shipping as a key cost driver, a $100 minimum order level was included as part of the BPA. A reverse auction process was used to carry out the competition for the BPAs, which GSA anticipated would result in more pricing discounts offered by vendors. As part of the reverse auction process, the vendors submitted an initial quote. After GSA evaluated the quotes, the vendors were notified of the lowest quotes and provided at least one opportunity to revise their quotes, resulting in price reductions. GSA obtained commitments from agencies and help set goals for additional discounts to let businesses know that the agencies were serious in their commitment to the BPAs. This also helped GSA determine the number of BPAs that would be awarded. Because government purchase cards were the most common way to purchase office supplies, OS II includes a point of sale discount, under which BPA prices are automatically charged whenever a government purchase card is used for an item covered by the BPA rather than having the buyers ask for a discount. Additionally, purchases are automatically tax exempt if the purchases are made using a government purchase card. State sales taxes were identified by GSA's report as costing the federal agencies at least $7 million dollars in fiscal year 2009. To address concerns about vendor oversight and management, OS II has attempted to clearly define program implementation responsibilities, including laying out GSA, vendor, and buying agency responsibilities. A key aspect of a successful acquisition program is managing the vendors or suppliers to ensure that they are meeting terms and conditions of the contract or BPA and that the program or initiative is meeting its overall goals. This includes defining performance metrics, capturing or collecting data, preparing analysis and related reports, communicating the results of the analysis, and initiating corrective actions. GSA is capturing data on purchases and vendor performance that is assimilated and tracked through dashboards, which are high-level indicators of overall program performance. The dashboard information is used by the GSA team members responsible for oversight and is shared with agencies using OS II. Our review of GSA's OS II vendor files found that GSA has taken a more active role in oversight and is holding the vendors accountable for performance. For example, GSA has issued Letters of Concern to four vendors and has issued one Cure Notice to a vendor. These letters and notices are used to inform vendors that the agency has identified a problem with the vendor's compliance with the terms and conditions of the BPA. To support the OS II management responsibilities, GSA charges a 2 percent management fee, which is incorporated into the vendor prices. This fee, which is higher than the .75 percent fee normally charged on GSA schedules program sales, covers the additional program costs, such as the cost of the six officials responsible for administering the 15 BPAs, as well as their contractor support. GSA is learning lessons from OS II, its first of the second generation of strategic sourcing initiatives, and is attempting to incorporate these lessons into other strategic sourcing initiatives. While some of the lessons learned as OS II has progressed are not directly transferable to other initiatives, there are some aspects of it that can be applied to any strategic sourcing initiative. To this end, GSA established an office supplies commodity council to identify agencies' goals and needs. The input provided by the commodity team was incorporated into all aspects of the program from the vendor requirements to the selection criteria. This experience is being applied to other strategic sourcing initiatives. For example, GSA took a more collaborative approach as it moved to Federal Strategic Sourcing Initiative Second Generation Domestic Delivery Services II (DDS2). More specifically, GSA set up a commodity council that helped identify the program requirements and provide input on how the program operates. Vendor input was also sought and incorporated into the requirements. GSA's office supplies report contained some data and other limitations, but it showed that federal agencies were not using a consistent approach in both where and how they bought office supplies and often paid a price premium as a result of these practices. The magnitude of the price premium may be debatable, but other agencies that have conducted studies came to the same basic conclusion about the savings potential from leveraged buying. The GSA study helped set the course for a more strategic approach to buying office supplies--an approach that provides data to oversee the performance of vendors, monitor prices, and estimate savings. Additional savings are expected as more government agencies participate in the OS II initiative and further leverage the government's buying power. We provided a draft of this report to GSA, DHS, and DOD. We received written comments from GSA and DHS, which are included as appendices I and II, respectively. DOD had no comments. In its comments, GSA said it was pleased that our report affirmed that savings can be achieved through leveraged purchasing and better understanding of spend data. GSA also provided additional information on its strategic sourcing initiatives. GSA noted that it would have been very resource intensive for the agency to obtain information from a representative sample of the 270,000 purchase card holders for little added benefit. We revised our report to reflect GSA's comment. GSA provided some suggested language and technical changes to help clarify the report, which we incorporated as appropriate. We did not use GSA's suggested language concerning the limitations we identified in its study because we believe the language in our report accurately reflects our finding on this issue. DHS stated that it appreciated our work and provided additional information on its respective strategic sourcing initiatives. DHS also stated that it has realized savings from the OS II initiative and expects to continue to do so. We are sending copies of this report to the Administrator of General Services, the Secretaries of the Department of Homeland Security and Defense as well as the Air Force, Army, and Navy. In addition, the report is also available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made key contributions to this report are listed in appendix III. In addition to the contact named above, James Fuquay, Assistant Director; Marie Ahearn; Morgan Delaney Ramaker; Joseph Fread; Jean Lee; Jean McSween; Kenneth Patton; Carol Petersen; Raffaele Roffo; William Russell; Roxanna Sun; Jeff Tessin; and Ann Marie Udale made significant contributions to this report.

Concerned that federal agencies may not be getting the best prices available, Congress directed the General Services Administration (GSA) to study office supply purchases by the 10 largest federal agencies. GSA delivered the results of its study in November 2010. The study also discussed GSA's efforts to implement an initiative focused on leveraging the government's buying power to realize savings when buying office supplies, known as Office Supplies II (OS II). Under this initiative, GSA entered into agreements with vendors based on discounted prices to be offered to all federal agencies. Congress directed GAO to assess the GSA study, with particular attention to the potential for savings. Accordingly, GAO assessed (1) the support for the findings and conclusions in GSA's report and (2) how GSA's new office supply contracts support the goal of leveraging the government's buying power to achieve savings. To conduct this work, GAO analyzed the data GSA used for its study; met with and obtained documentation from officials at GSA and the Departments of Homeland Security (DHS), Air Force, Navy, and Army, which were among the 10 agencies in GSA's study; and reviewed contract documentation associated with GSA's new office supplies initiative. GSA and DHS commented on a draft of this report. GSA said it appreciated our recognition that leveraged purchasing can produce savings and also provided technical comments, which we incorporated as appropriate. DHS provided additional information on its strategic sourcing initiatives. GSA estimated that federal agencies spent about $1.6 billion during fiscal year 2009 purchasing office supplies from more than 239,000 vendors. GSA concluded that agency buyers paid higher prices when they bought office supplies outside GSA's Multiple Award Schedule program than they would have using the schedules or OS II. According to GSA, the price premiums averaged 75 percent compared to the schedule prices and 86 percent compared to OS II. GAO identified data and other limitations in GSA's study, such as not always controlling for variation in quantities of identical items when comparing prices. GAO was not able to fully quantify the impact of these limitations. Officials from other agencies--Air Force, Army, Navy, and DHS--also questioned the study's specific findings on price premiums, believing them to be overstated, but their own studies support GSA's general conclusion that better prices can be obtained through consolidated, leveraged purchasing. The GSA study also concluded that buyers compared prices before making purchases, but this conclusion was based on interviews with senior-level acquisition officials and not on information obtained from any of the approximately 270,000 government purchase cardholders who made the purchasing decisions. According to available data, GSA's new office supplies sourcing initiative, OS II, has produced savings. GSA estimated that the government saved $16 million from June 2010 through August 2011 through this initiative. According to GSA, the OS II initiative is demonstrating that leveraged buying can produce savings and has provided improvements for managing ongoing and future strategic sourcing initiatives. GSA reports that OS II allowed it to negotiate discounts with vendors who were selected for the initiative, and has spurred price competition among schedule vendors that were not selected as they react to the OS II pricing, resulting in decreased schedule prices. The initiative is also expected to lower government-wide office supply costs through more centralized contract management. Another key aspect of the initiative is that participating vendors provide sales and other information to GSA to help monitor prices, savings, and vendor performance. Finally, the OS II initiative offers lessons learned for other strategic sourcing initiatives, including the importance of identifying agencies' goals and needs and ensuring buying agency participation.

DOD and VA offer health care benefits to active duty servicemembers and veterans, among others. Under DOD's health care system, eligible beneficiaries may receive care from military treatment facilities or from civilian providers. Military treatment facilities are individually managed by each of the military services--the Army, the Navy, and the Air Force. Under VA, eligible beneficiaries may obtain care through VA's integrated health care system of hospitals, ambulatory clinics, nursing homes, residential rehabilitation treatment programs, and readjustment counseling centers. VA has organized its health care facilities into a polytrauma system of care that helps address the medical needs of returning servicemembers and veterans, in particular those who have an injury to more than one part of the body or organ system that results in functional disability and physical, cognitive, psychosocial, or psychological impairment. Persons with polytraumatic injuries may have injuries or conditions such as TBI, amputations, fractures, and burns. Over the past 6 years, DOD has designated over 30,000 servicemembers involved in Operations Iraqi Freedom and Enduring Freedom as wounded in action. Servicemembers injured in these conflicts are surviving injuries that would have been fatal in past conflicts, due, in part, to advanced protective equipment and medical treatment. The severity of their injuries can result in a lengthy transition from patient back to duty, or to veteran status. Initially, most seriously injured servicemembers from these conflicts, including activated National Guard and Reserve members, are evacuated to Landstuhl Regional Medical Center in Germany for treatment. From there, they are usually transported to military treatment facilities in the United States, with most of the seriously injured admitted to Walter Reed Army Medical Center or the National Naval Medical Center. According to DOD officials, once they are stabilized and discharged from the hospital, servicemembers may relocate closer to their homes or military bases and are treated as outpatients by the closest military or VA facility. As part of the Army's Medical Action Plan, the Army has developed a new organizational structure--Warrior Transition Units--for providing an integrated continuum of care for servicemembers who generally require at least 6 months of treatment, among other factors. Within each unit, the servicemember is assigned to a team of three key staff and this team is responsible for overseeing the continuum of care for the servicemember. The Army refers to this team as a "Triad," which consists of a (1) primary care manager--usually a physician who provides primary oversight and continuity of health care and ensures the quality of the servicemember's care; (2) nurse case manager--usually a registered nurse who plans, implements, coordinates, monitors, and evaluates options and services to meet the servicemember's needs; and (3) squad leader--a noncommissioned officer who links the servicemember to the chain of command, builds a relationship with the servicemember, and works along side the other parts of the Triad to ensure the needs of the servicemember and his or her family are met. The Army established 32 Warrior Transition Units, to provide a unit in every medical treatment facility that has 35 or more eligible servicemembers. The Army's goal is to fill the Triad positions according to the following ratios: 1:200 for primary care managers; 1:18 for nurse case managers at Army medical centers that normally see servicemembers with more acute conditions and 1:36 for other types of Army medical treatment facilities; and 1:12 for squad leaders. Returning injured servicemembers must potentially navigate two different disability evaluation systems that generally rely on the same criteria but for different purposes. DOD's system serves a personnel management purpose by identifying servicemembers who are no longer medically fit for duty. The military's process starts with identification of a medical condition that could render the servicemember unfit for duty, a process that could take months to complete. The servicemember is evaluated by a medical evaluation board (MEB) to identify any medical conditions that may render the servicemember unfit. The member is then evaluated by a physical evaluation board (PEB) to make a determination of fitness or unfitness for duty. If found unfit, and the unfit conditions were incurred in the line of duty, the PEB assigns the servicemember a combined percentage rating for those unfit conditions using VA's rating system as a guideline, and the servicemember is discharged from duty. This disability rating, along with years of service and other factors, determines subsequent disability and health care benefits from DOD. For servicemembers meeting the minimum rating and years of duty thresholds, monthly disability retirement payments are provided; for those not meeting these thresholds, a lump-sum severance payment is provided. As servicemembers in the Army navigate DOD's disability evaluation system, they interface with staff who play a key role in supporting them through the process. MEB physicians play a fundamental role as they are responsible for documenting the medical conditions of servicemembers for the disability evaluation case file. In addition, MEB physicians may require that servicemembers obtain additional medical evidence from specialty physicians such as a psychiatrist. Throughout the MEB and PEB process, a physical evaluation board liaison officer serves a key role by explaining the process to servicemembers, and ensuring that the servicemembers' case files are complete before they are forwarded for adjudication. The board liaison officer informs servicemembers of board results and of deadlines at key decision points in the process. The military also provides legal counsel to servicemembers in the disability evaluation process. The Army, for example, provides them with legal representation at formal board hearings. The Army will provide military counsel, or servicemembers may retain their own representative at their own expense. In addition to receiving benefits from DOD, veterans may receive compensation from VA for lost earning capacity due to service-connected disabilities. Although a servicemember may file a VA claim while still in the military, he or she can only obtain disability compensation from VA as a veteran. VA will evaluate all claimed conditions, whether they were evaluated previously by the military service's evaluation process or not. If the VA finds that a veteran has one or more service-connected disabilities with a combined rating of at least 10 percent, VA will pay monthly compensation. The veteran can claim additional benefits over time, for example, if a service-connected disability worsens. To improve the timeliness and resource utilization of DOD's and VA's separate disability evaluation systems, the agencies embarked on a planning effort of a joint disability evaluation system that would enable servicemembers to receive VA disability benefits shortly after leaving the military without going through both DOD's and VA's processes. A key part of this planning effort included a "table top" exercise whereby the planners simulated the outcomes of cases using four potential options that incorporated variations of following three elements: (1) a single, comprehensive medical examination to be used by both DOD and VA in their disability evaluations; (2) a single disability rating performed by VA; and (3) incorporating a DOD-level evaluation board for adjudicating servicemembers' fitness for duty. Based on the results of this exercise, DOD and VA implemented the selected pilot design using live cases at three Washington, D.C.-area military treatment facilities including Walter Reed Army Medical Center in November 2007. Key features of the pilot include (see fig. 1): a single physical examination conducted to VA standards as part of the disability ratings prepared by VA, for use by both DOD and VA in determining disability benefits; and additional outreach and non-clinical case management provided by VA staff at the DOD pilot locations to explain VA results and processes to servicemembers. The Army has made strides increasing key staff positions in support of servicemembers undergoing medical treatment as well as disability evaluation, but faces a number of challenges to achieving or maintaining stated goals. Although the Army has made significant progress in staffing its Warrior Transition Units, several challenges remain, including hiring medical staff in a competitive market, replacing temporarily borrowed personnel with permanent staff, and getting eligible servicemembers into the units. With respect to supporting servicemembers as they navigate the disability evaluation process, the Army has reduced caseloads of key support staff, but has not yet reached its goals and faces challenges with both hiring and meeting current demands of servicemembers in the process. Since September 2007, the Army has made considerable progress in staffing its Warrior Transition Units, increasing the number of staff assigned to Triad positions by almost 75 percent. As of February 6, 2008, the Army had about 2,300 personnel staffing its Warrior Transition Units. In February 2008, the Army reported that its Warrior Transition Units had achieved "full operational capability," which was the goal established in the Army's Medical Action Plan. The Warrior Transition Units reported that they had met this goal even though some units had staffing shortages or faced other challenges. The Army's January 2008 assessment defined full operational capability across a wide variety of areas identified in the Army's Medical Action Plan, not just personnel fill. For example, the assessment included whether facilities and barracks were suitable and whether a Soldier and Family Assistance Center was in place and providing essential services. In addition, the commander assessed whether the unit could conduct the mission- essential tasks assigned to it. As a result, such ratings have both objective and subjective elements, and the Army allows commanders to change the ratings based on their judgment. Location (size of Warrior Transition Unit population) Fort Hood, Texas (957) Walter Reed Army Medical Center, Washington, D.C. (674) Fort Lewis, Washington (613) Fort Campbell, Kentucky (596) Fort Drum, New York (395) Fort Polk, Louisiana (248) Fort Knox, Kentucky (243) Fort Irwin & Balboa, California (89) Fort Belvoir, Virginia (43) Fort Huachuca, Arizona (41) Redstone Arsenal, Alabama (17) The Army is confronting other challenges, as well, including replacing borrowed staff in Triad positions with permanently assigned staff without disrupting the continuity of care for servicemembers. We previously reported in September 2007 that many units were relying on borrowed staff to fill positions--about 20 percent overall. This practice has continued; in February 2008, about 20 percent of Warrior Transition Unit staff continued to be borrowed from other positions. Army officials told us that using borrowed staff was necessary to get the Warrior Transition Units implemented quickly and has been essential in staffing units that have experienced sudden increases in servicemembers needing care. Army officials told us that using borrowed staff is a temporary solution for staffing the units, and these staff will be transitioned out of the positions when permanent staff are available. Replacing the temporary staff will result in turnover among Warrior Transition Unit staff, which can disrupt the continuity of care provided to servicemembers. Another lingering challenge facing the Army is getting eligible servicemembers into the Warrior Transition Units. In developing its approach, the Army envisioned that servicemembers meeting specific criteria, such as requiring more than 6 months of treatment or having a condition that requires going through the Medical Evaluation Board process, would be assigned to the Warrior Transition Units. Since September 2007, the Warrior Transition Unit population has increased by about 80 percent--from about 4,350 to about 7,900 servicemembers. However, although the percentage of eligible servicemembers going through the Medical Evaluation Board process who were not in a Warrior Transition Unit has been cut almost in half since September 2007, more than 2,500 eligible servicemembers were not in units, as of February 6, 2008. About 1,700 of these servicemembers (about 70 percent) are concentrated in ten locations. (See table 2.) Warrior Transition Unit commanders conduct risk assessments of eligible servicemembers to determine if their care can be appropriately managed outside of the Warrior Transition Unit. These assessments are to be conducted within 30 days of determining that the servicemember meets eligibility criteria. For example, a servicemember's knee injury may require a Medical Evaluation Board review--a criterion for being placed in a Warrior Transition Unit--but the person's unit commander can determine that the person can perform a desk job while undergoing the medical evaluation process. According to Army guidance, servicemembers eligible for the Warrior Transition Unit will generally be moved into the units, that it will be the exception, not the rule, for a servicemember to not be transferred to a Warrior Transition Unit. Army officials told us that the population of 2,500 servicemembers who had not been moved into a Warrior Transition Unit consisted of both servicemembers who had just recently been identified as eligible for a unit but had not yet been evaluated and servicemembers whose risk assessment determined that their care could be managed outside of a unit. Officials told us that servicemembers who needed their care managed more intensively through Warrior Transition Units had been identified through the risk assessment process and had been moved into such units. As eligible personnel are brought into the Warrior Transition Units, however, it could exacerbate staffing shortfalls in some units. To minimize future staffing shortfalls, Army officials told us that they are identifying areas where they anticipate future increases in the number of servicemembers needing care in a Warrior Transition Unit and would use this information to determine appropriate future staffing needs of the units. Another emerging challenge is gathering reliable and objective data to measure progress. A central goal of the Army's efforts is to make the system more servicemember- and family-focused and the Army has initiated efforts to determine how well the units are meeting servicemembers' needs. To its credit, the Army has developed a wide range of methods to monitor its units, among them a program to place independent ombudsmen throughout the system as well as town hall meetings and a telephone hotline for servicemembers to convey concerns about the Warrior Transition Units. Additionally, through its Warrior Transition Program Satisfaction Survey, the Army has been gathering and analyzing information on servicemembers' opinions about their nurse case manager and the overall Warrior Transition Unit. However, initial response rates have been low, which has limited the Army's ability to reliably assess satisfaction. In February 2008, the Army started following up with nonrespondents, and officials told us that these efforts have begun to improve response rates. To obtain feedback from a larger percentage of servicemembers in the Warrior Transition Units, the Army administered another satisfaction survey in January 2008. This survey, which also solicited servicemembers' opinions about components of the Triad and overall satisfaction with the Warrior Transition Units, garnered a more than 90 percent response rate from the population surveyed. While responses to the survey were largely positive, the survey is limited in its ability to accurately gauge the Army's progress in improving servicemember satisfaction with the Warrior Transition Unit, because it was not intended to be a methodologically rigorous evaluation. For example, the units were not given specific instructions on how to administer the survey, and as a result, it is not clear the extent to which servicemembers were provided anonymity in responding to the survey. Units were instructed to reach as many servicemembers as possible within a 24-hour period in order to provide the Army with immediate feedback on servicemembers' overall impressions of the care they were receiving. Injured and ill servicemembers who must undergo a fitness for duty assessment and disability evaluation rely on the expertise and support of several key staff--board liaisons, legal personnel, and board physicians-- to help them navigate the process. Board liaisons explain the disability process to servicemembers and are responsible for ensuring that their disability case files are complete. Legal staff and medical evaluation board physicians can substantially influence the outcome of servicemembers' disability evaluations because legal personnel provide important counsel to servicemembers during the disability evaluation process, and evaluation board physicians evaluate and document servicemembers' medical conditions for the disability evaluation case file. With respect to board liaisons, the Army has expanded hiring efforts and met its goals for reducing caseloads at most treatment facilities, but not at some of the facilities with the most servicemembers in the process. In August 2007, the Army established an average caseload target of 30 servicemembers per board liaison. As of February 2008, the Army had expanded the number of board liaisons by about 22 percent. According to the Army, average caseloads per liaison have declined from 54 servicemembers at the end of June 2007 to 46 at the end of December 2007. However, 11 of 35 treatment facilities continue to have shortages of board liaisons and about half of all servicemembers in the disability evaluation process are located at these 11 treatment facilities. (See fig. 2.) Due to their caseloads, liaisons we spoke with at one location had difficulty making appointments with servicemembers, which has challenged their ability to provide timely and comprehensive support. The Army plans to hire additional board liaisons, but faces challenges in keeping up with increased demand. According to an Army official responsible for staff planning, the Army reviews the number of liaisons at each treatment facility weekly and reviews Army policy for the target number of servicemembers per liaison every 90 days. The official also identified several challenges in keeping up with increased demand for board liaisons, including the increase in the number of injured and ill servicemembers in the medical evaluation board process overall, and the difficulty of attracting and retaining liaisons at some locations. According to Army data, the total number of servicemembers completing the medical evaluation board process increased about 19 percent from the end of 2006 to the end of 2007. In addition to gaps in board liaisons, according to Army documents, staffing of dedicated legal personnel who provide counsel to injured and ill servicemembers throughout the disability evaluation processes is currently insufficient. Ideally, according to the Army, servicemembers should receive legal assistance during both the medical and physical evaluation board processes. While servicemembers may seek legal assistance at any time, the Office of the Judge Advocate General's policy is to assign dedicated legal staff to servicemembers when their case goes before a formal physical evaluation board. In June 2007, the Army assigned 18 additional legal staff--12 Reserve attorneys and 6 Reserve paralegals-- to help meet increasing demands for legal support throughout the process. As of January 2008, the Army had 27 legal personnel--20 attorneys and 7 paralegals--located at 5 of 35 Army treatment facilities who were dedicated to supporting servicemembers primarily with the physical evaluation board process. However, the Office of the Judge Advocate General has acknowledged that these current levels are insufficient for providing support during the medical evaluation board process, and proposed hiring an additional 57 attorneys and paralegals to provide legal support to servicemembers during the medical evaluation board process. The proposed 57 attorneys and paralegals include 19 active-duty military attorneys, 19 civilian attorneys, and 19 civilian paralegals. On February 21, 2008, Army officials told us that 30 civilian positions were approved, consisting of 15 attorneys and 15 paralegals. While the Army has plans to address gaps in legal support for servicemembers, challenges with hiring and staff turnover could limit their efforts. According to Army officials, even if the plan to hire additional personnel is approved soon, hiring of civilian attorneys and paralegals may be slow due to the time it takes to hire qualified individuals under government policies. Additionally, 19 of the 57 Army attorneys who would be staffed under the plan would likely only serve in their positions for a period of 12 to 18 months. According to a Disabled American Veterans representative with extensive experience counseling servicemembers during the evaluation process, frequent rotations and turnover of Army attorneys working on disability cases limits their effectiveness in representing servicemembers due to the complexity of disability evaluation regulations. With respect to medical evaluation board physicians, who are responsible for documenting servicemembers medical conditions, the Army has mostly met its goal for the average number of servicemembers per physician at each treatment facility. In August 2007, the Army established a goal of one medical evaluation board physician for every 200 servicemembers. As with the staffing ratio for board liaisons, the ratio for physicians is reviewed every 90 days by the Army and the ratio at each treatment facility is reviewed weekly, according to an Army official. As of February 2008, the Army had met the goal of 200 servicemembers per physician at 29 of 35 treatment facilities and almost met the goal at two others. Despite having mostly met its goal for medical evaluation board physicians, according to Army officials, the Army continues to face challenges in this area. For example, according to an Army official, physicians are having difficulty managing their caseload even at locations where they have met or are close to the Army's goal of 1 physician for 200 servicemembers due not only to the volume of cases but also their complexity. According to Army officials, disability cases often involve multiple conditions and may include complex conditions such as TBI and PTSD. Some Army physicians told us that the ratio of servicemembers per physician allows little buffer when there is a surge in caseloads at a treatment facility. For this reason, some physicians told us that the Army could provide better service to servicemembers if the number of servicemembers per physician was reduced from 200 to 100 or 150. In addition to increasing the number of staff who support this process, the Army has reported other progress and efforts underway that could further ease the disability evaluation process. For example, the Army has reported improving outreach to servicemembers by establishing and conducting standardized briefings about the process. The Army has also improved guidance to servicemembers by developing and issuing a handbook on the disability evaluation process, and creating a web site for each servicemember to track his or her progress through the medical evaluation board. Finally, the Army told us that efforts are underway to further streamline the process for servicemembers and improve supporting information technology. For example, the Army established a goal to eliminate 50 percent of the forms required by the current process. While we are still assessing the scope, status, and potential impact of these efforts, a few questions have been raised about some of them. For example, according to Army officials, servicemembers' usage of the medical evaluation board web site has been low. In addition, some servicemembers with whom we spoke believe the information presented on the web site was not helpful in meeting their needs. One measure of how well the disability evaluation system is working does not indicate that improvements have occurred. The Army collects data and regularly reports on the timeliness of the medical evaluation board process. While we have previously reported that the Army has few internal controls to ensure that these data were complete and accurate, the Army recently told us that they are taking steps to improve the reliability of these data. We have not yet substantiated these assertions. Assuming current data are reliable, the Army has reported not meeting a key target for medical evaluation board timeliness and has even reported a negative trend in the last year. Specifically, the Army's target is for 80 percent of the medical evaluation board cases to be completed in 90 days or less, but the percent that met the standard declined from 70 percent in October through December 2006, to 63 percent in October through December 2007. Another potential indicator of how well the disability evaluation process is working is under development. Since June 2007, the Army has used the Warrior Transition Program Satisfaction Survey to ask servicemembers about their experience with the disability evaluation process and board liaisons. However, according to Army officials in charge of the survey, response rates to survey questions related to the disability process were particularly low because most surveyed servicemembers had not yet begun the disability evaluation process. The Army is in the process of developing satisfaction surveys that are separate from the Warrior Transition Unit survey to gauge servicemembers' perceptions of the medical and physical evaluation board processes. DOD and VA have joined together to quickly pilot a streamlined disability evaluation process, but evaluation plans currently lack key elements. In August 2007, DOD and VA conducted an intensive 5-day "table top" exercise to evaluate the relative merits of four potential pilot alternatives. Though the exercise yielded data quickly, there were trade-offs in the nature and extent of data that could be obtained in that time frame. In November 2007, DOD and VA jointly initiated a 1-year pilot in the Washington, D.C. area using live cases, although DOD and VA officials told us they may consider expanding the pilot to other locations beyond the current sites around July 2008. However, pilot results may be limited at that and other critical junctures, and pilot evaluation plans currently lack key elements, such as criteria for expanding the pilot. Prior to implementing the pilot in November 2007, the agencies conducted a 5-day "table top" exercise that involved a simulation of cases intended to test the relative merits of 4 pilot options. All the alternatives included a single VA rating to be used by both agencies. However, the exercise was designed to evaluate the relative merits of certain other key features, such as whether DOD or VA should conduct a single physical examination, and whether there should be a DOD-wide disability evaluation board, and if so, what its role would be. Ultimately, the exercise included four pilot alternatives involving different combinations of these features. Table 3 summarizes the pilot alternatives. The simulation exercise was formal in that it followed a pre-determined methodology and comprehensive in that it involved a number of stakeholders and captured a broad range of metrics. DOD and VA were assisted by consultants who provided data collection, analysis, and methodological support. The pre-determined methodology involved examining previously decided cases, to see how they would have been processed through each of the four pilot alternatives. The 33 selected cases intentionally reflected decisions originating from each of the military services and a broad range and number of medical conditions. Participants in the simulation exercise included officials from DOD, each military service, and VA who are involved in all aspects of the disability evaluation processes at both agencies. Metrics collected included case outcomes including the fitness decision, the DOD and VA ratings, and the median expected days to process cases. These outcomes were compared for each pilot alternative with actual outcomes. In addition, participants rank ordered their preference for each pilot alternative, and provided feedback on expected servicemember satisfaction as well as service and organization acceptance. They also provided their views on legislative and regulatory changes and resource requirements to implement alternative processes, and identified advantages and disadvantages of each alternative. This table top exercise enabled DOD and VA to obtain sufficient information to support a near-term decision to implement the pilot, but it also required some trade-offs. For example, the intensity of the exercise-- simulating four pilot alternatives, involving more than 40 participants over a 5-day period--resulted in an examination of only a manageable number of cases. To ensure that the cases represented each military service and different numbers and types of potential medical conditions, a total of 33 cases were judgmentally selected by service: 8 Army, 9 Navy, 8 Marine, and 8 Air Force. However, the sample used in the simulation exercise was not statistically representative of each military service's workload; as such it is possible that a larger and more representative sample could have yielded different outcomes. Also, expected servicemember satisfaction was based on the input of the DOD and VA officials participating in the pilot rather than actual input from the servicemembers themselves. Based on the data from this exercise, the Senior Oversight Committee gave approval in October 2007 to proceed with piloting an alternative process with features that scored the highest in terms of participants' preferential voting and projected servicemember satisfaction. These elements included a single VA rating (as provided in all the alternatives tested) and a comprehensive medical examination conducted by VA. The selected pilot design did not include a DOD-wide disability evaluation board. Rather, the services' physical evaluation boards would continue to determine fitness for duty, as called for under Alternative 2. DOD and VA officials have described to us a plan for expanding the pilot that is geared toward quick implementation, but may have limited pilot results available to them at a key juncture. With respect to time frames, the pilot, which began in November 2007, is scheduled to last 1 year, through November 2008. However, prior to that date, planners have expressed interest in expanding the pilot outside the Washington metropolitan area. Pilot planners have told us that around July 2008-- which is not long after the first report on the pilot is due to Congress-- they may ask the Senior Oversight Committee to decide on expansion to more locations based on data available at that time. They suggested that a few additional locations would allow them to collect additional experience and data outside the Washington, D.C. area before decisions on broader expansion are made. According to DOD and VA officials, time frames for national expansion have not yet been decided. However, DOD also faces deadlines for providing Congress an interim report on the pilot's status as early as October 2008, and for issuing a final report. While expanding the pilot outside the Washington, D.C. area will likely yield useful information to pilot planners, due to the time needed to fully process cases, planners may have limited pilot results available to guide their decision making. As of February 17, 2008, 181 cases were currently in the pilot process, but none had completed the process. After conducting the simulation exercise, pilot planners set a goal of 275 days (about 9 months) for a case to go through the entire joint disability evaluation process. If the goal is an accurate predictor of time frames, potentially very few cases will have made it through the entire pilot process by the time planners seek to expand the pilot beyond the Washington area. As a result, DOD and VA are accepting some level of risk by expanding the pilot solely on the basis of early pilot results. In addition to having limited information at this key juncture, pilot planners have yet to designate criteria for moving forward with pilot expansion and have not yet selected a comparison group to identify differences between pilot cases and cases processed under the current system, to allow for assessment of pilot performance. DOD and VA are collecting data on decision times and rating percentages, but have not identified how much improvement in timeliness or consistency would justify expanding the pilot process. Further, pilot planners have not laid out an approach for measuring the pilot's performance on key metrics-- including timeliness and accuracy of decisions--against the current process. Selection of the comparison group cases is a significant decision, because it will help DOD and VA determine the pilot's impact, compared with the current process, and help planners identify needed corrections and manage for success. An appropriate comparison group might include servicemembers with a similar demographic and disability profile. Not having an appropriate comparison group increases the risk that DOD and VA will not identify problem areas or issues that could limit the effectiveness of any redesigned disability process. Pilot officials stated that they intend to identify a comparison group of non-pilot disability evaluation cases, but have not yet done so. Another key element lacking from current evaluation plans is an approach for surveying and measuring satisfaction of servicemembers and veterans with the pilot process. As noted previously, several high-level commissions identified servicemember confusion over the current disability evaluation system as a significant problem. Pilot planners told us that they intend to develop a customer satisfaction survey and use customer satisfaction data as part of their evaluation of pilot performance but, as of February 2008, the survey was still under development. Even after the survey has been developed, results will take some time to collect and may be limited at key junctures because the survey needs to be administered after servicemembers and veterans have completed the pilot process. Without data on servicemember satisfaction, the agencies cannot know whether or the extent to which the pilot they are implementing has been successful at reducing servicemember confusion and distrust over the current process. Over the past year, the Army has made substantial progress toward improving care for its servicemembers. After problems were disclosed at Walter Reed in early 2007, senior Army officials assessed the situation and have since dedicated significant resources--including more than 2,000 personnel--and attention to improve this important mission. Today, the Army has established Warrior Transition Units at its major medical facilities and doctors, nurses, and fellow servicemembers at these units are at work helping wounded, injured, and ill servicemembers through what is often a difficult healing process. Some challenges remain, such as filling all the Warrior Transition Unit personnel slots in a competitive market for medical personnel, lessening reliance on borrowed personnel to fill slots temporarily, and getting servicemembers eligible for Warrior Transition Unit services into those units. Overall, the Army is to be commended for its efforts thus far; however, sustained attention to remaining challenges and reliable data to track progress will be important to sustaining gains over time. For those servicemembers whose military service was cut short due to illness or injury, the disability evaluation is an extremely important issue because it affects their service retention or discharge and whether they receive DOD benefits such as retirement pay and health care coverage. Once they become veterans, it affects the cash compensation and other disability benefits they may receive from VA. Going through two complex disability evaluation processes can be difficult and frustrating for servicemembers and veterans. Delayed decisions, confusing policies, and the perception that DOD and VA disability ratings result in inequitable outcomes have eroded the credibility of the system. The Army has taken steps to increase the number of staff that can help servicemembers navigate its process, but is challenged to meet stated goals. Moreover, even if the Army is able to overcome challenges and sufficiently ramp up staff levels, these efforts will not address the systemic problem of having two consecutive evaluation systems that can lead to different outcomes. Considering the significance of the problems identified, DOD and VA are moving forward quickly to implement a streamlined disability evaluation that has potential for reducing the time it takes to receive a decision from both agencies, improving consistency of evaluations for individual conditions, and simplifying the overall process for servicemembers and veterans. At the same time, DOD and VA are incurring some risk with this approach because the cases used were not necessarily representative of actual workloads. Incurring some level of risk is appropriate and perhaps prudent in this current environment; however, planners should be transparent about that risk. For example, to date, planners have not yet articulated in their planning documents the extent of data that will be available at key junctures, and the criteria they will use in deciding to expand the pilot beyond the Washington, D.C. area. More importantly, decisions to expand beyond the few sites currently contemplated should occur in conjunction with an evaluation plan that includes, at minimum, a sound approach for measuring the pilot's performance against the current process and for measuring servicemembers' and veterans' satisfaction with the piloted process. Failure to properly assess the pilot before significant expansion could potentially jeopardize the systems' successful transformation. Mr. Chairman, this completes our prepared remarks. We would be happy to respond to any questions you or other Members of the Subcommittee may have at this time. For further information about this testimony, please contact Daniel Bertoni at (202) 512-7215 or [email protected], or John H. Pendleton 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 statement. GAO staff who made major contributions to this testimony are listed in appendix I. In addition to the contacts named above, Bonnie Anderson, Assistant Director; Michele Grgich, Assistant Director; Janina Austin; Susannah Compton; Cindy Gilbert; Joel Green; Christopher Langford; Bryan Rogowski; Chan My Sondhelm; Walter Vance; and Greg Whitney, made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

In February 2007, a series of Washington Post articles about conditions at Walter Reed Army Medical Center highlighted problems in the Army's case management of injured servicemembers and in the military's disability evaluation system. These deficiencies included a confusing disability evaluation process and servicemembers in outpatient status for months and sometimes years without a clear understanding about their plan of care. These reported problems prompted various reviews and commissions to examine the care and services to servicemembers. In response to problems at Walter Reed and subsequent recommendations, the Army took a number of actions and DOD formed a joint DOD-VA Senior Oversight Committee. This statement updates GAO's September 2007 testimony and is based on ongoing work to (1) assess actions taken by the Army to help ill and injured soldiers obtain health care and navigate its disability evaluation process; and to (2) describe the status, plans, and challenges of DOD and VA efforts to implement a joint disability evaluation system. GAO's observations are based largely on documents obtained from and interviews with Army, DOD, and VA officials. The facts contained in this statement were discussed with representatives from the Army, DOD, and VA. Over the past year, the Army significantly increased support for servicemembers undergoing medical treatment and disability evaluations, but challenges remain. To provide a more integrated continuum of care for servicemembers, the Army created a new organizational structure--the Warrior Transition Unit--in which servicemembers are assigned key staff to help manage their recovery. Although the Army has made significant progress in staffing these units, several challenges remain, including hiring medical staff in a competitive market, replacing temporarily borrowed personnel with permanent staff, and getting eligible servicemembers into the units. To help servicemembers navigate the disability evaluation process, the Army is increasing staff in several areas, but gaps and challenges remain. For example, the Army expanded hiring of board liaisons to meet its goal of 30 servicemembers per liaison, but as of February 2008, the Army did not meet this goal at 11 locations that support about half of servicemembers in the process. The Army faces challenges hiring enough liaisons to meet its goals and enough legal personnel to help servicemembers earlier in the process. To address more systemic issues, DOD and VA promptly designed and are now piloting a streamlined disability evaluation process. In August 2007, DOD and VA conducted an intensive 5-day exercise that simulated alternative pilot approaches using previously-decided cases. This exercise yielded data quickly, but there were trade-offs in the nature and extent of data that could be obtained in that time frame. The pilot began with "live" cases at three treatment facilities in the Washington, D.C. area in November 2007, and DOD and VA may consider expanding the pilot to additional sites around July 2008. However, DOD and VA have not finalized their criteria for expanding the pilot beyond the original sites and may have limited pilot results at that time. Significantly, current evaluation plans lack key elements, such as an approach for measuring the performance of the pilot--in terms of timeliness and accuracy of decisions--against the current process, which would help planners manage for success of further expansion.

Federal crop insurance protects participating farmers against the financial losses caused by events such as droughts, floods, hurricanes, and other natural disasters. In 1995, crop insurance premiums were about $1.5 billion. USDA's Risk Management Agency administers the federal crop insurance program through FCIC. Federal crop insurance offers farmers two primary types of insurance coverage. The first--called catastrophic insurance--provides protection against extreme crop losses for the payment of a $50 processing fee, whereas the second--called buyup insurance--provides protection against more typical smaller crop losses in exchange for a premium paid by the farmer. FCIC conducts the program primarily through private insurance companies that sell and service federal crop insurance--both catastrophic and buyup--for the federal government and retain a portion of the insurance risk. FCIC also offers catastrophic insurance through the local offices of USDA's Farm Service Agency. FCIC pays the companies a fee, called an administrative expense reimbursement, that is intended to reimburse the companies for the expenses reasonably associated with selling and servicing crop insurance to farmers. The reimbursement is calculated as a percentage of the premiums received, regardless of the expenses incurred by the companies. Beginning in 1994, companies were required to report expenses in a consistent format following standard industry guidelines to provide FCIC with a basis for establishing future reimbursement rates. For buyup crop insurance, FCIC reduced the administrative expense reimbursement from a base rate of 34 percent of the premiums on policies sold from 1988 through 1991 to 31 percent of the premiums from 1994 through 1996. The 1994 reform act requires FCIC to reduce the reimbursement rate to no more than 29 percent of total premiums in 1997, no more than 28 percent in 1998, and no more than 27.5 percent in 1999. FCIC can set the rate lower than these mandated ceilings. In addition, the companies earn profits when insurance premiums exceed losses on policies for which they retain risk. These profits are called underwriting gains. Since 1990, companies selling crop insurance have earned underwriting gains totaling more than $500 million. FCIC had agreements with 22 companies in 1994 and 19 companies in 1995 to sell and service federal crop insurance. In 1995, the insurance companies sold about 80 percent of all federal crop insurance, while USDA's Farm Service Agency sold the remainder. In performing our review, we examined expenses at nine companies representing about 85 percent of the total federal crop insurance premiums written by private companies in 1994 and 1995. We chose the companies considering factors such as premium volume, location, and type of ownership. In 1994 and 1995, FCIC's administrative expense reimbursements to participating companies selling buyup insurance--31 percent of premiums--were higher than the expenses that can be reasonably associated with the sale and service of federal crop insurance. For the 2-year period, FCIC reimbursed the nine companies we reviewed about $580 million. For this period, the companies reported expenses of about $542 million to sell and service crop insurance--a difference of about $38 million. However, our review showed that about $43 million of the companies' reported expenses could not be reasonably associated with the sale and service of federal crop insurance. Therefore, we believe that these expenses should not be considered by FCIC in determining an appropriate future reimbursement rate for administrative expenses. Furthermore, we found that a number of the reported expenses appeared excessive for reimbursement through a taxpayer-supported program and suggest an opportunity to further reduce future reimbursement rates for administrative expenses. Finally, a variety of factors have emerged since the period covered by our review that have increased companies' revenues or may decrease their expenses, such as higher crop prices and premium rates and reduced administrative requirements. These factors should be considered in determining future reimbursement rates. Our review showed that about $43 million of the companies' reported expenses could not be reasonably associated with the sale and service of federal crop insurance. These expenses, which we believe should not be considered in determining an appropriate future reimbursement rate for administrative expenses, included expenses for acquiring competitors' businesses, protecting companies from underwriting losses, sharing company profits through bonuses or management fees, and lobbying expenses. Among the costs reported by the crop insurance companies that did not appear to be reasonably associated with the sale and service of crop insurance to farmers were those related to costs the companies incurred when they acquired competitors' business. These costs potentially aided the companies in vying for market share and meant that one larger company, rather than several smaller companies, was delivering crop insurance to farmers. However, this consolidation was not required for the sale and service of crop insurance to farmers, provided no net benefit to the crop insurance program, and according to FCIC, was not an expense that FCIC expected its reimbursement to cover. For example, one company took over the business of a competing company under a lease arrangement. The lease payment totaled $3 million in both 1994 and 1995. About $400,000 of this payment could be attributed to actual physical assets the company was leasing, and we recognized that amount as a reasonable expense. However, the remaining $2.6 million--which the company was paying each year for access to the former competitor's policyholder base--provided no benefit to the farmer and no net value to the crop insurance program. Likewise, we saw no apparent benefit to the crop insurance program from the $1.5 million the company paid executives of the acquired company over the 2-year period as compensation for not competing in the industry. In total, we identified costs in this general category totaling about $12 million for the 2-year period. We also found that two companies included payments to commercial reinsurers among their reported crop insurance delivery expenses. These are payments the companies made to other insurance companies to expand their protection against potential underwriting losses. This commercial reinsurance allows companies to expand the amount of insurance they are permitted to sell under insurance regulations while limiting their underwriting losses. The cost of reinsurance relates to company decisions to manage underwriting risks rather than to the sale and service of crop insurance to farmers. We discussed this type of expense with FCIC, and it agreed that this expense should be paid from companies' underwriting revenues and thus should not be considered in determining a future reimbursement rate for administrative expenses. For the two companies that reported reinsurance costs as an administrative expense, these expenses totaled $10.7 million over the 2 years. Furthermore, we found that some companies included as administrative expenses for selling and servicing crop insurance, expenses that resulted from decisions to distribute profits to (1) company executives and employees through bonuses or (2) parent companies through management fees. We found that profit-sharing bonuses were a significant component of total salary expenses at one company, equaling 49 percent of basic salaries in 1994 and 63 percent in 1995. These bonuses totaled $9 million for the 2 years. While company profit sharing may benefit a company in competing with another company for employees, the bonuses do not contribute to the overall sale and service of crop insurance or serve to enhance program objectives. Furthermore, while we recognize that performance-based employee bonuses and bonuses paid to agents represent reasonable expenses, the profit-sharing bonuses in this example did not appear to be reasonable program expenses because they were paid out of profits after all necessary program expenses were paid. Additionally, we identified profit-sharing bonuses totaling $2.1 million reported as expenses at three other companies for 1994 and 1995. In total, we found expenditures in this general category amounting to $12.2 million over the 2 years. Similarly, we noted that two companies reported expenditures for management fees paid to parent companies as crop insurance administrative expenses. Company representatives provided few examples of tangible benefits received in return for their payment of the management fee. We recognized management fees as a reasonable program expense to the extent that companies could identify tangible benefits received from parent companies. Otherwise, we considered payment of management fees to be a method of sharing income with the parent company and paid in the form of a before-profit expense item rather than a dividend. These expenses totaled $1.1 million for the 2 years. FCIC's standard reinsurance agreement with the companies precludes them from reporting expenditures for lobbying as crop insurance delivery expenses. Despite this prohibition, we found that the companies included a total of $418,400 for lobbying in their expenses reported for 1994 and 1995. The vast majority of these expenses involved the portion of companies' membership dues attributable to lobbying by crop insurance trade associations. Adjusting for these and other expenses reported in error, we determined, and FCIC concurred, that the expense rate for companies' expenses reasonably associated with the sale and service of buyup crop insurance in 1994-95 was about 27 percent of premiums. This is about 4 percentage points, or $81 million, less than the reimbursement FCIC provided. Of these 4 percentage points, 2 points reflect companies' reported expenses that were less than their reimbursement; the remainder reflect adjustments to their reported expenses that did not appear to be reasonably associated with the sale and service of crop insurance. In addition, we found a number of expenses reported by the companies that, although associated with the sale and service of crop insurance, seemed to be excessive for a taxpayer-supported program. While difficult to fully quantify, these types of expenditures suggest that opportunities exist for the government to reduce its future reimbursement rate for administrative expenses while still adequately reimbursing companies for the reasonable expenses of selling and servicing crop insurance policies. For example, in the crop insurance business, participating companies compete with each other for market share through the sales commissions paid to independent insurance agents. To this end, companies offer higher commissions to agents to attract them and their farmer clients from one company to another. When an agent switches from one company to another, the acquiring company increases market share, but there is no net benefit to the crop insurance program. On average, the nine companies in our review paid agents sales commissions of 16 percent of buyup premiums they sold in 1994 and 16.2 percent in 1995. However, one company paid more--an average of about 18.1 percent of buyup premiums sold in 1994 and 17.5 percent in 1995. When this company, which accounted for about 15 percent of all sales in these 2 years, is not included in the companies' average, commission expenses for the other eight companies averaged 15.6 percent of buyup premiums in 1994 and 15.8 percent in 1995. This company paid its agents about $6 million more than the amount it would have paid had it used the average commission rate paid by the other eight companies. Furthermore, in our review of company-reported expenses, at eight of the nine companies, we found instances of expenses that seemed to be excessive for conducting a taxpayer-supported program. For example, we found that one company in our sample for 1994 reported expenses of $8,391 to send six company managers (four accompanied by their spouses) to a 3-day meeting at a resort location. The billing from the resort included rooms at $323 per night, $405 in golf green fees, $139 in charges at a golf pro shop, and numerous restaurant and bar charges. Our sample for 1995 included a $31,483 billing from the same resort for lodging and other costs associated with a company "retreat" costing $46,857 in total. In another instance, as part of paying for employees to attend industry meetings at resort locations, we found that one company paid for golf tournament entry fees, tickets to an amusement park, spouse travel, child care, and pet care, and reported these as crop insurance delivery expenses. Our review of companies' expenses also showed that some companies' entertainment expenditures appeared excessive for selling and servicing crop insurance to farmers. For example, one company spent about $44,000 in 1994 for a Canadian fishing trip for a group of company employees and agents. It also spent about $18,000 to rent and furnish a sky box at a baseball stadium. Company officials said that the expenditures were necessary to attract agents to the company. These expenditures were reported as travel expenses in 1994 and as advertising expenses in 1995. Moreover, the company's 1995 travel expenses included $22,000 for a trip to Las Vegas for several company employees and agents. Similarly, our sample of companies' expenditures disclosed payments for season tickets to various professional sports events at two other companies; and six companies paid for country club memberships and related charges for various company officials and reported these as expenses to sell and service crop insurance. While a number of the companies believe that the type of expenses described above are important to maintaining an effective sales force and supporting their companies' mission, we, along with FCIC, believe that most of these expenses appear to be excessive for a program supported by the American taxpayers. Since the period covered by our review, a variety of factors have emerged that have increased companies' revenues or may decrease companies' expenses. Crop prices and premium rates increased in 1996 and 1997, thereby generating higher premiums. This had the effect of increasing the reimbursements paid to companies for administrative expenses by about 3 percent of premiums without a proportionate increase in workload for the companies. Moreover, FCIC and the industry's efforts to simplify the program's administrative requirements may reduce companies' workload, thereby reducing their administrative expenses. As of January 1997, FCIC had completed 26 simplification actions and was continuing to study 11 additional potential actions. Neither FCIC nor the companies could precisely quantify the amount of savings that companies can expect from these changes, but they agreed that the changes were necessary and collectively may reduce costs. In 1995, the government's total cost to deliver catastrophic insurance policies was less through USDA than through private companies. The total cost to the government to deliver catastrophic insurance consists of three components: (1) the basic sales and service delivery costs, (2) offsetting income from processing fees paid by farmers, and (3) company-earned underwriting gains. When only the first and second components were considered, the costs to the government for both delivery systems were comparable. However, the payment of an underwriting gain to companies, the third component, made the total 1995 cost of delivery through private companies more expensive to the government. With respect to the first component--basic sales and service delivery costs--the cost to the government was higher in 1995 when provided through USDA. The government's costs for basic sales and service delivery through USDA included expenses associated with activities such as selling and processing policies; developing computer software; training adjusters and adjusting claims. These costs also included indirect or overhead costs, such as general administration, rent, and utilities. Also included in the 1995 direct and indirect costs for USDA's delivery were the Department's one-time start-up costs for establishing its delivery system. Direct costs for basic delivery through USDA amounted to about $91 per crop policy, and indirect costs amounted to about $42 per crop policy, for a total basic delivery cost to the government of about $133 per crop policy. The basic delivery cost to the government for company delivery consisted of the administrative expense reimbursement paid to the companies by FCIC and the cost of administrative support provided by USDA's Farm Service Agency. The administrative expense reimbursement paid to the companies amounted to about $73 per crop policy, and USDA's support costs amounted to about $10 per crop policy, for a total basic delivery cost to the government for company delivery of about $83 per crop policy. The second component--offsetting income from farmer-paid processing fees--reduced the basic delivery costs to the government for both delivery systems. For USDA's delivery, processing fees paid by farmers and remitted to the Treasury reduced the government's basic delivery cost of about $133 by an average of $53 per crop policy. For company delivery, fees paid by farmers and remitted to the government reduced the government's basic delivery cost of about $83 by $7 per crop policy. For company delivery, the effect on the cost to the government was relatively small because the 1994 reform act authorized the companies to retain the fees they collected from farmers up to certain limits. Only those fees that exceeded these limits were remitted back to the government. Combining the basic sales and service delivery costs and the offsetting income from farmer-paid processing fees, the government's costs were comparable for both delivery systems. The third component--underwriting gains paid by FCIC only to the companies--is the element that made delivery through the companies more expensive in 1995. The insurance companies can earn underwriting gains in exchange for taking responsibility for any claims resulting from those policies for which the companies retain risk. In 1995, companies earned an underwriting gain of an estimated $45 million, or about a 37-percent return, on the catastrophic premiums for which they retained risk. This underwriting gain increased the government's delivery cost for company delivery by $127 per crop policy. Underwriting gains are, of course, not guaranteed. In years with a high incidence of catastrophic losses, companies could experience net underwriting losses, meaning that they would have to pay out money from their reserves in excess of the premium paid to them by the government, potentially reducing the government's total cost of company delivery in such years. The 37-percent underwriting gain received by the companies on catastrophic policies in 1995 substantially exceeded FCIC's long-term target. According to FCIC, the large underwriting gains in 1995 may have been unusual in that there were relatively few catastrophic loss claims and many farmers did not provide sufficient data on their production capabilities. In 1996, however, the underwriting gains on catastrophic policies were even higher--$58 million. The current arrangement for reimbursing companies for their administrative expenses--under which FCIC pays private companies a fixed percentage of premiums--has certain advantages, including ease of administration. However, expense reimbursement based on a percentage of premiums does not necessarily reflect the amount of work involved to sell and service crop insurance policies. Alternative reimbursement arrangements, including, among others, those that would (1) cap the reimbursement per policy or (2) pay a flat dollar amount per policy plus a reduced fixed percentage of premiums, offer the potential to better match FCIC's reimbursements with companies' administrative expenses. Each alternative has advantages and disadvantages, and we make no recommendation concerning which alternative, if any, should be pursued. With respect to the first alternative, FCIC could reduce its total expense reimbursements to companies by capping, or placing a limit on, the amount it reimburses companies for the sale and service of crop insurance policies. Savings would vary depending on where the cap is set. Capping the expense reimbursement at around $1,500 per policy, for example, would result in a potential savings of about $74 million while affecting less than 10 percent of the individual policies written in 1995. Under the current reimbursement arrangement, as policy premiums increase, the companies' reimbursement from FCIC for administering the policies increases. However, the workload, or cost, associated with administering the policy does not increase proportionately. Therefore, for policies with the highest premiums, there is a large differential between FCIC's reimbursement and the costs incurred to administer those particular policies. For example, in 1995, the largest 3 percent of the policies received about one-third of the total reimbursement. In fact, the five largest policies in 1995 generated administrative expense reimbursements ranging from about $118,000 to $472,000. Alternatively, FCIC could reduce its total expense reimbursements to companies by paying a flat dollar amount per policy plus a reduced fixed percentage of premiums. FCIC could reimburse companies a fixed amount for each policy written to pay for the fixed expenses associated with each policy as well as a percentage of premium to compensate companies for the variable expenses associated with the size and value of a policy. For example, paying a flat $100 per policy plus 17.5 percent of premium could result in a potential savings of about $67 million. FCIC has included this alternative in its proposed 1998 standard reinsurance agreement with the industry. As we discuss in more detail in our report, while these and other alternative reimbursement methods could result in lower cost reimbursements to insurance companies, some methods may increase FCIC's own administrative expenses for reporting and compliance. Some alternatives may also assist smaller companies to compete more effectively with larger companies and/or encourage more service to smaller farmers than does the current system. Companies generally prefer FCIC's current reimbursement method because of its administrative simplicity. In conclusion, we recommended that the Administrator of the Risk Management Agency determine an appropriate reimbursement rate for selling and servicing crop insurance and include this rate in the new reinsurance agreement currently being developed between FCIC and the companies. Furthermore, we recommended that the Administrator explicitly convey the type of expenses that the administrative reimbursement is intended to cover. USDA's Risk Management Agency agreed with our recommendations and has included these changes in the proposed 1998 agreement now being developed. The crop insurance industry disagreed with the methodology, findings, conclusions, and recommendations presented in our report. It expressed concern that we were not responsive to the mandate in the 1994 act and did not appropriately analyze company data. It also expressed concern that implementing GAO's recommendations could destabilize the industry. We carefully reviewed the industry's comments and continue to believe that our report fulfills the intent of the mandate, our methodology is sound, our report's findings and conclusions are well supported, and our recommendations offer reasonable suggestions for reducing the costs of the crop insurance program. This completes my prepared statement. I will be happy to respond to any questions you may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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GAO discussed the: (1) adequacy of the administrative expense reimbursement paid by the U.S. Department of Agriculture's (USDA) Federal Crop Insurance Corporation (FCIC) to participating insurance companies for selling and servicing crop insurance; and (2) comparative cost to the government of delivering catastrophic crop insurance through USDA and the private sector. GAO noted that: (1) for the 1994 and 1995 period it reviewed, GAO found that the administrative expense reimbursement rate of 31 percent of premiums paid to insurance companies resulted in reimbursements that were $81 million more than the companies' expenses for selling and servicing crop insurance; (2) furthermore, GAO found that some of these reported expenses did not appear to be reasonably associated with the sale and service of federal crop insurance and accordingly should not be considered in determining an appropriate future reimbursement rate for administrative expenses; (3) among these expenses were those associated with acquiring competitors' businesses, profit sharing bonuses, and lobbying; (4) in addition, GAO found other expenses that appeared excessive for reimbursement through a taxpayer-supported program; (5) these expenses suggest an opportunity to further reduce future reimbursement rates; (6) these expenses included agents' commissions that exceeded the industry average, unnecessary travel-related expenses, and questionable entertainment activities; (7) finally, a variety of factors that have emerged since the period covered by GAO's review have increased companies' revenues or may decrease companies' expenses; (8) crop prices and premium rates increased in 1996 and 1997, generating higher premiums; (9) this had the effect of increasing FCIC's expense reimbursement to companies; (10) at the same time, companies' expenses associated with crop insurance sales and service could decrease as FCIC reduces the administrative requirements with which the companies must comply; (11) combined, all these factors indicate that FCIC could lower the reimbursement to a rate in the range of 24 percent of premiums and still amply cover reasonable company expenses for selling and servicing federal crop insurance policies; (12) regarding the cost of catastrophic insurance delivery, GAO found that, in 1995, the government's total costs to deliver catastrophic insurance were less through USDA than private companies; (13) although the basic costs associated with selling and servicing catastrophic crop insurance through USDA and private companies were comparable, total delivery costs were less through USDA because USDA's delivery avoids the need to pay an underwriting gain to companies; (14) finally, GAO identified a number of different approaches to reimbursing companies for their administrative expenses that offer the opportunity for cost savings; and (15) companies generally prefer the existing reimbursement method because of its relative administrative simplicity.

Ex-Im Bank is an independent U.S. government agency whose mission is to finance the export of U.S. goods and services overseas and to support U.S. jobs, particularly when private sector lenders are unable or unwilling to accept the risk. Ex-Im Bank provides medium- and long-term loans and guarantees, export credit insurance, and working capital guarantees. Under the loan and guarantee program, Ex-Im Bank guarantees the repayment of loans or makes loans to foreign purchasers of U.S. goods and services. The export credit insurance program provides protection to U.S. exporters against the risks of nonpayment by foreign buyers for political or commercial reasons. The working capital guarantee program provides U.S. exporters with short-term loans and the necessary working capital to pay for raw materials, labor, and overhead to produce goods or provide services for export. Energy transactions represented a major component of transactions financed by Ex-Im Bank during the 1990s. The values financed for energy sector transactions compared to total Ex-Im Bank financing for loans and guarantees averaged around 27 percent during this period and represented as much as 47 percent of all Ex-Im Bank financing in 1995. Ex-Im Bank categorizes energy sector transactions according to the end-use industrial activity. That is, U.S. exports of services and equipment used in energy sector projects are considered energy transactions. Energy sector transactions are divided into subsectors that include fossil fuels, nuclear energy, and renewable energy. Examples of exports financed under fossil fuel projects include engineering services, drilling equipment, and turbines. Examples of renewable energy products or services financed include heat exchangers for geothermal power plants, solar electric modules for solar power generation, and engineering services to design a hydroelectric dam. Ex-Im Bank defines renewable energy to include geothermal, hydroelectric, biomass, wind, and solar activities. The definition of renewable energy for different policy purposes is a subject of debate, especially regarding hydroelectric power because of concerns about potential environmental impacts of large dams. Of the $28 billion Ex-Im Bank provided in loans and guarantees for energy- related projects from 1990 to 2001, about 93 percent was used to finance fossil fuel projects. (See app. II for a discussion of trends in export credit insurance and working capital guarantees.) The number of fossil fuel projects financed each year dropped sharply during the early 1990s, but the values financed annually showed significant fluctuations with no clear trend. For renewable energy, there has been a small volume of overall activity during this period, with most of the financing provided primarily in 1994 when two large geothermal power plants were financed. Trends in final commitment applications submitted for energy sector projects largely mirror the trends in the number and values financed for energy sector projects because 90 percent of these applications were financed. The number of fossil fuel projects financed annually by Ex-Im Bank decreased significantly over the 1990s, while the values financed fluctuated substantially. (See fig. 1.) Ex-Im Bank financed 474 fossil fuel projects over the period, with the number falling from 91 in 1990 to 15 in 1999, before rising slightly in 2000 and 2001. The total value financed for fossil fuel projects over the period was about $25.7 billion, with annual values ranging from $546 million in 1999 to more than $3.6 billion in both 1993 and 1995. The average value financed per project increased significantly during the early 1990s, and ranged from $7 million in 1990 to more than $79 million in 1995. The types of fossil fuel projects Ex-Im Bank financed varied over the period. As shown in figure 2, during the early 1990s, extraction, transport, and processing projects such as oil and gas exploration and the development of oil and gas pipelines dominated Ex-Im Bank's fossil fuel project financing in terms of values financed. In the mid-1990s, however, power production projects, such as power plants using natural gas, oil, and coal, received the most financing. Neither project type was particularly dominant from 1997 to 2000. Projects in Mexico received the largest share of fossil fuel financing during 1990 to 2001, at 16 percent, followed by projects in Venezuela and Algeria, at about 10 percent each. In terms of the numbers of projects, Algeria and Mexico received 43 percent of the total number financed over the 12-year period. Most of these were for small value loans and guarantees financed from 1990 to 1992. Appendix III shows Ex-Im Bank's distribution of fossil fuel energy projects by total number and values financed to recipient countries. For renewable energy, a small number of projects were financed in most years, with the overall value of financing concentrated primarily in one year. As shown in figure 1, from 1990 to 1996, the number of renewable energy projects varied from two to six. Ex-Im Bank did not finance any renewable energy projects from 1997 to 1999, but did finance two renewable energy projects in 2000 and three in 2001. Overall, Ex-Im Bank financed 30 renewable energy projects from 1990 to 2001, accounting for about 6 percent of the total number of energy sector projects financed. Most projects financed between 1990 and 1996 were to construct hydroelectric and geothermal power plants. Of the projects receiving loans and guarantees in 2000 and 2001, three were for hydroelectric engineering services and two were for solar projects. Appendix IV identifies the renewable energy loans and guarantees financed from 1990 to 2001, including the project type, supplier, value financed, and country. The values financed for renewable energy projects varied dramatically during 1990 through 2001, with the majority of the financing provided in 1994. Overall, Ex-Im Bank financed renewable energy projects totaling $730 million from 1990 through 2001 or about 3 percent of all energy projects financed. Almost 60 percent of these funds were provided in 1994, when two large geothermal projects were financed in the Philippines for almost $395 million. As shown in figure 3, geothermal and hydroelectric projects represented 75 percent and 17 percent of the total value of financing provided for renewable energy projects, while solar, wind, and biomass projects combined accounted for about 8 percent of total financing. Trends in the number and value of final commitment applications submitted for energy sector projects closely track the trends for energy projects financed, because 90 percent of final commitment applications submitted were financed by Ex-Im Bank. While Ex-Im Bank offers two earlier types of applications--the letter of interest and preliminary commitment--the final commitment application is the only one required to obtain financing for a project and is the only one used consistently from 1990 to 2001. As shown in figure 4, the number of fossil fuel final commitment applications for loans and guarantees decreased significantly from 1990 to 2001, while the values of financing requested in these applications fluctuated greatly. For renewable energy, the application trends also mirrored those of the overall renewable energy projects financed, with the overall numbers remaining at low levels and the financed values concentrated primarily in 1994. Ex-Im Bank denies very few final applications and only a small percentage of applications are withdrawn or canceled. From 1990 through 2001, Ex-Im Bank records indicate that only 2 of the 577 energy sector applications were denied; both were fossil fuel projects. During this period, about 10 percent of the energy sector final applications for loans and guarantees were either withdrawn by the applicant or canceled by Ex-Im Bank because the applicant did not meet the requisite terms and conditions. Ex-Im Bank has not consistently reported to Congress on its efforts to meet the 1989 legislative financing target for renewable energy or its renewable energy promotion efforts. In reviewing Ex-Im Bank's annual reports, we looked for basic information on renewable energy projects that would include the number of projects and values financed, the types of projects, and the value of renewable energy project financing relative to overall energy sector financing. Ex-Im Bank's reporting to Congress was most complete for fiscal year 1990 when Ex-Im Bank provided a report in 1991 to the Committees on Appropriations with specific information regarding both Ex-Im Bank's meeting the 5 percent renewable energy target and its marketing and promotional efforts for renewable energy. This report also provided specific information regarding values financed, types of projects financed, and an estimate for potential demand for future financing. Other than this one-time report to Congress, Ex-Im Bank has typically provided information about its renewable energy efforts in its annual report. During the period 1990 to 2001, Ex-Im Bank's annual reports identified the percentage of renewable energy projects to the total energy projects financed in 3 years--1990, 1991, and 1994. Including all financing types-- loans and guarantees, insurance, and working capital guarantees--Ex-Im Bank met the 5 percent target twice--1990 and 1994--and came close in 1996 when renewable energy projects accounted for 4.8 percent of the total values financed. (See fig. 5.) Ex-Im Bank's annual reports since 1990 contained varying amounts of additional information regarding its efforts to promote renewable energy. Overall, Ex-Im Bank provided the most consistent reporting from fiscal years 1990 to 1994, which included the number of projects and values financed, types of projects, and countries where the projects were implemented. The 1995 and 1998 reports did not address renewable energy. Various factors have affected Ex-Im Bank's renewable energy financing, including worldwide economic conditions and energy consumption patterns, financing challenges faced by diverse renewable energy suppliers, foreign government support of renewable energy sectors, and environmental concerns. Ex-Im Bank has not placed a priority on promoting renewable energy exports, but has addressed the sector through its general marketing efforts and its Environmental Exports Program. Ex-Im Bank established the Renewable Energy Exports Advisory Committee to help expand its support of U.S. renewable energy exporters in May 2002. Broad economic conditions and market trends are important to Ex-Im Bank's overall financing and energy sector patterns. These include, for example, exchange rates and economic growth trends. While identifying the impacts of these factors is complex, macroeconomic factors have been identified as particularly important in the geothermal sector. According to industry representatives and analysts, the Asian financial crisis and subsequent economic and political turmoil in Southeast Asia was a key reason for a decline in construction of geothermal facilities in the region in the late 1990s. The relatively small share of most renewable resources in world energy consumption, due partly to cost disadvantages, is viewed as a key factor underlying the demand for Ex-Im Bank financing. According to Department of Energy estimates, in 1999 about 7 percent of world energy consumption was from hydroelectricity and 1 percent from other renewable sources. For energy used for electricity generation, hydroelectricity supplied 19 percent and other renewables 2 percent. A primary reason for this relatively small share of renewables is cost, according to government and industry assessments. While the costs of some renewable energy technologies have decreased, they have generally not been competitive with fossil fuels for most uses, according to these assessments. A related factor is that the feasibility of renewable energy projects often depends on environmental factors such as the location of rivers, geothermal heat sources, and wind supply. The renewable energy market is diverse, with sectors and firms varying in terms of key characteristics that could affect the demand for Ex-Im Bank financing. These characteristics include, for example, firm size and exporting experience, project risk, and payback periods. The geothermal sector includes large-scale power production and smaller-scale direct heating and agricultural uses. Project risk can be high with substantial exploration and development costs. The solar energy sector includes multinational producers of photovoltaics for export to electric utilities as well as producers of off-grid equipment that can include small-scale uses. U.S. wind energy suppliers include one firm producing for large-scale on- grid utility uses and a number of firms providing for smaller scale power generation. Representatives for different renewable energy sectors have cited various exporting challenges or financing needs, not necessarily under Ex-Im Bank's control, including: Actual or perceived financial risk of renewable energy projects; For small businesses, lack of investment capital or contacts in export Lack of credit-worthy buyers for certain types of renewable energy projects, such as smaller scale projects in developing countries; Need in some sectors for longer repayment terms due to higher up-front Difficulty in understanding financing options and coordinating financing among exporters, buyers, financial institutions, sources of funding assistance, and local governments. Government support has been an important factor in the growth of renewable energy. Foreign government support, for example, is seen as critical to rapid growth in the international wind and photovoltaic markets. Several European countries and Japan have used various strategies and financial incentives for increasing renewable energy in their domestic markets. World photovoltaic shipments almost tripled between 1994 and 2000, due in part to subsidized programs in Europe and Japan.Similarly, the world wind energy market grew sharply between 1994 and 2001, due in part to government support and growth in Europe. The United States has had some production incentives and tax credits for renewable energy at the state and federal level but their impact has varied depending on amounts and certainty of initiatives. According to the Department of Energy, nonhydroelectric renewable electricity generation in the United States declined between 1993 and 1998. The U.S. domestic wind energy market did grow strongly in 2001, which analysts attribute in part to firms taking advantage of a federal production tax credit scheduled to expire at the end of 2003. Governments have provided official development assistance for renewable energy projects in developing countries, including concessional loans and grants. According to analysts and industry representatives, such assistance can in some cases yield advantages to donor country exporters. Links to exports are explicit in cases of tied aid, where trade-related concessional financing of public sector capital projects is conditional on the procurement of goods and services from the donor country. Many industrialized countries, including the United States, view tied aid as potentially trade-distorting and agreed in 1992 to limits on its use. Renewable energy projects are often exempt from international restrictions due to not being commercially viable. Ex-Im Bank has matched tied aid offers by other countries in some instances. From 1991 to 2001, Ex-Im Bank funded four tied aid projects for renewable energy.According to some renewable energy industry representatives, tied aid has not generally been viewed as a viable export financing option for U.S. renewable energy exporters because of the documentation requirements and the length of the process. Increased public concerns about the environmental and social impacts of large hydroelectric dams may have affected financing of hydroelectric projects, according to Ex-Im Bank and industry officials. Ex-Im Bank adopted environmental procedures and guidelines in February 1995,which provide for qualitative and quantitative assessments of air and water quality, management of hazardous and toxic materials and waste, cultural and ecological effects, and other factors. Environmental concerns regarding hydroelectric power plants were highlighted in 1996 when the Yangtze Three Gorges hydroelectric power plant was proposed by China. Although Ex-Im Bank was approached regarding financing, the project proceeded with financing from other sources and has continued to be controversial. Ex-Im Bank did not finance any hydroelectric projects from 1997 to 1999, but did finance engineering and architectural services for two hydroelectric projects in Turkey in 2000 and one in 2001. According to Ex-Im Bank officials and some environmental groups, issues regarding its financing activities in the hydroelectric sector illustrate a tension between increasing renewable energy financing and responding to environmental concerns. Ex-Im Bank has not focused on or allocated specific resources to promote the renewable energy sector. Instead, Ex-Im Bank has addressed this sector through its general marketing efforts and the Environmental Exports Program. With the exception of aircraft sales, Ex-Im Bank does not target its resources or marketing efforts toward specific industry sectors, according to senior Ex-Im Bank officials. Instead Ex-Im Bank's business development officers are assigned geographic regions and are expected to promote all sectors, such as energy, telecommunications, and manufacturing equipment, within their respective regions. According to Ex-Im Bank officials, an environmental liaison officer was appointed in 1994 to focus exclusively on promoting and developing environmentally beneficial projects, which by definition include renewable energy projects. However, the individual in that position has been assigned other duties over time, and the official's portfolio now includes responsibility for the South America region and the medical equipment sector. Several trade association and industry officials said this dilution of responsibility has affected Ex-Im Bank's ability to effectively promote renewable energy exports. They stressed that having an experienced person dedicated specifically to renewable energy is critical to providing effective linkages among Ex-Im Bank, exporters, foreign buyers, financiers, and other U.S. government agencies. According to Ex-Im Bank officials, its efforts to promote small businesses have benefited some renewable energy exporters. In 2000, Congress required that not less than 10 percent of all Ex-Im Bank annual financing be provided to support small businesses. Ex-Im Bank officials said that the product typically best suited to meet the needs of renewable energy small businesses is short- or medium-term insurance. Of the nine renewable energy-related insurance policies underwritten by Ex-Im Bank since 1999, seven were provided to three small businesses. Although Ex-Im Bank has financed some renewable energy projects under its Environmental Exports Program, the program's impact on Ex-Im Bank's financing of renewable energy projects appears to be limited. Ex-Im Bank established the environmental exports program in 1994 to provide enhanced levels of support for a broad range of exports deemed environmentally beneficial. Of the $3.1 billion financed for environmentally beneficial projects from 1994 to 2001, about $457 million was provided to finance renewable energy projects--of which $333 million was financed in 1994. Meanwhile, fossil fuel projects deemed environmentally beneficial received just over $2 billion. Ex-Im Bank officials said they have not seen a notable increase in renewable energy applications or projects financed since the program was introduced. Although Ex-Im Bank provided $113 million for environmentally beneficial renewable energy projects in 1996, it did not finance other renewable energy projects again until 2000 and 2001 when it financed transactions totaling approximately $5 million and $6 million, respectively. Several Ex-Im Bank officials attributed this recent activity in the renewable energy sector to Ex-Im Bank's focus on providing loans and short-term insurance to small businesses. Ex-Im Bank and renewable energy industry officials have acknowledged that Ex-Im Bank can do a better job of promoting their products and services to renewable energy sectors. Officials identified Ex-Im Bank's establishment of a Renewable Energy Exports Advisory Committee in May 2002 as an effort to help the Bank expand its support of U.S. renewable energy exporters. Over the next 2 years, the advisory committee will focus on specific issues such as how Ex-Im Bank can modify its existing programs, what new financing products or changes to existing products should be considered, and how to improve its outreach to U.S. renewable energy exporters and foreign buyers. Congress has demonstrated a long-standing and continued interest in Ex-Im Bank's efforts to promote the export of renewable energy products and services. While Ex-Im Bank has undertaken some efforts to increase its funding of renewable energy exports, they have been limited. This report highlights several factors and challenges to renewable energy exports. Some factors, such as cost disadvantages in many markets, are largely outside Ex-Im Bank's control while others, such as product terms and the allocation and targeting of business development resources, represent areas in which Ex-Im Bank has some control. In addition, Ex-Im Bank's renewable energy financing to date shows how a few large projects can account for the majority of financing in an area, and illustrates that significant small-scale renewable energy financing activity could take place with relatively low values financed. Ex-Im Bank's renewable energy efforts can be measured and reported in various ways. In addition to information on the programs and initiatives undertaken to promote renewable energy, specific information about project financing would be helpful to Congress. Although Ex-Im Bank has provided specific funding information to Congress for some reporting periods, it has not provided this information consistently. Such information can help Congress better track and understand Ex-Im Bank's efforts to promote renewable energy and identify emerging trends and challenges in financing renewable energy projects. In reporting on its renewable energy efforts under Ex-Im Bank's 2002 reauthorization act, we recommend that the Chairman of the Export- Import Bank provide adequate information for Congress to assess these efforts and the types of challenges Ex-Im Bank faces. In addition to information on types of outreach and specific processes or programs to promote renewable energy exports, Ex-Im Bank should provide information on the types and amounts of financing actually provided, including the number and values financed for renewable energy transactions each year, and the specific renewable energy sectors to which the financing is provided. Ex-Im Bank provided written comments on a draft of this report, which are reprinted in appendix V. In its response, Ex-Im Bank reiterated as important a number of factors identified in the report as significant to the Bank's energy sector financing trends, including broad economic and market trends. Ex-Im Bank also expressed the view that the report understates the Bank's support of renewable energy sector exports. We believe that the report appropriately identifies both external and internal factors that have affected the Bank's energy sector financing, and points out the difficulty of determining the specific impacts of various factors. Ex-Im Bank stated that in comparing its financing of renewable energy and fossil fuel exports, we should have included only the fossil fuel exports for power generation and excluded extraction, transportation, and processing projects, such as pipeline construction. Our analysis is based on energy sector project data provided to us by Ex-Im Bank, which included both categories of fossil-fuel related energy financing. We believe that comparing renewable energy sector financing to only a portion of fossil- fuel related financing would have been inappropriate for demonstrating overall financing trends. Ex-Im Bank did not comment on our recommendation that Ex-Im Bank's future reporting to Congress on its renewable energy efforts include specific information on its financing of renewable energy projects. We are sending copies of this report to the appropriate congressional committees, and the Honorable Eduardo Aguirre, Vice Chairman, Export- Import Bank of the United States. Copies will also be made available to others upon request. In addition, this report is also available on GAO's Web site at no charge at http://www.gao.gov. Please contact me at (202) 512-4347 if you or your staff has any questions concerning this report. Major contributors to this report are listed in appendix VI. In response to Chairman Bereuter's request, we identified and assessed (1) trends in Ex-Im Bank's financing of and applications for fossil fuel and renewable energy-related projects, (2) the extent of Ex-Im Bank's reporting to Congress on its renewable energy efforts, and (3) key factors affecting Ex-Im Bank's renewable energy sector financing. To meet these objectives, we analyzed a range of documents and interviewed policy and program officials from the Export-Import Bank as well as energy trade associations, private sector companies, think tanks, and nongovernmental organizations. To address the first objective, we obtained the cooperation of Ex-Im Bank's Engineering and Environment Division staff in creating reports from two different databases--one for loans and guarantees and the other for insurance--to identify the number and value of energy-related transactions that Ex-Im Bank financed by each product type (loans and guarantees, insurance, and working capital guarantees) for fiscal years 1990 through 2001. The reports were further divided by sub sectors, which included fossil fuel extraction, transport and processing, fossil fuel power generation, renewable energy, and nuclear energy. Ex-Im Bank also provided similar reports for applications submitted but not supported by Ex-Im Bank for loans and guarantees by various sub sectors. Ex-Im Bank did not provide applications data for insurance or working capital guarantees. Applications data were reported in the fiscal years in which they were received, while project data were reported in the fiscal years in which they were financed. We analyzed these reports to identify trends in the number and values financed for energy sector projects as well as the number and value of energy sector applications submitted. We did not focus on nuclear energy projects because they are outside the scope of our request and comprise only a small percentage of Ex-Im Bank's energy sector portfolio. The report, however, notes that nuclear energy projects account for the balance of energy sector projects financed when combined with fossil fuel and renewable energy projects. Ex-Im Bank officials noted concerns over the reliability and completeness of some of the data, particularly insurance transactions. Reliability issues occur because insurance transactions often include multi-buyer policies that cover many products and services. These policies may be in different sectors and would therefore be difficult to characterize under one sector code. Further, insurance underwriters code the transaction according to the principal product or service, not according to the project's end-use, as the loans and guarantees division would do. Ex-Im Bank officials estimate that the insurance data provided are about 75 percent accurate but noted that increased accuracy would require the review of each policy - a large investment of time. Ex-Im Bank officials also note that insurance records prior to 1992 were not readily available We chose to focus our principal findings on the loans and guarantees programs because of these concerns and because loans and guarantees account for 89 percent of the value of energy sector projects financed by Ex-Im Bank. We discuss trends in the number and values financed for insurance and working capital guarantees in appendix II. We also focused on loans and guarantees because Ex-Im Bank provided data for both the applications submitted and projects financed for the period 1990 to 2001. We compared this data to data used in other Ex-Im Bank reports to assess its reliability and found them to be consistent. To address the second objective, we reviewed the 1989 legislation that established the Ex-Im Bank renewable energy-financing target and reporting requirement. We also reviewed Ex-Im Bank's 2002 reauthorization act, which includes a reporting requirement for Ex-Im Bank's renewable energy promotion efforts. To ascertain the extent to which Ex-Im Bank reported data to Congress regarding its renewable energy efforts, we analyzed Ex-Im Bank's annual reports for fiscal years 1990 to 2001 and a 1991 report to the Committees on Appropriations. To determine the percentage of the value financed for renewable energy projects to the total energy sector, we analyzed the energy sector project reports provided by Ex-Im Bank for fiscal years 1990 to 2001. To address the third objective regarding factors that affected the increases and decreases in Ex-Im Bank's energy sector financing, we analyzed reports on energy sector trends. We reviewed relevant Ex-Im Bank and GAO reports regarding tied aid provided by the United States and other foreign governments. To obtain industry perspective on the factors affecting trends, we discussed these issues with representatives from the various renewable energy trade associations including the American Wind Energy Association, Solar Energy Industries Association, U.S. Hydropower Council for International Development, Geothermal Energy Association, and U.S. Export Council on Energy Efficiency. We also interviewed officials from the International Rivers Network, Institute for Policy Studies, and several private sector renewable energy firms. To identify factors internal to Ex-Im Bank that affected energy sector trends, we analyzed Ex-Im Bank program data relating to its efforts to promote renewable energy, the Environmental Exports Program, and the Renewable Energy Exports Advisory Committee. We also interviewed policy and program officials from Ex-Im Bank to discuss the trends and factors. We conducted our review from December 2001 through September 2002 in accordance with generally accepted government auditing standards. While loans and guarantees have traditionally accounted for 89 percent of Ex-Im Bank's energy sector portfolio, export credit insurance and working capital guarantees represented about 10 percent and less than 1 percent of the values financed, respectively. The values of export credit insurance for fossil fuel projects fluctuated, while the number of fossil fuel transactions declined. Conversely, the renewable energy sector showed a slight increase in both the value financed and the number of insurance transactions during this period. Meanwhile, trends for the value of working capital guarantees for fossil fuels increased incrementally, while the number of transactions varied. Only two renewable energy projects received working capital guarantees during this period. Ex-Im Bank provided insurance for 281 energy sector projects totaling $2.9 billion from 1992 through 2001 under the export credit insurance program. As shown in figure 6, the values financed for fossil fuel energy projects varied from a high of $749 million in 1992 to lows of $45 million and $52 million in 1997 and 2001, respectively. Meanwhile, the trend in the number of insurance transactions financed for fossil fuel projects declined steadily by more than 50 percent--from 39 to 18 fossil fuel transactions-- from 1992 through 2001. While trends in the number and values financed for renewable energy projects increased during this period for export credit insurance, the overall financing provided and numbers financed for export credit insurance was $3.5 million for 12 transactions. Ex-Im Bank did not finance any renewable energy insurance transactions in 4 of the 10 years analyzed, but the value financed increased from $170,850 in 1994 to $711,000 in 2001. A peak was noted in 1998 as Ex-Im Bank financed over $1 million in insurance transactions. Similarly, the number of renewable energy projects has increased from zero in 1992 to five in 2001, reflecting Ex-Im Bank's focus on using the insurance program to reach small businesses, including renewable energy businesses. Ex-Im Bank financed working capital guarantees for 64 energy sector projects totaling over $120 million from 1992 through 2001. As shown in figure 7, the financing provided for working capital guarantees for fossil fuel projects decreased to zero in 1994 but increased incrementally until 2000. The values financed doubled in 2001--from $14 million in 2000 to about $28 million. Meanwhile, the number of working capital guarantees provided for fossil fuel projects during the period increased--with some variations from year to year. The number of fossil fuel projects financed ranged from 0 in 1994 to 10 in 1997 and 1999. Over 80 percent of the fossil fuel working capital guarantees were provided after 1995. Only two renewable energy projects were financed through the working capital guarantee program when Ex-Im Bank provided $8.9 million to finance two wind energy projects in 1996. International Drilling Integrated Power Corporation M/G Electric, Inc. Ormat, Inc. Ormat, Inc. Caterpillar, Inc. Siemens Solar Industries Geothermal Power Company, Inc. Mid American Holdings Company Mid American Holdings Company Integrated C-E Services, Inc. Sargent and Lundy, LLC Voith Hydro, Inc. National-Oilwell, Inc. Voith Hydro, Inc. Enron Wind Systems, Inc. Enron Wind Systems, Inc. Enron Wind Systems, Inc. BP Solarex Ormat, Inc. Kaiser Engineers & Constructors, Inc. Washington Group International, Inc. In addition to those named above, Nathan A. Morris, Lynn Cothern, and Ernie Jackson made key contributions to this report. Export Promotion: Mixed Progress in Achieving a Governmentwide Strategy (GAO-02-850, Sept. 4, 2002). Export Promotion: Export-Import Bank and Treasury Differ in Their Approaches to Using Tied Aid (GAO-02-741, June 28, 2002). Export Promotion: Government Agencies Should Combine Small Business Export Training Programs (GAO-01-1023, Sept. 21, 2001). Renewable Energy: DOE's Funding and Markets for Wind Energy and Solar Cell Technologies (GAO/RCED-99-130, May 14, 1999). U.S. Export-Import Bank's Asian Financial Exposure (GAO/NSIAD-98- 150R, Apr. 17, 1998). Export Finance: Federal Efforts to Support Working Capital Needs of Small Business (GAO/NSIAD-97-20, Feb. 13, 1997). Export-Import Bank: Reauthorization Issues (GAO/T-NSIAD-97-147, Apr. 29, 1997). Export-Import Bank: Options for Achieving Possible Budget Reductions (GAO/NSIAD-97-7, Dec. 20, 1996). Export Finance: Comparative Analysis of U.S. and European Union Export Credit Agencies (GAO/GGD-96-1, Oct. 24, 1995). Export Finance: The Role of the U.S. Export-Import Bank (GAO/GGD-93- 39, Dec. 23, 1992). Export Promotion: Federal Efforts to Increase Exports of Renewable Energy Technologies (GAO/GGD-93-29, Dec. 30, 1992). The U.S. Export-Import Bank: The Bank Provides Direct and Indirect Assistance to Small Businesses (GAO/GGD-92-105, Aug. 21, 1992).

From 1990 through 2001, the Export-Import Bank (Ex-Im Bank) of the United States provided export financing commitments totaling $31 billion to promote the export of U.S. goods and services for use in the energy sector. The energy sector is divided into fossil fuel, renewable, and nuclear energy. Financing is provided through a range of products, including loans and guarantees, export credit insurance, and working capital guarantees. Of the $28 billion Ex-Im Bank provided in loans and guarantees for energy-related projects from 1990 to 2001, 93 percent was used to finance fossil fuel projects, and 3 percent was for renewable energy projects. Trends in applications for fossil fuel and renewable energy projects largely mirrored trends in the energy projects financed because 90 percent of applications submitted were financed. Since 1990, Ex-Im Bank has not consistently provided information about its renewable energy program to Congress; its 1995 and 1998 annual reports did not address renewable energy. Ex-Im Bank's energy portfolio is affected by broad factors such as worldwide market conditions and to some degree by its policies, promotion efforts, and programs. The relatively small share of renewable energy in worldwide energy consumption, due in part to cost factors, is a key factor. Although Ex-Im Bank has undertaken some efforts to promote renewable energy, it has not focused specifically on this sector.

NCLBA reauthorized the Elementary and Secondary Education Act of 1965 (ESEA) and built upon accountability requirements created under a previous reauthorization, the Improving America's Schools Act of 1994 (IASA). Under ESEA, as amended, Congress sought to improve student learning by incorporating academic standards and assessments in the requirements placed on states. Academic standards, which describe what students should know and be able to do at different grade levels in different subjects, help guide school systems in their choice of curriculum and help teachers plan for classroom instruction. Assessments, which states use to measure student progress in achieving the standards, are required to be administered by states. NCLBA further strengthened some of the accountability requirements contained in ESEA, as amended. Specifically, NCLBA's accountability provisions require states to develop education plans that establish academic standards and performance goals for schools to meet AYP and lead to 100 percent of their students being proficient in reading, math, and science by 2014. This proficiency must be assessed annually in reading and math in grades 3 through 8 and periodically in science, whereas assessments were required less frequently under the IASA. Under NCLBA, schools' assessment data generally must be disaggregated to assess progress toward state proficiency targets for students in certain designated groups, including low-income students, minority students, students with disabilities, and those with limited English proficiency. Each of these groups must make AYP in order for the school to make AYP. Schools that fail to make AYP for 2 or more consecutive years are required to implement various improvement measures identified in NCLBA, and these measures are more extensive than those required under IASA. Education, which has responsibility for general oversight of NCLBA, reviews and approves state plans for meeting AYP requirements. As we have previously reported, Education had approved all states' plans--fully or conditionally--by June 2003. NCLBA also recognizes the role of teachers in providing a quality education by requiring states to ensure that all teachers in core academic subjects are "highly qualified." Under this requirement, teachers generally must have a bachelor's degree, be fully certified, and demonstrate their knowledge of the subjects they teach. Previously, there were no specific requirements regarding teacher quality under ESEA, as amended. According to our analysis of NLS-NCLB data from Education, most principals reported their schools focused on multiple instructional practices in their voluntary school improvement efforts. These strategies were used more often at schools with higher proportions of low-income students ("high-poverty schools") and schools with higher proportions of minority students ("high-minority schools") than at schools with lower proportions of low-income students ("low-poverty schools") and schools with lower proportions of minority students ("low-minority schools"). Likewise, the survey of math teachers in California, Georgia, and Pennsylvania indicates teachers were using many different instructional practices in response to their state tests, and teachers at high-poverty and high-minority schools were more likely than teachers at low-poverty and low-minority schools to have been increasing their use of some of these practices. Some researchers we spoke with suggested that differences in the use of these instructional practices exist because schools with low- poverty or low-minority student populations might generally be meeting accountability standards and, therefore, would need to try these strategies less frequently. According to nationally representative data from Education's NLS-NCLB, in school year 2006-2007 most principals focused on multiple strategies in their school improvement efforts. The survey asked principals the extent to which their schools were focusing on ten different strategies in their voluntary school improvement initiatives. The three most common strategies were: (1) using student achievement data to inform instruction and school improvement; (2) providing additional instruction to low- achieving students; and (3) aligning curriculum and instruction with standards and/or assessments. (See fig. 1.) Nearly all school principals placed a major or moderate focus on three or more surveyed strategies in their school improvement efforts, and over 80 percent of principals placed a major or moderate focus on six or more strategies. However, as Education's report on the survey data cautioned, the number of improvement strategies emphasized was not necessarily an indication of the intensity or quality of the improvement efforts. While nearly all principals responded that they used multiple improvement strategies, there were statistically significant differences in principals' responses across a range of school characteristics, including percentage of the school's students receiving free or reduced price lunch (poverty), percentage of minority students, the school's location, and AYP status. For example, when comparing schools across poverty levels, we found that principals at high-poverty schools were two to three times more likely than principals at low-poverty schools to focus on five particular strategies in their school improvement efforts: Restructuring the school day to teach core content areas in greater depth; Increasing instructional time for all students (e.g., by lengthening the school day or year, shortening recess); Providing extended-time instructional programs (e.g., before-school, after- school, or weekend instructional programs); Implementing strategies for increasing parents' involvement in their children's education; and Increasing the intensity, focus, and effectiveness of professional development. Likewise, when comparing schools across minority levels, we found that principals at high- and moderate-minority schools were approximately two to three times more likely than principals at low-minority schools to make six particular school improvement strategies a major or moderate focus of their school improvement efforts. For instance, principals at schools with a high percentage of minority students were more than three times as likely as principals at schools with a low percentage of minority students to provide extended-time instruction such as after-school programs. A school's location was associated with differences in principals' responses about the strategies they used as well: principals at rural schools were only about one-third to one-half as likely as central city schools to make five of these school improvement strategies a moderate or major focus of their school improvement efforts. When we compared principal responses based on AYP status, there was some evidence of a statistically significant association between AYP status and the extent to which principals focused these strategies in their school improvement efforts, but it was limited when the other variables such as poverty and minority were taken into account. AYP status had some correlation with the demographic characteristics of poverty and minority, and those characteristics explained the patterns of principals' responses more fully than the AYP characteristic. However, our analysis generally showed that schools that had not made AYP were more likely to make six of these school improvement strategies a moderate or major focus of their school improvement plan than schools that had made AYP. Additionally, Education reported that schools identified for improvement under NCLBA--that is, schools that have not made AYP for two or more consecutive years--were engaged in a greater number of improvement efforts than non-identified schools. Therefore, principals of the non- identified schools may have been less likely than principals of identified schools to view specific strategies as a major or moderate focus. We spoke with several researchers about the results of our analysis of the principals' responses, especially at high-poverty and high-minority schools. While the researchers could not say with certainty the reasons for the patterns, they noted that high-poverty and high-minority schools tend to be most at risk of not meeting their states' standards, so that principals at those schools might be more willing to try different approaches. Conversely, the researchers noted that principals at schools meeting standards would not have the same incentives to adopt as many school improvement strategies. The RAND survey of elementary and middle school math teachers in California, Georgia and Pennsylvania showed that in each of the three states at least half of the teachers reported increasing their use of certain instructional practices in at least five areas as a result of the statewide math test (see fig. 2). For example, most teachers in Pennsylvania responded that due to the state math test they: (1) focused more on standards, (2) emphasized assessment styles and formats, (3) focused more on subjects tested, (4) searched for more effective teaching methods, and (5) spent more time teaching content. As we did with the survey responses of principals, we analyzed the teacher survey data to determine whether math teachers' responses differed by school characteristics for poverty, minority, location, and AYP status. As with the principals' responses, we found that elementary and middle school math teachers in high-poverty and high-minority schools were more likely than teachers in low-poverty and low-minority schools to report increasing their use of certain instructional practices, and this pattern was consistent across the three states (see fig. 3). For example, 69 percent of math teachers at high-poverty schools in California indicated they spent more time teaching test-taking strategies as opposed to 38 percent of math teachers in low-poverty schools. In Georgia, 50 percent of math teachers in high-poverty schools reported offering more outside assistance to non- proficient students in contrast to 26 percent of math teachers in low- poverty schools. Fifty-one percent of math teachers at high-poverty schools in Pennsylvania reported focusing more attention on students close to proficiency compared to 23 percent of math teachers doing so in low poverty schools. Similar to what our poverty analysis showed, survey responses provided some evidence that math teachers in high-minority schools were more likely than those in low-minority schools to change their instructional practices. Math teachers at high-minority schools in each of the three states, as compared to those at low-minority schools, were more likely to: rely on open-ended tests in their own classroom assessments; increase the amount of time spent teaching mathematics by replacing non- instructional activities with mathematics instruction; focus on topics emphasized in the state math test; and teach general test-taking strategies. We also analyzed the RAND data with regard to school location and a school's AYP status, but results from these characteristics were not significant for as many instructional practices. As we did regarding the survey responses of principals, we spoke to several researchers, including the authors of the three-state teacher study, regarding possible reasons for the patterns we saw in the teacher survey data. The researchers we spoke with provided similar possible reasons for the patterns in the teacher survey as they did for patterns in the principal survey. For instance, the researchers noted that high-poverty and high- minority schools are more likely to be at risk of failing to meet the state standards, which might prompt teachers to try different approaches. On the other hand, the researchers stated that teachers at those schools meeting the standards would not have the same incentives to change their instructional practices. Research shows that using a standards-based curriculum that is aligned with corresponding instructional guidelines can positively influence teaching practices. Specifically, some studies reported changes by teachers who facilitated their students developing higher-order thinking skills, such as interpreting meaning, understanding implied reasoning, and developing conceptual knowledge, through practices such as multiple answer problem solving, less lecture and more small group work. Additionally, a few researchers we interviewed stated that a positive effect of NCLBA's accountability provisions has been a renewed focus on standards and curriculum. However, some studies indicated that teachers' practices did not always reflect the principles of standards-based instruction and that current accountability policies help contribute to the difficulty in aligning practice with standards. Some research shows that, while teachers may be changing their instructional practices in response to standards-based reform, these changes may not be fully aligned with the principles of the reform. That research also notes that the reliability in implementing standards in the classroom varied in accordance with teachers' different beliefs in and support for standards-based reform as well as the limitations in their instructional capabilities. For example, one observational study of math teachers showed that, while teachers implemented practices envisioned by standards-based reform, such as getting students to work in small groups or using manipulatives (e.g., cubes or tiles), their approaches did not go far enough in that students were not engaged in conversations about mathematical or scientific concepts and ideas. To overcome these challenges, studies point to the need for teachers to have opportunities to learn, practice, and reflect on instructional practices that incorporate the standards, and then to observe their effects on student learning. However, some researchers have raised concerns that current accountability systems' focus on test scores and mandated timelines for achieving proficiency levels for students do not give teachers enough time to learn, practice, and reflect on instructional practices and may discourage some teachers from trying ambitious teaching practices envisioned by standards-based reform. Another key element of a standards-based accountability system is assessments, which help measure the extent to which schools are improving student learning through assessing student performance against the standards. Some researchers note that assessments are powerful tools for managing and improving the learning process by providing information for monitoring student progress, making instructional decisions, evaluating student achievement, and evaluating programs. In addition, assessments can also influence instructional content and help teachers use or adjust specific classroom practices. As one synthesis concluded, assessments can influence whether teachers broaden or narrow the curriculum, focus on concepts and problem solving--or emphasize test preparation over subject matter content. In contrast, some of the research and a few experts we interviewed raised concerns about testing formats that do not encourage challenging teaching practices and instructional practices that narrow the curriculum as a result of current assessment practices. For example, depending on the test used, research has shown that teachers may be influenced to use teaching approaches that reflect the skills and knowledge to be tested. Multiple choice tests tend to focus on recognizing facts and information while open-ended formats are more likely to require students to apply critical thinking skills. Conclusions from a literature synthesis conducted by the Department of Education stated that " teachers respond to assessment formats used, so testing programs must be designed and administered with this influence in mind. Tests that emphasize inquiry, provide extended writing opportunities, and use open-ended response formats or a portfolio approach tend to influence instruction in ways quite different from tests that use closed-ended response formats and which emphasize procedures." We recently reported that states have most often chosen multiple choice items over other item types of assessments because they are cost effective and can be scored within tight time frames. While multiple choice tests provide cost and time saving benefits to states, the use of multiple choice items make it difficult, if not impossible, to measure highly complex content. Other research has raised concerns that, to avoid potential consequences from low-scoring assessment results under NCLBA, teachers are narrowing the curriculum being taught--sometimes referred to as "teaching to the test"--either by spending more classroom time on tested subjects at the expense of other non-tested subjects, restricting the breadth of content covered to focus only on the content covered by the test, or focusing more time on test-taking strategies than on subject content. Our literature review found some studies that pointed to instructional practices that appear to be effective in raising student achievement. But, in discussing the broader implications of these studies with the experts that we interviewed, many commented that, taken overall, the research is not conclusive about which specific instructional practices improve student learning and achievement. Some researchers stated that this was due to methodological issues in conducting the research. For example, one researcher explained that, while smaller research studies on very specific strategies in reading and math have sometimes shown powerful relationships between the strategy used and positive changes in student achievement, results from meta- analyses of smaller studies have been inconclusive in pointing to similar patterns in the aggregate. A few other researchers stated that the lack of empirical data about how instruction unfolds in the classroom hampers the understanding about what works in raising student performance. A few researchers also noted that conducting research in a way that would yield more conclusive results is difficult. One of the main difficulties, as explained by one researcher, is the number of variables a study may need to examine or control for in order to understand the effectiveness of a particular strategy, especially given the number of interactions these variables could have with each other. One researcher mentioned cost as a challenge when attempting to gather empirical data at the classroom level, stating "teaching takes place in the classroom, but the expense of conducting classroom-specific evaluations is a serious barrier to collecting this type of data." Finally, even when research supports the efficacy of a strategy, it may not work with different students or under varying conditions. In raising this point, one researcher stated that "educating a child is not like making a car" whereby a production process is developed and can simply be repeated again and again. Each child learns differently, creating a challenge for teachers in determining the instructional practices that will work best for each student. Some of the practices identified by both the studies and a few experts as those with potential for improving student achievement were: Differentiated instruction. In this type of instruction, teaching practices and plans are adjusted to accommodate each student's skill level for the task at hand. Differentiated instruction requires teachers to be flexible in their teaching approach by adjusting the curriculum and presentation of information for students, thereby providing multiple options for students to take in and process information. As one researcher described it, effective teachers understand the strategies and practices that work for each student and in this way can move all students forward in their learning and achievement. More guiding, less telling. Researchers have identified two general approaches to teaching: didactic and interactive. Didactic instruction relies more on lecturing and demonstrations, asking short answer questions, and assessing whether answers are correct. Interactive instruction focuses more on listening and guiding students, asking questions with more than one correct answer, and giving students choices during learning. As one researcher explained, both teaching approaches are important, but some research has shown that giving students more guidance and less direction helps students become critical and independent thinkers, learn how to work independently, and assess several potential solutions and apply the best one. These kinds of learning processes are important for higher-order thinking. However, implementing "less instruction" techniques requires a high level of skill and creativity on the part of the teacher. Promoting effective discourse. An important corollary to the teacher practice of guiding students versus directing them is effective classroom discussion. Research highlights the importance of developing students' understanding not only of the basic concepts of a subject, but higher-order thinking and skills as well. To help students achieve understanding, it is necessary to have effective classroom discussion in which students test and revise their ideas, and elaborate on and clarify their thinking. In guiding students to an effective classroom discussion, teachers must ask engaging and challenging questions, be able to get all students to participate, and know when to provide information or allow students to discover it for themselves. Additionally, one synthesis of several experimental studies examining practices in elementary math classrooms identified two instructional approaches that showed positive effects on student learning. The first was cooperative learning in which students work in pairs or small teams and are rewarded based on how well the group learns. The other approach included programs that helped teachers introduce math concepts and improve skills in classroom management, time management, and motivation. This analysis also found that using computer-assisted instruction had moderate to substantial effects on student learning, although this type of instruction was always supplementary to other approaches or programs being used. We found through our literature review and interviews with researchers that the issue of effective instructional practices is intertwined with professional development. To enable all students to achieve the high standards of learning envisioned by standards-based accountability systems, teachers need extensive skills and knowledge in order to use effective teaching practices in the classroom. Given this, professional development is critical to supporting teachers' learning of new skills and their application. Specifically, the research concludes that professional development will more likely have positive impacts on both teacher learning and student achievement if it: Focuses on a content area with direct links to the curriculum; Challenges teachers intellectually through reflection and critical problem Aligns with goals and standards for student learning; Lasts long enough so that teachers can practice and revise their Occurs collaboratively within a teacher learning community--ongoing teams of teachers that meet regularly for the purposes of learning, joint lesson planning, and problem solving; Involves all the teachers within a school or department; Provides active learning opportunities with direct applications to the Is based on teachers' input regarding their learning needs. Some researchers have raised concerns about the quality and intensity of professional development currently received by many teachers nationwide. One researcher summarized these issues by stating that professional development training for teachers is often too short, provides no classroom follow up, and models more "telling than guiding" practices. Given the decentralized nature of the U.S. education system, the support and opportunity for professional development services for teachers varies among states and school districts, and there are notable examples of states that have focused resources on various aspects of professional development. Nevertheless, shortcomings in teachers' professional development experiences overall are especially evident when compared to professional development requirements for teachers in countries whose students perform well on international tests, such as the Trends in International Mathematics and Science Study and the Program for International Student Assessment. For example, one study showed that fewer than 10 percent of U.S. math teachers in school year 2003-04 experienced more than 24 hours of professional development in mathematics content or pedagogy during the year; conversely, teachers in Sweden, Singapore, and the Netherlands are required to complete 100 hours of professional development per year. We provided a copy of our draft report to the Secretary of Education for review and comment. Education's written comments, which are contained in appendix V, expressed support for the important questions that the report addresses and noted that the American Recovery and Reinvestment Act of 2009 included $250 million to improve assessment and accountability systems. The department specifically stated that the money is for statewide data systems to provide information on individual student outcomes that could help enable schools to strengthen instructional practices and improve student achievement. However, the department raised several issues about the report's approach. Specifically, the department commented that we (1) did not provide the specific research citations throughout the report for each of our findings or clearly explain how we selected our studies; (2) mixed the opinions of education experts with our findings gleaned from the review of the literature; (3) did not present data on the extent to which test formats had changed or on the relationship between test format and teaching practices when discussing our assessment findings; and (4) did not provide complete information from an Education survey regarding increases and decreases in instructional time. As stated in the beginning of our report, the list of studies we reviewed and used for our findings are contained in appendix IV. We provide a description in appendix I of our criteria, the types of databases searched, the types of studies examined (e.g., experimental and nonexperimental) and the process by which we evaluated them. We relied heavily on two literature syntheses conducted by the Department of Education-- Standards in Classroom Practice: Research Synthesis and The Influence of Standards on K-12 Teaching and Student Learning: A Research Synthesis, which are included in the list. These two syntheses covered, in a more comprehensive way than many of the other studies that we reviewed, the breadth of the topics that we were interested in and included numerous research studies in their reviews. Many of the findings in this report about the research are taken from the conclusions reached in these syntheses. However, to make this fact clearer and more prominent, we added this explanation to our abbreviated scope and methodology section on page 5 of the report. Regarding the use of expert opinion, we determined that obtaining the views of experts about the research we were reviewing would be critical to our understanding its broader implications. This was particularly important given the breadth and scope of our objectives. The experts we interviewed, whose names and affiliations are listed in appendix III, are prominent researchers who conduct, review, and reflect on the current research in the field, and whose work is included in some of the studies we reviewed, including the two literature syntheses written by the Department of Education and used by us in this study. We did not consider their opinions "conjecture" but grounded in and informed by their many years of respected work on the topic. We have been clear in the report as to when we are citing expert opinion, the research studies, or both. Regarding the report section discussing the research on assessments, it was our intent to highlight that, according to the research, assessments have both positive and negative influences on classroom teaching practices, not to conclude that NCLBA was the cause of either. Our findings in this section of the report are, in large part, based on conclusions from the department's syntheses mentioned earlier. For example, The Influence of Standards on K-12 Teaching and Student Learning: A Research Synthesis states "... tests matter--the content covered, the format used, and the application of their results--all influence teacher behavior." Furthermore, we previously reported that states most often have chosen multiple choice assessments over other types because they can be scored inexpensively and their scores can be released prior to the next school year as required by NCLBA. That report also notes that state officials and alignment experts said that multiple choice assessments have limited the content of what can be tested, stating that highly complex content is "difficult if not impossible to include with multiple choice items." However, we have revised this paragraph to clarify our point and provide additional information. Concerning the topic of narrowing the curriculum, we agree with the Department of Education that this report should include a fuller description of the data results from the cited Education survey in order to help the reader put the data in an appropriate context. Hence, we have added information to that section of the report. However, one limitation of the survey data we cite is that it covers changes in instructional time for a short time period--from school year 2004-05 to 2006-07. In the its technical comments, the Department refers to its recent report, Title I Implementation: Update on Recent Evaluation Findings for a fuller discussion of this issue. The Title I report, while noting that most elementary teachers reported no change from 2004-05 to 2006-07 in the amount of instructional time that they spent on various subjects, also provides data over a longer, albeit earlier period time period, from 1987-88 to 2003-04, from the National Center on Education Statistics Schools and Staffing Survey. In analyzing this data, the report states that elementary teachers had increased instructional time on reading and mathematics and decreased the amount of time spent on science and social studies during this period. We have added this information as well. Taken together, we believe these data further reinforce our point that assessments under current accountability systems can have, in addition to positive influences on teaching, some negative ones as well, such as the curriculum changes noted in the report, even if the extent of these changes is not fully known. Education also provided technical comments that we incorporated as appropriate. We are sending copies of this report to the Secretary of Education, relevant congressional committees, and other interested parties. The report also is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7215 or [email protected]. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VI. To address the objectives of this study, we used a variety of methods. To determine the types of instructional practices schools and teachers are using to help students achieve state academic standards and whether those practices differ by school characteristics, we used two recent surveys of principals and teachers. The first survey, a nationally- representative survey from the Department of Education's (Education) National Longitudinal Study of No Child Left Behind (NLS-NCLB) conducted by the RAND Corporation (RAND), asked principals the extent to which their schools were focusing on certain strategies in their voluntary school improvement efforts. Education's State and Local Implementation of the No Child Left Behind Act Volume III-- Accountability Under NCLB: Interim Report included information about the strategies emphasized by principals as a whole, and we obtained from Education the NLS-NCLB database to determine the extent to which principals' responses differed by school characteristic variables. We conducted this analysis on school year 2006-2007 data by controlling for four school characteristic variables: (1) the percentage of a school's students receiving free or reduced price lunch (poverty); (2) the percentage of students who are a racial minority (minority); (3) whether the school is in an urban, urban fringe (suburban), or rural area (school location); and (4) the school's adequate yearly performance (AYP) status. We analyzed data from a second RAND survey, which was a three-state survey sponsored by the National Science Foundation that asked math teachers in California, Georgia, and Pennsylvania how their classroom teaching strategies differed due to a state math test. RAND selected these states to represent a range of approaches to standards-based accountability and to provide some geographic and demographic diversity; the survey data is representative only for those three states individually. RAND's report on the three-state survey data included information about how teachers within each of the three states had changed their teaching practices due to a state accountability test. RAND provided us with descriptive data tables based on its school year 2005-2006 survey data; we analyzed the data to measure associations between the strategies used and the school characteristic variables. We requested tables that showed this information for teachers in all schools, and separately for teachers in different categories of schools (elementary and middle schools) and by the school characteristics of poverty, minority, school location and AYP status. We obtained from RAND standard error information associated with the estimates from the different types of schools and thus were able to test the statistical significance of differences in likelihood between what teachers from different types of schools reported. As part of our analyses for both surveys, we reviewed documentation and performed electronic testing of the data obtained through the surveys. We also conducted several interviews with several researchers responsible for the data collection and analyses and obtained information about the measures they took to ensure data reliability. On the basis of our efforts to determine the reliability of the data, we determined the data from each of these surveys were sufficiently reliable for the purposes of our study. We reviewed existing literature to determine what researchers have found regarding the effect of standards-based accountability systems on instructional practices, and practices that work in raising student achievement. To identify existing studies, we conducted searches of various databases, such as the Education Resources Information Center, Proquest, Dialog EDUCAT, and Education Abstracts. We also asked all of the education researchers that we interviewed to recommend additional studies. From these sources, we identified 251 studies that were relevant to our study objectives about the effect of standards-based accountability systems on instructional practices and instructional practices there are effective in raising student achievement. We selected them according to the following criteria: covered the years 2001 through 2008 and were either experimental or quasi-experimental studies, literature syntheses, or studied multiple sites. We selected the studies for our review based on their methodological strength, given the limitations of the methods used, and not necessarily on whether the results could be generalized. We performed our searches from August 2008 to January 2009. To assess the methodological quality of the selected studies, we developed a data collection instrument to obtain information systematically about each study being evaluated and about the features of the evaluation methodology. We based our data collection and assessments on generally accepted social science standards. We examined factors related to the use of comparison and control groups; the appropriateness of sampling and data collection methods; and for syntheses, the process and criteria used to identify studies. A senior social scientist with training and experience in evaluation research and methodology read and coded the methodological discussion for each evaluation. A second senior social scientist reviewed each completed data collection instrument and the relevant documentation to verify the accuracy of every coded item. This review identified 20 selected studies that met GAO's criteria for methodological quality. We supplemented our synthesis by interviewing prominent education researchers identified in frequently cited articles and through discussions with knowledgeable individuals. We also conducted interviews with officials at the U.S. Department of Education, including the Center on Innovation and Improvement, and the Institute on Education Sciences' National Center for Education Evaluation and Regional Assistance, as well as other educational organizations. We also reviewed relevant federal laws and regulations. In order to analyze the National Longitudinal Study of No Child Left Behind (NLS-NCLB) principal survey conducted by the RAND Corporation, we analyzed strategies on which principals most often focused, taking into account the percentage of a school's students receiving free or reduced price lunch (poverty), the percentage of students who are a racial minority (minority), whether the school is in an urban, suburban, or rural area (school location), and the school's adequate yearly performance (AYP) status (see table 1). Our analyses used "odds ratios," generally defined as the ratio of the odds of an event occurring in one group compared to the odds of it occurring in another group, to express differences in the likelihoods of schools with different characteristics using these strategies. We used odds ratios rather than percentages because they are more appropriate for statistical modeling and multivariate analysis. Odds ratios indicate how much higher (when they are greater than 1.0) or lower (when they are less than 1.0) the odds were that principals would respond that a given strategy was a major or moderate focus. We included a reference category for the school characteristics (low minority, low poverty, and central city) in the top row of table 1, and put comparison groups beneath those reference categories, as indicated by the column heading in the second row (high-minority, high- poverty, or rural schools). As an example, the third cell in the "high- minority schools" column indicates that principals in high-minority schools were 2.65 times more likely to make "implementing new instructional approaches or curricula in reading/language arts/English" a focus of their school improvement efforts. In another example, the odds that principals would "restructure the school day to teach core content areas in greater depth (e.g., establishing a literacy block)" were 2.8 times higher for high-poverty schools than low poverty schools, as seen in the sixth cell under "high-poverty schools." Those cells with an asterisk indicate statistically significant results; that is, we have a high degree of confidence that the differences we see are not just due to chance but show an actual difference in the survey responses. See appendix I for further explanation of our methodology. "Strong States, Weak Schools: The Benefits and Dilemmas of Centralized Accountability" Quasi-experimental design with matched groups; multiple regressions used with data. Literature review using a best-evidence synthesis (related to a meta-analysis) Cornelia M. Ashby (202) 512-7215 or [email protected]. Janet Mascia (Assistant Director), Bryon Gordon (Assistant Director), and Andrew Nelson (Analyst-in-Charge) managed all aspects of the assignment. Linda Stokes and Caitlin Tobin made significant contributions to this report in all aspects of the work. Kate van Gelder contributed to writing this report, and Ashley McCall contributed to research for the report. Luann Moy, Justin Fisher, Cathy Hurley, Douglas Sloane, and John Smale Jr. provided key technical support, and Doreen Feldman and Sheila R. McCoy provided legal support. Mimi Nguyen developed the graphics for the report.

The federal government has invested billions of dollars to improve student academic performance, and many schools, teachers, and researchers are trying to determine the most effective instructional practices with which to accomplish this. The Conference Report for the Consolidated Appropriations Act for Fiscal Year 2008 directed GAO to study strategies used to prepare students to meet state academic achievement standards. To do this, GAO answered: (1) What types of instructional practices are schools and teachers most frequently using to help students achieve state academic standards, and do those instructional practices differ by school characteristics? (2) What is known about how standards-based accountability systems have affected instructional practices? (3) What is known about instructional practices that are effective in improving student achievement? GAO analyzed data from a 2006-2007 national survey of principals and 2005-2006 survey of teachers in three states, conducted a literature review of the impact of standards-based accountability systems on instructional practices and of practices that are effective in improving student achievement, and interviewed experts. Nationwide, most principals focused on multiple strategies to help students meet academic standards, such as using student data to inform instruction and increasing professional development for teachers, according to our analysis of data from a U.S. Department of Education survey. Many of these strategies were used more often at high-poverty schools--those where 75 percent or more of the students were eligible for the free and reduced-price lunch program--and high-minority schools--those where 75 percent or more of students were identified as part of a minority population, than at lower poverty and minority schools. Likewise, math teachers in California, Georgia, and Pennsylvania increased their use of certain instructional practices in response to their state tests, such as focusing more on topics emphasized on assessments and searching for more effective teaching methods, and teachers at high-poverty and high-minority schools were more likely than teachers at lower-poverty schools and lower-minority schools to have made these changes, according to GAO's analysis of survey data collected by the RAND Corporation. Some researchers suggested that differences exist in the use of these practices because schools with lower poverty or lower minority student populations might generally be meeting accountability requirements and therefore would need to try these strategies less frequently. Research shows that standards-based accountability systems can influence instructional practices in both positive and negative ways. For example, some research notes that using a standards-based curriculum that is aligned with corresponding instructional guidelines can facilitate the development of higher order thinking skills in students. But, in some cases, teacher practices did not always reflect the principles of standards-based instruction, and the difficulties in aligning practice with standards were attributed, in part, to current accountability requirements. Other research noted that assessments can be powerful tools for improving the learning process and evaluating student achievement, but assessments can also have some unintended negative consequences on instruction, including narrowing the curriculum to only material that is tested. Many experts stated that methodological issues constrain knowing more definitively the specific instructional practices that improve student learning and achievement. Nevertheless, some studies and experts pointed to instructional practices that are considered to be effective in raising student achievement, such as differentiated instruction. Professional development for teachers was also highlighted as important for giving teachers the skills and knowledge necessary to implement effective teaching practices.

The Title I property improvement program was established by the National Housing Act (12 U.S.C. 1703) to encourage lending institutions to finance property improvement projects that would preserve the nation's existing housing stock. Under the program, FHA insures 90 percent of a lender's claimable loss on an individual defaulted loan. The total amount of claims that can be paid to a lender is limited to 10 percent of the value of the total program loans held by each lender. Today, the value of Title I's outstanding loans is relatively small compared with other FHA housing insurance programs. As of September 30, 1997, the value of loans outstanding on the property improvement program totaled about $4.4 billion on 364,423 loans. By contrast, the value of outstanding FHA single-family loans in its Mutual Mortgage Insurance Fund totaled about $360 billion. Similarly, Title I's share of the owner-occupied, single-family remodeling market is small--estimated by the National Association of Home Builders to be about 1 percent in fiscal year 1997. Approximately 3,700 lenders are approved by FHA to make Title I loans. Lenders are responsible for managing many aspects of the program, including making and servicing loans, monitoring the contractors, and dealing with borrowers' complaints. In conducting these activities, lenders are responsible for complying with FHA's underwriting standards and regulations and ensuring that home improvement work is inspected and completed. FHA is responsible for approving lenders, monitoring their operations, and reviewing the claims submitted for defaulted loans. Title I program officials consider lenders to have sole responsibility for program operations and HUD's role is primarily to oversee lenders and ensure that claims paid on defaulted loans are proper. Homeowners obtain property improvement loans by applying directly to Title I lenders or by having a Title I lender-approved dealer--that is a contractor--prepare a credit application or otherwise assist the homeowner in obtaining the loan from the lender. During fiscal years 1986 through 1996, about 520,000 direct and 383,000 dealer loans were made under the program. By statute, the maximum size of property improvement loans is $25,000 for single-family loans and the maximum loan term is about 20 years. Title I regulations require borrowers to have an income adequate to meet the periodic payments required by a property improvement loan. Most borrowers have low- to moderate incomes, little equity in their homes, and/or poor credit histories. HUD's expenses under the Title I program, such as claim payments made by FHA on defaulted loans, are financed from three sources of revenue: (1) insurance charges to lenders of 0.5 percent of the original loan amount for each year the loan is outstanding, (2) funds recovered from borrowers who defaulted on loans, and (3) appropriations. In an August 1997 report on the Title I program, Price Waterhouse concluded that the program was underfunded during fiscal years 1990 through 1996. Price Waterhouse estimated that a net funding deficit of about $150 million occurred during the period, with a net funding deficit in 1996 of $11 million. Data from the Price Waterhouse report on estimated projected termination rates for program loans made in fiscal year 1996 can be used to calculate an estimated cumulative claim rate of about 10 percent over the life of Title I loans insured by FHA in that fiscal year. When FHA-approved Title I lenders make program loans, they collect information on borrowers, such as age, income, and gender; the property, such as its address; and loan terms, such as interest rate. While lenders are required to report much of this information to their respective regulatory agencies by the Home Mortgage Disclosure Act, HUD collects little of this information when Title I loans are made. Using information that it requires lenders to provide, HUD records the lender's and borrower's names, state and county, as well as the size, term, and purpose of the loan. Other information collected by HUD on other single-family loan insurance programs, such as the borrower's address, Social Security number, income, and debt are not collected by HUD when Title I loans are made. HUD does collect all of the information available on borrowers, property, and loans when Title I loans default and lenders submit claims. Title I officials told us they collected little information when loans were made because they consider the program to be lender-operated. As a result, HUD cannot identify the characteristics of borrowers and neighborhoods served by the program, nor can it identify certain potential abuses of the program. For example, HUD does not collect borrowers' Social Security numbers and property addresses when loans are made. Therefore, HUD would have difficulty determining if some borrowers are obtaining multiple Title I loans or if some borrowers are exceeding the maximum amount of Title I loans per property when loans are made. HUD regulations limit the total amount of indebtedness on Title I loans to $25,000 for each single-family property. In this regard, our examination of HUD's Title I claims data found a number of instances in which the same Social Security number was used for multiple claims. As discussed previously, claims on about 10 percent of the program's loans can be expected over the life of program loans. Our examination of 16,556 claims paid by HUD between January 1994 and August 1997 revealed 247 instances in which the same Social Security number appeared on multiple claims. These cases totaled about $5.2 million in paid claims. In several instances, claims were paid on as many as five loans having the same Social Security number during the 3-1/2-year period. Our Office of Special Investigations, together with HUD's Office of the Inspector General, is inquiring further into the circumstances surrounding these loans. However, because these loans may have been for multiple properties, or multiple loans on the same property that totaled less than $25,000, they may not have violated program regulations. Allowing individual borrowers to accumulate large amounts of Title I HUD insured debt, however, exposes HUD to large losses in the case of financial stress on the part of such heavily indebted borrowers. In addition, while information available to HUD allows identification of potential abuses of the $25,000 indebtedness limit after loans have defaulted, control over the indebtedness limitation is not possible for 90 percent of the program's loans made that do not default because borrowers' Social Security numbers and property addresses are not collected when the loans are made. While HUD collects more extensive information on program loans when they default, we found problems with the accuracy of some of the information recorded in its claims database. Our random sample of 53 loans on which a claim had been denied and subsequently paid by HUD, found that 7 loans, or 13 percent, had been miscoded as dealer loans when they were direct loans, or direct loans when they were dealer loans. This is important because HUD recently cited high default rates on dealer loans, among other reasons, for proposing regulations to eliminate the dealer loan portion of the program. Considering the miscoding on identifying loans as dealer or direct, we question HUD's ability to identify default experience by loan type. In addition, HUD's information on claims denied and subsequently approved was problematic. Although HUD can deny claims for property improvement loans for a number of reasons, HUD did not have a system in place to provide information on why claims are denied or approved for payment following a denial. HUD could not provide us with information on how many claims it denied because of poor underwriting or other program abuses or which lenders had a higher-than-average number of claims denied for specific program violations. In addition, we were unable to determine from HUD's data system why a denied claim was subsequently paid following an appeal by the lender or waiver by HUD. Such information is important in determining how well lenders are complying with program regulations, whether internal controls need to be strengthened, and which lenders should be targeted for review by HUD's Office of Quality Assurance. We also found that files for claims that were initially denied by HUD and subsequently paid frequently did not contain the names of program officials who decided the denied claims should be paid and the reasons for their decisions. Of the 53 randomly selected loan claim files we examined, 50 contained no evidence of further review by a HUD official following the initial denial or provided any basis for eventually paying the claim. Unless information on who makes decisions to deny claims and the reasons for the denial and subsequent payments are documented, HUD has no basis for reviewing the reasonableness of those decisions. HUD recently made changes to its claims database system to identify the reasons claims are denied. Program officials agreed that such information is important in determining how well program regulations are being complied with and in targeting lenders for quality assurance reviews. Claims examiners are now required to identify their reasons for denial, including the section of the regulation that was violated. However, the change does not address the problem of missing documentation in the claims file explaining the reasons for paying claims that were previously denied. HUD's monitoring reviews of Title I lenders to identify compliance problems have declined substantially in recent years. Between fiscal years 1995 and 1997, HUD performed 33 Title I on-site quality assurance reviews of lenders. Most of these reviews (26) were performed in fiscal year 1995. During fiscal years 1996 and 1997, HUD performed five and two on-site lender reviews, respectively. According to HUD officials, prior to fiscal year 1997, HUD had a staff of 23 individuals to monitor the 3,700 lenders approved by FHA to make Title I loans and about 8,000 other FHA approved lenders making loans on other FHA insurance programs. Because of this limited monitoring resource, HUD decided to focus its lender monitoring on major high volume FHA programs, according to these HUD officials. Monitoring priorities have also led to few follow-up reviews by HUD. As a result, it is difficult to determine the impact of the quality assurance reviews that were performed on improving lenders' compliance. When making Title I loans, lenders are required to ensure that borrowers represent acceptable credit risks, with a reasonable ability to make payments on the loans, and to see that the property improvement work is completed. However, our examination of 53 loan claim files revealed that one or more required documents needed to ensure program compliance were missing from more than half (30) of the files. In 12 cases, the required original loan application, signed by the borrower, was not in the loan file. The original loan application is important because it is used by the claims examiner to review the adequacy of the lender's underwriting and to ensure that the borrower's signature and Social Security number matches those on other documents, including the credit report. Furthermore, for 23 of the 53 claim files, we found that required completion certificates, certifying that the property improvement work had been completed, were missing or were signed but not dated by the borrowers. According to program guidelines, claims submitted for payment after defaults have occurred on dealer loans should not be paid unless a signed completion certificate is in the file. We found that completion certificates were missing from the files for 13 dealer loans and were not dated for another 4 dealer loans. Lastly, for 33 loans on which program regulations required that an inspection be conducted by the lender, 18 loan files did not contain the report. We also reviewed the 53 claim files to determine how well lenders were complying with underwriting standards. All documentation supporting the underwriting determination should be retained in the loan file, according to HUD regulations. HUD can deny a lender's claim if the lender has not followed HUD underwriting standards in making the loan. However, HUD does not examine the quality of a lender's loan underwriting during the claims process if 12 loan payments were made by the borrower before defaulting on the loan. Since 27 percent of the Title I loans that default do so within the first year, this practice, in effect, exempts the majority of defaulted loans from an examination of the quality of the lenders' underwriting. Of the 53 loans in our sample, 13 defaulted within 12 months of loan origination and were subject to an underwriting review by HUD. We focused our underwriting examination on these 13 loan claim files. We found that for 4 of the 13 loans, on which HUD eventually paid claims, lenders made questionable underwriting decisions. Title I program regulations require that the credit application and review by the lender must establish that the borrower, is an acceptable credit risk, had 2 years of stable employment, and that his/her income will be adequate to meet the periodic payments required by the loan, as well as the borrower's other housing expenses and recurring charges. However, for four of these loans, information in the files indicated that the borrowers may not have had sufficient income to qualify for the loan or had poor credit. For example, on one loan, the lender used a pay stub covering the first 2 weeks of March to calculate the borrower's annual income. The pay stub showed that the borrower's year-to-date earnings were $6,700 by the middle of March, and this amount was used to calculate that his annual income was $34,000, or about $2,800 per month. However, the pay stub also showed that for the 2-week period in March, the borrower worked a full week with overtime and only earned $725, or about $1,600 per month. The file contained no other documentation, such as income tax returns, W-2 forms, or verification from the employer to support the higher monthly income. Program officials told us that it was acceptable to use one pay stub to calculate monthly income; however, the "yearly earnings to date" figure should not be used because it can at times inflate the actual income earned during a normal pay period. The borrower, with about $1,600 per month in corrected income, still met HUD's income requirements for the amount of the loan. However, HUD denied the original claim because its underwriting standards had not been followed in that the borrower had poor credit at the time the loan was made. In a letter responding to HUD's denial of its claim, the lender acknowledged that the borrower had limited credit at the time the loan was made, but pointed out the (mis-calculated) higher income of $2,800 per month to justify making the loan. This reasoning was apparently accepted by HUD as there was no evidence in the claim file that HUD questioned the error in calculating the borrower's monthly income. The borrower defaulted on the loan after making two payments, and HUD paid a claim of $14,000. Similar problems with lenders' noncompliance with Title I program regulations have been identified by HUD. As noted previously, between fiscal years 1995 and 1997, HUD performed 33 Title I on-site quality assurance reviews of lenders. Among other things, HUD cited lenders for engaging in poor credit underwriting practices and having loan files with missing inspection reports or inspection reports that were not signed or dated. HUD sent the lenders letters detailing its findings and requested a written response addressing the findings. HUD, however, did not perform follow-up, on-site reviews on 32 lenders to ensure that they had taken corrective actions. For the 33 on-site reviews, nine lenders were referred to HUD's Mortgagee Review Board for further action. The Board assessed four of these lenders a total of $23,500 in civil penalties. Under its HUD 2020 Management Reform Plan and related efforts, HUD has been making changes to the Title I program operations. HUD has relocated its claims examination unit to the Albany (New York) Financial Operations Center and contracted with Price Waterhouse to develop claims examination guidelines. According to program officials in Albany, the new claims process will be more streamlined and automated and include lenders filing claims electronically. In addition, HUD is consolidating all single-family housing operations from 81 locations across the nation into four Single-Family Homeownership Centers. Each center has established a quality assurance division to (1) monitor lenders, (2) recommend sanctions against lenders and other program participants such as contractors and loan officers, (3) issue limited denials of program participation against program participants, and (4) refer lenders for audits/investigations. However, since HUD's quality assurance staff will monitor lenders involved in all FHA single-family programs, the impact of this change on improving HUD's oversight of Title 1 lenders is unclear. Overall, by the end of fiscal year 1998, the quality assurance staff will increase to 76, up from 43 in February 1998. HUD expects that the addition of more quality assurance staff will increase the number of reviews of lenders and allow more comprehensive reviews of lender operations. In closing, Mr. Chairman, our preliminary analysis shows weaknesses in HUD's management of its Title I property improvement loan insurance program and oversight of program lenders. These weaknesses center on the absence of information needed to manage the program and HUD's oversight of lenders' compliance with program regulations. HUD officials attributed these weaknesses to the program's being lender-operated, limited staff resources, and HUD's assignment of monitoring priorities. Because of these weaknesses, we are concerned that HUD may have little assurance that the property improvement program is operating efficiently and free of abuse. The challenge faced by HUD in managing and overseeing this program centers on how to obtain the information needed to manage the program and to strengthen the oversight of lenders for this program, which is relatively small compared with other FHA housing insurance programs. Our report will include any recommendations or options we have to offer to strengthen HUD's management and oversight of the program. Mr. Chairman, this concludes my statement. We would be pleased to respond to any questions that you or Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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GAO discussed certain aspects of the Department of Housing and Urban Development's (HUD) management and oversight of its loan insurance program for home improvements under Title I of the National Housing Act, focusing on: (1) the extent to which the information needed to manage the program was available to HUD; (2) the extent to which HUD was overseeing program lenders; and (3) whether HUD has any ongoing or planned efforts under way to strengthen its management and oversight. GAO noted that: (1) its preliminary analysis shows that HUD is not collecting information needed for managing the program; (2) specifically, GAO found that HUD collects little information when loans are made on program borrowers, properties, and loan terms, such as the borrower's income and the address of the property being improved; (3) moreover, HUD does not maintain information on why it denies loan claims or why it subsequently approves some for payment; (4) HUD also provides limited oversight of lenders' compliance with program regulations, conducting only 2 on-site lender reviews in fiscal year 1997 of the approximately 3,700 program lenders; (5) regarding the need for oversight of lenders' compliance, GAO found that loan claim files submitted by lenders to HUD following loan defaults often do not contain required loan documents, including the original loan applications and certifications signed by the borrower that the property improvement work has been completed; (6) in addition, some claims were paid by HUD even though there were indications that lenders did not comply with required underwriting standards when insuring the loan; (7) as a result of the management and oversight weaknesses GAO has observed, its preliminary work indicates that HUD does not know who the program is serving, if lenders are complying with program regulations, and whether certain potential program abuses are occurring, such as violations of the $25,000 limitation on the amount of Title I loan indebtedness for each property; (8) HUD officials attributed these weaknesses to the program's being lender-operated, limited staff resources, and HUD's assignment of monitoring priorities; (9) under the HUD 2020 Management Reform Plan and related efforts, HUD is making significant changes in all of its single-family housing programs, including the Title I property improvement program; (10) these changes are motivated in part by HUD's goals to downsize the agency and address long-standing agencywide management weaknesses; and (11) GAO is assessing the extent to which these changes may affect the management and oversight weaknesses it identified.

DLA is DOD's logistics manager for all departmental consumable items and some repair parts. Its primary business function is materiel management: providing supply support to sustain military operations and readiness. In addition, DLA performs five other supply-related business functions: distributing materiel from DLA and service-owned inventories, purchasing fuels for DOD and the U.S. government, storing strategic materiel, marketing surplus DOD materiel for reuse and disposal, and providing numerous information services, such as item cataloging, for DOD and the U.S. government, as well as selected foreign governments. These six business functions are managed by field commands that report to and support the agency's central command authority. In 2000, DLA refocused its logistics mission from that of a supplier of materiel to a manager of supply chain relationships. To support this transition, the agency developed a strategic plan (known as DLA 21) to reengineer and modernize its operations. Among the goals of DLA 21 are to optimize inventories, improve efficiency, increase effectiveness through organizational redesign, reduce inventories, and modernize business systems. DLA relies on over 650 systems to support warfighters by allowing access to global inventories. Whether it is ensuring that there is enough fuel to service an aircraft fleet, providing sufficient medical supplies to protect and treat military personnel, or supplying ample food rations to our soldiers on the frontlines, information technology plays a key role in ensuring that Defense Department agencies are prepared for their missions. Because of its heavy reliance on IT to accomplish its mission, DLA invests extensively in this area. For fiscal year 2002, DLA's IT budget is about $654 million. Our recent reviews of DLA's IT management have identified weaknesses in such important areas as enterprise architecture management, incremental investment management, and software acquisition management. In June 2001, we reported that DLA did not have an enterprise architecture to guide the agency's investment in its Business Systems Modernization (BSM) project--the agency's largest IT project. The use of an enterprise architecture, which describes an organization's mode of operation in useful models, diagrams, and narrative, is required by the OMB guidance that implements the Clinger-Cohen Act of 1996 and is a commercial best practice. Such a "blueprint" can help clarify and optimize the dependencies and relationships among an agency's business operations and the IT infrastructure and applications supporting them. An effective architecture describes both the environment as it is and the target environment that an organization is aiming for (as well as a plan for the transition from one to the other). We concluded that without this architecture, DLA will be challenged in its efforts to successfully acquire and implement BSM. Further, we reported that DLA was not managing its investment in BSM in an incremental manner, as required by the Clinger-Cohen Act of 1996 and OMB guidance and in accordance with best commercial practices. An incremental approach to investment helps to minimize the risk associated with such large-scale projects as BSM. Accordingly, we recommended that DLA make the development, implementation, and maintenance of an enterprise architecture an agency priority and take steps to incrementally justify and validate its investment in BSM. According to DLA officials, the agency is addressing these issues. In January 2002, we reported a wide disparity in the rigor and discipline of software acquisition processes between two DLA systems. Such inconsistency in processes for acquiring software (the most costly and complex component of systems) can lead to the acquisition of systems that do not meet the information needs of management and staff, do not provide support for necessary programs and operations, and cost more and take longer than expected to complete. We also reported that DLA did not have a software process-improvement program in place to effectively strengthen its corporate software acquisition processes, having eliminated the program in 1998. Without a management-supported software process-improvement program, it is unlikely that DLA can effectively improve its institutional software acquisition capabilities, which in turn means that the agency's software projects will be at risk of not delivering promised capabilities on time and within budget. Accordingly, we recommended that DLA institute a software process-improvement program and correct the software acquisition process weaknesses that we identified. According to DLA officials, the agency is addressing each of these issues. In May 2000, we issued the Information Technology Investment Management (ITIM) maturity framework, which identifies critical processes for successful IT investment and organizes these processes into an assessment framework comprising five stages of maturity. This framework supports the fundamental requirements of the Clinger-Cohen Act of 1996, which requires IT investment and capital planning processes and performance measurement. Additionally, ITIM can provide a useful roadmap for agencies when they are implementing specific, fundamental IT capital planning and investment management practices. The federal Chief Information Officers Council has favorably reviewed the framework, and it is also being used by a number of executive agencies and organizations for designing related policies and procedures and self-led or contractor-based assessments. ITIM establishes a hierarchical set of five different maturity stages. Each stage builds upon the lower stages and represents increased capabilities toward achieving both stable and effective (and thus mature) IT investment management processes. Except for the first stage--which largely reflects ad hoc, undefined, and undisciplined decision and oversight processes--each maturity stage is composed of critical processes essential to satisfy the requirements of that stage. These critical processes are defined by core elements that include organizational commitment (for example, policies and procedures), prerequisites (for example, resource allocation), and activities (for example, implementing procedures). Each core element is composed of a number of key practices. Key practices are the specific tasks and conditions that must be in place for an organization to effectively implement the necessary critical processes. Figure 1 shows the five ITIM stages and a brief description of each stage. Using ITIM, we assessed the extent to which DLA satisfied the five critical processes in stage 2 of the framework. Based on DLA's acknowledgment that it had not executed any of the key practices in stage 3, we did not independently assess the agency's capabilities in this stage or stages 4 and 5. To determine whether DLA had implemented the stage 2 critical processes, we compared relevant DLA policies, procedures, guidance, and documentation associated with investment management activities to the key practices and critical processes in ITIM. We rated the key practices as "executed" based on whether the agency demonstrated (by providing evidence of performance) that it had met the criteria of the key practice. A key practice was rated as "not executed" when we found insufficient evidence of a practice during the review, or when we determined that there were significant weaknesses in DLA's execution of the key practice. As part of our analysis, we selected four IT projects as case studies to verify application of the critical processes and practices. We selected projects that (1) supported different DLA business areas (such as materiel management), (2) were in different lifecycle phases (for example, requirements definition, design, operations and maintenance), (3) represented different levels of risk (such as low or medium) as designated by the agency, and (4) included at least one investment that required funding approval by a DOD authority outside of DLA (for example, the Office of the Secretary of Defense (OSD)). The four projects are the following: Business Systems Modernization: This system, which supports DLA's materiel management business area, is in the concept demonstration phase of development. DLA reported that it spent about $136 million on this system in fiscal year 2001, and it has budgeted about $133 million for fiscal year 2002. BSM is intended to modernize DLA's materiel management business function, replacing two of its standard systems (the Standard Automated Materiel Management System and the Defense Integrated Subsistence Management System). The project is also intended to enable the agency to reengineer its logistics practices to reflect best commercial business practices. For example, in support of DLA's goal of reducing its role as a provider and manager of materiel and increasing its role as a manager of supply chain relationships, BSM is to help link customers with appropriate suppliers and to incorporate commercial business practices regarding physical distribution and financial management. The agency has classified this project as high risk, and OSD has funding approval authority for this project. Hazardous Materials Information System (HMIS): This system, which supports DLA's logistics operations function, was implemented in 1978. In fiscal year 2001, DLA reported that it spent about $1 million on this system and budgeted about $2.4 million for fiscal year 2002. In 1999 DLA began a redesign effort to transform HMIS into a Web-based system with a direct interface to the manufacturers and suppliers of hazardous material. The project is in the development stage. It contains data on the chemical composition of materials classified as "hazardous" for the purposes of usage, storage, and transportation. The system is used by Emergency Response Teams whenever a spill or accident occurs involving hazardous materials. The agency classified this project as low risk, and funding approval occurs within DLA. The Defense Reutilization and Marketing Automated Information System (DAISY): This system, which supports DLA's materiel reuse and disposal mission, is in the operations and maintenance lifecycle phase. The agency reported that it spent approximately $4.4 million on DAISY in fiscal year 2001, and it has budgeted about $7 million for fiscal year 2002. This system is a repository for transactions involving the reutilization, transfer, donation, sale, or ultimate disposal of excess personal property from DOD, federal, and state agencies. The excess property includes spare and repair parts, scrap and recyclable material, precious metals recovery, hazardous material, and hazardous waste disposal. Operated by the Defense Reutilization and Marketing Service, the system is used at 190 locations worldwide. The agency classified this project as low risk, and funding approval occurs within DLA. Standard Automated Materiel Management System (SAMMS): This system, which supports DLA's materiel management business area, is 30 years old and approaching the end of its useful life. The agency reports that investment in SAMMS (budgeted at approximately $19 million for fiscal year 2002) is directed toward keeping the system operating until its replacement, BSM, becomes fully operational (scheduled for fiscal year 2005). This system provides the Inventory Control Points with information regarding stock levels, as well as with the capabilities required for (1) acquisition and management of wholesale consumable items, (2) direct support for processing requisitions, (3) forecasting of requirements, (4) generation of purchase requests, (5) maintenance of technical data, (6) financial management, (7) identification of items, and (8) asset visibility. The agency has classified the maintenance of SAMMS as a low risk effort, and funding approval occurs within DLA. For these projects, we reviewed project management documentation, such as mission needs statements, project plans, and status reports. We also analyzed charters and meeting minutes for DLA oversight boards, DLA's draft Automated Information System Emerging Program Life Management (LCM) Review and Milestone Approval Directive and Portfolio Management and Oversight Directives, and DOD's 5000 series guidance on systems acquisition. In addition, we reviewed documentation related to the agency's self-assessment of its IT investment operations. To supplement our document reviews, we interviewed senior DLA officials, including the vice director (who sits on the Corporate Board, DLA's highest level investment decisionmaking body), the chief information officer (CIO), the chief financial officer, and oversight board members. We also interviewed the program managers of our four case study projects, as well as officials responsible for managing the IT investment process and other staff within Information Operations. To determine what actions DLA has taken to improve its IT investment management processes, we interviewed the CIO and officials of the Policy, Plans, and Assessments and the program executive officer (PEO) operations groups within the Information Operations Directorate. These groups are primarily responsible for implementing investment management process improvements. We also reviewed a draft list of IT investment management improvement tasks. We conducted our work at DLA headquarters in Fort Belvoir, Virginia, from June 2001 through January 2002, in accordance with generally accepted government auditing standards. In order to have the capabilities to effectively manage IT investments, an agency should (1) have basic, project-level control and selection practices in place and (2) manage its projects as a portfolio of investments, treating them as an integrated package of competing investment options and pursuing those that best meet the strategic goals, objectives, and mission of the agency. DLA has a majority of the project-level practices in place. However, it is missing several crucial practices, and it is not performing portfolio-based investment management. According to the CIO, the evolving state of its investment management capabilities is the result of agency leadership's recently viewing IT investment management as an area of management focus and priority. Without having crucial processes and related practices in place, DLA lacks essential management controls over its sizable IT investments. At ITIM stage 2 maturity, an organization has attained repeatable, successful IT project-level investment control processes and basic selection processes. Through these processes, the organization can identify expectation gaps early and take appropriate steps to address them. According to ITIM, critical processes at stage 2 include (1) defining investment board operations, (2) collecting information about existing investments, (3) developing project-level investment control processes, (4) identifying the business needs for each IT project, and (5) developing a basic process for selecting new IT proposals. Table 1 discusses the purpose for each of the stage 2 critical processes. To its credit, DLA has put in place about 75 percent of the key practices associated with stage 2 critical processes. For example, DLA has oversight boards to perform investment management functions, and it has basic project-level control processes to help ensure that IT projects are meeting cost and schedule expectations. However, DLA has not executed several crucial stage 2 investment practices. For example, the business needs for IT projects are not always clearly identified and defined, basic investment selection processes are still being developed, and policies and procedures for project oversight are not documented. Table 2 summarizes the status of DLA's stage 2 critical processes, showing how many associated key practices the agency has executed. DLA's actions in each of the critical processes are discussed in the sections that follow. To help ensure executive management accountability for IT capital planning and investment decisions, an organization should establish a governing board or boards responsible for selecting, controlling, and evaluating IT investments. According to ITIM, effective IT investment board operations require, among other things, that (1) board membership have both IT and business knowledge, (2) board members understand the investment board's policies and procedures and exhibit core competencies in using the agency's IT investment policies and procedures, (3) the organization's executives and line managers support and carry out board decisions, (4) the organization create organization-specific process guidance that includes policies and procedures to direct the board's operations, and (5) the investment board operate according to written policies and procedures. (The full list of key practices is provided in table 3.) DLA has established several oversight boards that perform IT investment management functions. These boards include the following: The DLA Investment Council, which is intended to review, evaluate, and approve new IT and non-IT investments between $100,000 and $1,000,000. The Program Executive Officer Review Board, which is intended to review and approve the implementation of IT investments that are budgeted for over $25 million in all or over $5 million in any one year. The Corporate Board, which is intended to review, evaluate, and approve all IT and non-IT investments over $1 million. DLA is executing four of the six key practices needed for these boards to operate effectively. For example, the membership of these boards integrates both IT and business knowledge. In addition, board members informed us of their understanding of their board's informal practices. Further, according to IT investment officials, project managers, and agency documentation, the boards have a process for ensuring that their decisions are supported and carried out by organization executives and line managers. This process involves documenting board decisions in meeting minutes, assigning staff to carry out the decisions, and tracking the actions taken on a regular basis until the issues are addressed. Nonetheless, DLA is missing the key ingredient associated with two of the board oversight practices that are needed to operate effectively-- organization-specific guidance. This guidance, which serves as official operations documentation, should (1) clearly define the roles of key people within its IT investment process, (2) delineate the significant events and decision points within the processes, (3) identify the external and environmental factors that will influence the processes (that is, legal constraints, the behavior of key subordinate agencies and military customers, and the practices of commercial logistics that DLA is trying to emulate as part of DLA 21); and (4) explain how IT investment-related processes will be coordinated with other organizational plans and processes. DLA does not have guidance that sufficiently addresses these issues. Policies and procedures governing operations are in draft for one board and have not been developed for the two other boards. Without this guidance governing the operations of the investment boards, the agency is at risk of performing key investment decisionmaking activities inconsistently. Such guidance would also provide a degree of transparency that is helpful in both communicating and demonstrating how these decisions are made. Table 3 summarizes the ratings for each key practice and the specific findings supporting the ratings. An IT project inventory provides information to investment decision- makers to help evaluate the impacts and opportunities created by proposed or continuing investments. This inventory (which can take many forms) should, at a minimum, identify the organization's IT projects (including new and existing systems) and a defined set of relevant investment management information about them (for example, purpose, owner, lifecycle stage, budget cost, physical location, and interfaces with other systems). Information from the IT project inventory can, for example, help identify systems across the organization that provide similar functions and help avoid the commitment of additional funds for redundant systems and processes. It can also help determine more precise development and enhancement costs by informing decisionmakers and other managers of interdependencies among systems and how potential changes in one system can affect the performance of other systems. According to ITIM, effectively managing an IT project inventory requires, among other things, (1) identifying IT projects, collecting relevant information about them, and capturing this information in a repository, (2) assigning responsibility for managing the IT project inventory process to ensure that the inventory meets the needs of the investment management process, (3) developing written policies and procedures for maintaining the IT project inventory, (4) making information from the inventory available to staff and managers throughout the organization so they can use it, for example, to build business cases and to support project selection and control activities, and (5) maintaining the IT project inventory and its information records to contribute to future investment selections and assessments. (The full list of key practices is provided in table 4.) DLA has executed many of the key practices in this critical process. For example, according to DLA's CIO, IT projects are identified and specific information about them is entered into a central repository called the DLA Profile System (DPS). DPS includes, among other things, project descriptions, key contact information, lifecycle stage, and system interfaces. In addition, the CIO is responsible for managing the IT project identification process to ensure that DPS meets the needs of the investment management process. However, DLA has not defined written policies and procedures for how and when users should add to or update information in the DPS. In addition, DLA is not maintaining DPS records, which would be useful during future project selections and investment evaluations, and for documenting the evolution of a project's development. Without appropriate policies and procedures in place to describe the objectives and information requirements of the inventory, DPS is not being maximized as an effective tool to assist in the fundamental analysis essential to effective decisionmaking. Table 4 summarizes the ratings for each key practice and the specific findings supporting the ratings. Investment review boards should effectively oversee IT projects throughout all lifecycle phases (concept, design, development, testing, implementation, and operations/maintenance). At stage 2 maturity, investment review boards should review each project's progress toward predefined cost and schedule expectations, using established criteria and performance measures, and should take corrective actions to address cost and milestone variances. According to ITIM, effective project oversight requires, among other things, (1) having written polices and procedures for project management, (2) developing and maintaining an approved management plan for each IT project, (3) having written policies and procedures for oversight of IT projects, (4) making up-to-date cost and schedule data for each project available to the oversight boards, (5) reviewing each project's performance by regularly comparing actual cost and schedule data to expectations, (6) ensuring that corrective actions for each under- performing project are documented, agreed to, implemented, and tracked until the desired outcome is achieved, and (7) using information from the IT project inventory. (The complete list of key practices is provided in table 5.) DLA has executed most of the key practices in this area. In particular, DLA relies on the guidance in the Department of Defense 5000 series directives for project management and draft guidance in an Automated Information System (AIS) Emerging Program Life-Cycle Management (LCM) Review and Milestone Approval Directive for specific IT project management. In addition, for each of the four projects we reviewed, a project management plan had been approved, and cost and schedule controls were addressed during project review meetings. Further, based on our review of project documentation and in discussion with project managers, up-to-date cost and schedule project data were provided to the PEO Review Board. This board oversees project performance regularly by comparing actual cost and schedule data to expectations and has a process for ensuring that, for underperforming projects, corrective actions are documented, agreed to, and tracked. Notwithstanding these strengths, DLA has some weaknesses in project oversight. Specifically, although the Corporate Board and the Investment Council have written charters, there are no written policies or procedures that define their role in collectively overseeing IT projects. Without these policies and procedures, project oversight may be inconsistently applied, leading to the risk that performance problems, such as cost overruns and schedule slippages, may not be identified and resolved in a timely manner. In addition, according to representatives from the oversight boards, they do not use information from the IT project inventory to oversee projects because they are more comfortable using more traditional methods of obtaining and using information (that is, informally talking with subject matter experts and relying on experience). The inventory is of value only to the extent that decisionmakers use it. As discussed earlier, while the inventory need not be the only source of information, it should nevertheless serve as a reliable and consistent tool for understanding project and overall portfolio decisions. Table 5 summarizes the ratings for each key practice and the specific findings supporting the ratings. Defining business needs for each IT project helps ensure that projects support the organization's mission goals and meets users' needs. This critical process creates the link between the organization's business objectives and its IT management strategy. According to ITIM, effectively identifying business needs requires, among other things, (1) defining the organization's business needs or stated mission goals, (2) identifying users for each project who will participate in the project's development and implementation, (3) training IT staff adequately in identifying business needs, and (4) defining business needs for each project. (The complete list of key practices is provided in table 6.) DLA has executed all but one of the key practices associated with effectively defining business needs for IT projects. For example, DLA's mission goals are described in DLA's strategic plan. In addition, according to IT investment management officials, the IT staff is adequately trained in identifying business needs because they generally have prior functional unit experience. In addition, according to DLA directives, IT projects are assigned an Integrated Process Team (IPT) to guide and direct the project through the development lifecycle. The IPTs are composed of IT and functional staff. Moreover, DOD and DLA directives require that business requirements and system users be identified and that users participate in the lifecycle management of the project. According to an IT investment official, each IT project has a users' group that meets throughout the lifecycle to discuss problems and potential changes related to the system. We verified that this was the case for the four projects we reviewed. While the business needs for three of the four projects we reviewed were clearly identified and defined, DLA has reported that this has not been consistently done for all IT projects. According to IT investment management officials, this inconsistency arose because policies and procedures for developing business needs were not always followed or required. DLA officials have stated that they are developing new guidance to address this problem. However, until this guidance is implemented and enforced, DLA cannot effectively demonstrate that priority mission and business improvement needs are forming the basis for all its IT investment decisions. Table 6 summarizes the ratings for each key practice and the specific findings supporting the ratings. Selecting new IT proposals requires an established and structured process to ensure informed decisionmaking and infuse management accountability. According to ITIM, this critical process requires, among other things, (1) making funding decisions for new IT proposals according to an established process, (2) providing adequate resources for proposal selection activities, (3) using an established proposal selection process, (4) analyzing and ranking new IT proposals according to established selection criteria, including cost and schedule criteria, and (5) designating an official to manage the proposal selection process. (The complete list of key practices is provided in table 7.) DLA has executed some of the key practices for investment proposal selection. For example, DLA executives make funding decisions for IT investments using DOD's Program Objective Memorandum (POM) process, which is part of DOD's annual budgeting process. Through this process, proposals for new projects or enhancements to ongoing projects are evaluated by DLA's IT and financial groups and submitted to OSD through DLA's Corporate Board with recommendations for funding approval. In addition, according to the CIO, adequate resources have been provided to carry out activities related to the POM process. Nonetheless, DLA has yet to execute some of the critical practices related to this process area. Specifically, DLA acknowledges that the agency is not analyzing and prioritizing new IT proposals according to established selection criteria. Instead, the Corporate Board uses the expertise from the IT organization and its own judgment to analyze and prioritize projects. To its credit, DLA recognizes that it cannot continue to rely solely on the POM process to make sound IT investment selection decisions. Therefore, the agency has been working to establish an IT selection process over the past two budget cycles that is more investment-focused and includes increased involvement from IT Operations staff, necessary information, and established selection criteria. Until DLA implements an effective IT investment selection process that is well established and understood throughout the agency, executives cannot be adequately assured that they are consistently and objectively selecting proposals that best meet the needs and priorities of the agency. Table 7 summarizes the ratings for each key practice and the specific findings supporting the ratings. An IT investment portfolio is an integrated, enterprisewide collection of investments that are assessed and managed collectively based on common criteria. Managing investments within the context of such a portfolio is a conscious, continuous, and proactive approach to expending limited resources on an organization's competing initiatives in light of the relative benefits expected from these investments. Taking an enterprisewide perspective enables an organization to consider its investments comprehensively so that the collective investments optimally address its mission, strategic goals, and objectives. This portfolio approach also allows an organization to determine priorities and make decisions about which projects to fund based on analyses of the relative organizational value and risks of all projects, including projects that are proposed, under development, and in operation. According to ITIM, stage 3 maturity includes (1) defining portfolio selection criteria, (2) engaging in project-level investment analysis, (3) developing a complete portfolio based on the investment analysis, (4) maintaining oversight over the investment performance of the portfolio, and (5) aligning the authority of IT investment boards. Table 8 describes the purposes for the critical processes in stage 3. According to DLA officials, they are currently focusing on implementing stage 2 processes and have not implemented any of the critical processes in stage 3. Until the agency fully implements both stage 2 and 3 processes, it cannot consider investments in a comprehensive manner and determine whether it has the appropriate mix of IT investments to best meet its mission needs and priorities. DLA recognizes the need to improve its IT investment processes, but it has not yet developed a plan for systematically correcting weaknesses. To properly focus and target IT investment process improvements, an organization should fully identify and assess current process strengths and weaknesses (that is, create an investment management capability baseline) as the first step in developing and implementing an improvement plan. As we have previously reported, this plan should, at a minimum, (1) specify measurable goals, objectives, milestones, and needed resources, and (2) clearly assign responsibility and accountability for accomplishing well-defined tasks. The plan should also be documented and approved by agency leadership. In implementing the plan, it is important that DLA measure and report progress against planned commitments, and that appropriate corrective action be taken to address deviations. DLA does not have such a plan. In March 2001, it attempted to baseline agency IT operations by reviewing its project-level investment management practices using ITIM. This effort identified practice strengths and weaknesses, but DLA considered the assessment to be preliminary (to be followed by a more comprehensive assessment at an unspecified later date) and limited in scope. DLA used the assessment results to establish broad milestones for strengthening its investment management process. The agency did not, however, develop a complete process improvement plan. For example, it did not (1) specify required resources to accomplish the various tasks, (2) clearly assign responsibility and accountability for accomplishing the tasks, (3) obtain support from senior level officials, and (4) establish performance measures to evaluate the effectiveness of the completed tasks. At the same time, the agency has separately begun other initiatives to improve its investment management processes, but these initiatives are not aligned with the established milestones or with each other. The DLA CIO characterizes the agency's approach to its various process improvement efforts as a necessary progression that includes some inevitable "trial and error" as it moves toward a complete process improvement plan. Without such a plan that allows the agency to systematically prioritize, sequence, and evaluate improvement efforts, DLA jeopardizes its ability to establish a mature investment process that includes selection and control capabilities that result in greater certainty about future IT investment outcomes. Until recently, IT investment management has not been an area of DLA management attention and focus. As a result, DLA currently finds itself without some of the capabilities that it needs to ensure that its mix of IT investments best meets the agency's mission and business priorities. To its credit, DLA now recognizes the need to strengthen its IT investment management and has taken positive steps to begin doing so. However, several critical IT investment management capabilities need to be enhanced before DLA can have reasonable assurance that it is maximizing the value of its IT investment dollar and minimizing the associated risks. Moreover, DLA does not yet have a process improvement plan that is endorsed and supported by agency leadership. The absence of such a plan limits DLA's prospects for introducing the management capabilities necessary for making prudent decisions that maximize the benefits and minimize the risks of its IT investment. To strengthen DLA's investment management capability and address the weaknesses discussed in this report, we recommend that the secretary of defense direct the DLA director to designate the development and implementation of effective IT investment management processes as an agencywide priority. Further, we recommend that the secretary of defense have the DLA director do the following: Develop a plan, within 6 months, for implementing IT investment management process improvements that is based on GAO's ITIM stage 2 and 3 critical processes. Ensure that the plan specifies measurable goals and time frames, defines a management structure for directing and controlling the improvements, and establishes review milestones. Ensure that the plan focuses first on correcting the weakness in the ITIM stage 2 critical processes, because these processes collectively provide the foundation for building a mature IT investment management process. Specifically: Develop and issue guidance covering the scope and operations of DLA's investment review boards. Such guidance should include, at a minimum, specific definitions of the roles and responsibilities within the IT investment process; an outline of the significant events and decision points within the processes; an identification of the external and environmental factors that will influence the processes (for example, legal constraints, the behavior of key suppliers or customers, or industry norms), and the manner in which IT investment-related processes will be coordinated with other organization plans and processes. Develop and issue policies and procedures for maintaining DLA's IT projects inventory for investment management purposes. Finalize and issue policies and procedures (including the use of information from the IT systems and project inventory) for the PEO Review Board's oversight of IT projects. Develop and issue similar policies and procedures for the other investment boards. Finalize and issue guidance supporting the identification of business needs and implementing management controls to ensure that proposals submitted to DLA for review clearly identify and define business requirements. Develop and issue guidance for the proposal selection process in such a way that the criteria for selection are clearly set forth, including formally assigning responsibility for managing the proposal selection process and establishing management controls to ensure that the proposal selection process is working effectively. Ensure that the plan next focuses on stage 3 critical processes, which are necessary for portfolio management, because along with the stage 2 foundational processes, these processes are necessary for effective management of IT investments. Implement the approved plan and report on progress made against the plan's goals and time frames to the secretary of defense every 6 months. DOD provided what it termed "official oral comments" from the director for acquisition resources and analysis on a draft of this report. In its comments, DOD concurred with our recommendations and described efforts under way and planned to implement them. However, it recommended that two report captions be changed to more accurately reflect, in DOD's view, the contents of the report and to eliminate false impressions. Specifically, DOD recommended that we change one caption from "DLA's Capabilities to Effectively Manage IT Investments Are Limited" to "DLA's Capabilities to Effectively Manage IT Investments Should Be Improved." DOD stated that this change is needed to recognize the fact that DLA has completed about 75 percent of the practices associated with stage 2 critical processes. We do not agree. As stated in our report, to effectively manage IT investments an agency should (1) have basic, project-level control and selection practices in place (stage 2 processes) and (2) manage its projects as a portfolio of investments (stage 3 processes). Although DLA has executed most of the key practices associated with stage 2 processes, the agency acknowledges that it has not implemented any of the stage 3 processes. Therefore, our caption as written describes DLA's IT investment management capabilities appropriately. In addition, DOD recommended that we change the caption "DLA Lacks a Plan to Guide Improvement Efforts" to "DLA Lacks a Published Plan to Guide Improvement Efforts." DOD stated that this change is needed because DLA has developed some elements of an implementation plan. We do not agree. Our point is that DLA did not have a complete process improvement plan, not that it has yet to publish the plan that it has. As we describe in the report, a complete plan should, at a minimum, (1) be based on a full assessment of process strengths and weaknesses, (2) specify measurable goals, objectives, milestones, and needed resources, (3) clearly assign responsibility and accountability for accomplishing well- defined tasks, and (4) be documented and approved by agency leadership. In contrast, DLA's planning document was based on a preliminary assessment of only stage 2 critical processes and lacked several of the critical attributes listed above. Moreover, DOD stated in its comments that DLA has not completed a formally documented and prioritized implementation plan to resolve stage 2 and 3 practice weaknesses and has yet to complete the self-assessment and gap analysis necessary to define planned action items. Accordingly, it is clear that DLA has not satisfied the tenets of a complete plan, and thus our caption is accurate as written. DOD provided additional comments that we have incorporated as appropriate in the report. We are sending copies of this report to the chairmen and ranking minority members of the Subcommittee on Defense, Senate Committee on Appropriations; the Subcommittee on Readiness and Management Support, Senate Committee on Armed Services; the Subcommittee on Defense, House Committee on Appropriations; and the Subcommittee on Military Readiness, House Committee on Armed Services. We are also sending copies to the director, Office of Management and Budget; the secretary of defense; the under secretary of defense for acquisition, technology, and logistics; the deputy under secretary of defense for logistics and materiel readiness; and the director, Defense Logistics Agency. Copies will be made available to others upon request. If you have any questions regarding this report, please contact us at (202) 512-3439 and (202) 512-7351, respectively, or by e-mail at [email protected] and [email protected]. An additional GAO contact and staff acknowledgments are listed in appendix II. In addition to the individual named above, key contributors to this report were Barbara Collier, Lester Diamond, Gregory Donnellon, Sabine Paul, and Eric Trout.

The Defense Logistics Agency (DLA) relies extensively on information technology (IT) to carry out its logistics support mission. This report focuses on DLA's processes for making informed IT investment decisions. Because IT investment management has only recently become an area of management focus and commitment at DLA, the agency's ability to effectively manage IT investments is limited. The first step toward establishing effective investment management is putting in place foundational, project-level control and selection processes. The second step toward effective investment management is to continually assess proposed and ongoing projects as an integrated and competing set of investment options. Accomplishing these two steps requires effective development and implementation of a plan, supported by senior management, which defines and prioritizes investment process improvements. Without a well-defined process improvement plan and controls for implementing it, it is unlikely that the agency will establish a mature investment management capability. As a result, GAO continues to question DLA's ability to make informed and prudent investment decisions in IT.

Since 2005, DOD and OPM have made significant progress in reducing delays in making personnel security clearance decisions and met statutory timeliness requirements for DOD's initial clearances completed in fiscal year 2008. IRTPA currently requires that decisions on at least 80 percent of initial clearances be made within an average of 120 days. In December of 2008, we conducted an analysis to assess whether DOD and OPM were meeting the current timelines requirements in IRTPA and examined the fastest 80 percent of initial clearance decisions for military, DOD civilian, and DOD industry personnel. We found that these clearance decisions were completed within 87 days, on average, and well within IRTPA's requirements. IRTPA further requires that by December 2009, a plan be implemented in which, to the extent practical, 90 percent of initial clearance decisions are made within 60 days, on average. We also analyzed the executive branch's 2009 annual report to Congress, which presented an average of the fastest 90 percent of initial clearance decisions in anticipation of IRTPA's December 2009 requirements. The report stated that the average time for completing the fastest 90 percent of initial clearances for military and DOD civilians in fiscal year 2008 was 124 days. The report also stated that the average time for completing the fastest 90 percent of initial clearances for private industry personnel working on DOD contracts in fiscal year 2008 was 129 days. DOD and OMB officials have noted that the existing clearance process is not likely to allow DOD and other agencies to meet the timeliness requirements that will take effect in December 2009 under IRTPA. IRTPA requires that the executive branch report annually on the progress made during the preceding year toward meeting statutory requirements for security clearances, including timeliness, and also provides broad discretion to the executive branch to report any additional information considered appropriate. Under the timeliness requirements in IRTPA, the executive branch can exclude the slowest clearances and then calculate the average of the remaining clearances. Using this approach and anticipating IRTPA's requirement that by December 2009, a plan be implemented under which, to the extent practical, 90 percent of initial clearance decisions are made within an average of 60 days, the executive branch's 2009 report cited as its sole metric for timeliness the average of the fastest 90 percent of initial clearances. We conducted an independent analysis of all initial clearance decisions that DOD made in fiscal year 2008 that more fully reflects the time spent making clearance decisions. Without excluding any portion of the data or taking an average, we analyzed 100 percent of 450,000 initial DOD clearances decisions made in fiscal year 2008 for military, DOD civilian, and DOD industry personnel. Figure 2 shows the full range of time it took DOD and OPM to make clearance decisions in fiscal year 2008. As you can see, our independent analysis of all of the initial clearances revealed that 39 percent of the clearance decisions took more than 120 days to complete. In addition, 11 percent of the initial clearance eligibility decisions took more than 300 days to complete. By limiting its reporting on timeliness to the average of the fastest 90 percent of the initial clearance decisions made in fiscal year 2008 and excluding mention of the slowest clearances, the executive branch did not provide congressional decision makers with visibility over the full range of time it takes to make all initial clearance decisions and the reasons why delays continue to exist. In our recent report, we recommended that the Deputy Director for Management at OMB (who is responsible for submitting the annual report) include comprehensive data on the timeliness of the personnel security clearance process in future versions of the IRTPA-required annual report to Congress. In oral comments in response to our recommendation, OMB concurred, recognized the need for timeliness, and underscored the importance of reporting on the full range of time to complete all initial clearances. We note, Mr. Chairman, that you previously submitted an amendment to expand IRTPA's provision on reporting on clearance timeliness. While IRTPA contains no requirement for the executive branch to report any information on quality, the act grants the executive branch broad latitude to include any appropriate information in its reports. The executive branch's 2006 through 2009 IRTPA-required reports to Congress on the clearance process provided congressional decision makers with little information on quality--a measure that could include topics such as the completeness of the clearance documentation of clearance decisions. The 2006 and 2008 reports did not contain any mention of quality, and the 2007 report mentioned a single quality measure--the frequency with which adjudicating agencies returned OPM's investigative reports because of quality deficiencies. The 2009 report does not contain any data on quality but proposes two measures of investigative report quality and identifies plans to measure adjudicative quality. Specifically, the discussion of these measures is included in the Joint Reform Team's December 2008 report, Security and Suitability Process Reform, which was included in the executive branch's 2009 report. We have previously reported that information on timeliness alone does not communicate a complete picture of the clearance process, and we have emphasized the importance of ensuring quality in all phases of the clearance process. For example, we recently estimated that with respect to initial top secret clearances adjudicated in July 2008, documentation was incomplete for most OPM investigative reports and some DOD adjudicative files. We independently estimated that 87 percent of about 3,500 investigative reports that adjudicators used to make clearance decisions were missing required documentation, and the documentation most often missing was employment verification. Incomplete documentation may lead to increases in both the time needed to complete the clearance process and in overall process costs and may reduce the assurance that appropriate safeguards are in place to prevent DOD from granting clearances to untrustworthy individuals. Because the executive branch has not sufficiently addressed quality in its reports, it has missed opportunities to provide congressional decision makers with greater visibility over the clearance process. In our most recent report, we recommended that the Deputy Director for Management at OMB include measures of quality in future versions of the IRTPA-required annual reports. In oral comments, OMB concurred with our recommendation and emphasized the importance of providing Congress more transparency about quality in the clearance process. Initial joint reform efforts partially reflect key practices for organizational transformation that we have identified, such as having committed leadership and a dedicated implementation team, but reports issued by the Joint Reform Team do not provide a strategic framework that contains important elements of successful transformation, including long-term goals with related outcome-focused performance measures to show progress, nor do they identify potential obstacles to progress and possible remedies. Consistent with some of the key practices for organizational transformation, a June 2008 Executive Order established the Suitability and Security Clearance Performance Accountability Council, commonly known as the Performance Accountability Council, as the head of the governmentwide governance structure responsible for achieving clearance reform goals and driving and overseeing the implementation of reform efforts. The Deputy Director for Management at OMB--who was confirmed in June 2009--serves as the Chair of the Council, and the Order also designated the Director of OPM and the Director of National Intelligence as Executive Agents for Suitability and Security, respectively. Membership on the council currently includes senior executive leaders from 11 federal agencies. In addition to high-level leadership of the Performance Accountability Council, the reform effort has benefited from a dedicated, multi-agency implementation team--the Joint Reform Team--to manage the transformation process from the beginning. The Joint Reform Team, while not formally part of the governance structure established by Executive Order 13467, works under the Council to provide progress reports to the President, recommend research priorities, and oversee the development and implementation of an information technology strategy, among other things. In addition to the key practices, the three reports issued by the Joint Reform Team have begun to address essential factors for reforming the security clearance process that we identified in prior work and that are also found in IRTPA. These factors include (1) developing a sound requirements determination process, (2) engaging in governmentwide reciprocity, (3) building quality into every step of the process, (4) consolidating information technology, and (5) identifying and reporting long-term funding requirements. While the personnel security clearance joint reform reports, which we reviewed collectively, begin to address essential factors for reforming the security clearance process, which represents positive steps, the Joint Reform Team's information technology strategy does not yet define roles and responsibilities for implementing a new automated capability that is intended to be a cross-agency collaborative initiative. GAO's prior work on key collaboration practices has stressed the importance of defining these roles and responsibilities when initiating cross-agency initiatives. In addition, the Joint Reform Team's reports do not contain any information on initiatives that will require funding, determine how much they will cost, or identify potential funding sources. Without long-term funding requirements, decision makers in both the executive and legislative branches will lack important information for comparing and prioritizing proposals for reforming the clearance processes. The reform effort's success will be dependent upon the extent to which the Joint Reform Team is able to fully address these key factors moving forward. Although the high-level leadership and governance structure of the current reform effort distinguish it from previous efforts, it is difficult to gauge progress of reform, or determine if corrective action is needed, because the council, through the Joint Reform Team, has not established a method for evaluating the progress of the reform efforts. Without a strategic framework that fully addresses the long-standing security clearance problems and incorporates key practices for transformation--including the ability to demonstrate progress leading to desired results--the Joint Reform Team is not in a position to demonstrate to decision makers the extent of progress that it is making toward achieving its desired outcomes, and the effort is at risk of losing momentum and not being fully implemented. In our May 2009 report, we recommended that OMB's Deputy Director of Management, in the capacity as Chair of the Performance Accountability Council, ensure that the appropriate entities--such as the Performance Accountability Council, its subcommittees, or the Joint Reform Team-- establish a strategic framework for the joint reform effort to include (1) a mission statement and strategic goals; (2) outcome-focused performance measures to continually evaluate the progress of the reform effort toward meeting its goals and addressing long-standing problems with the security clearance process; (3) a formal, comprehensive communication strategy that includes consistency of message and encourages two-way communication between the Performance Accountability Council and key stakeholders; (4) a clear delineation of roles and responsibilities for the implementation of the information technology strategy among all agencies responsible for developing and implementing components of the information technology strategy; and (5) long-term funding requirements for security clearance reform, including estimates of potential cost savings from the reformed process and provide them to decision makers in Congress and the executive branch. In oral comments on our report, OMB stated that it partially concurred with our recommendation to establish a strategic framework for the joint reform effort. Further, in written agency comments provided to us jointly by DOD and ODNI, they also partially concurred with our recommendation. Additionally, DOD and ODNI commented on the specific elements of the strategic framework that we included as part of our recommendation. For example, in the comments, DOD and ODNI agreed that the reform effort must contain outcome-focused performance measures, but added that these metrics must evolve as the process improvements and new capabilities are developed and implemented because the effort is iterative and in phased development. We continue to believe that outcome-focused performance measures are a critical tool that can be used to guide the reform effort and allow overseers to determine when the reform effort has accomplished it goals and purpose. In addition, DOD and ODNI asserted that considerable work has already been done on information technology for the reform effort, but added that even clearer roles and responsibilities will be identified moving forward. Regarding our finding that, at present, no single database exists in accordance with IRTPA's requirement that OPM establish an integrated database that tracks investigations and adjudication information, DOD and ODNI stated that the reform effort continues its iterative implementation of improvements to systems that improve access to information that agencies need. DOD and ODNI also acknowledged that more work needs to be done to identify long-term funding requirements. Mr. Chairman, I want to conclude by reiterating that DOD and OPM are meeting current IRTPA timeliness requirements, which means that 80 percent of initial clearance decisions are made within 120 days, on average. This represents significant and noteworthy progress from our finding in 2007, when we reported that industry personnel waited more than 1 year, on average, to receive a top secret clearance. I would also like to emphasize that, although the high-level leadership and governance structure of the current reform effort distinguish it from previous attempts at clearance reform, it is imperative that OMB's newly appointed Deputy Director for Management continue in the crucial role as chair of the Performance Accountability Council in deciding (1) how to implement the recommendations contained in our most recent reports, (2) what types of actions are necessary for developing a corrective action plan, and (3) how the corrective measures will be implemented. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions you may have at this time. For further information regarding this testimony, please contact me at (202) 512-3604 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 who made key contributions to this testimony are David E. Moser, Assistant Director; James D. Ashley; Lori Atkinson; Joseph M. Capuano; Sara Cradic; Mae Jones; Shvetal Khanna; James P. Klein; Ron La Due Lake; and Gregory Marchand. DOD Personnel Clearances: Comprehensive Timeliness Reporting, Complete Clearance Documentation, and Quality Measures Are Needed to Further Improve the Clearance Process. GAO-09-400. Washington, D.C.: May 19, 2009. Personnel Security Clearances: An Outcome-Focused Strategy Is Needed to Guide Implementation of the Reformed Clearance Process. GAO-09-488 Washington, D.C.: May 19, 2009. High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 22, 2009. DOD Personnel Clearances: Preliminary Observations about Timeliness and Quality. GAO-09-261R. Washington, D.C.: December 19, 2008. Personnel Security Clearance: Preliminary Observations on Joint Reform Efforts to Improve the Governmentwide Clearance Eligibility Process. GAO-08-1050T. Washington, D.C.: July 30, 2008. Personnel Clearances: Key Factors for Reforming the Security Clearance Process. GAO-08-776T. Washington, D.C.: May 22, 2008. Employee Security: Implementation of Identification Cards and DOD's Personnel Security Clearance Program Need Improvement. GAO-08-551T. Washington, D.C.: April 9, 2008. Personnel Clearances: Key Factors to Consider in Efforts to Reform Security Clearance Processes. GAO-08-352T. Washington, D.C.: February 27, 2008. DOD Personnel Clearances: Improved Annual Reporting Would Enable More Informed Congressional Oversight. GAO-08-350. Washington, D.C.: February 13, 2008. DOD Personnel Clearances: Delays and Inadequate Documentation Found for Industry Personnel. GAO-07-842T. Washington, D.C.: May 17, 2007. DOD Personnel Clearances: Additional OMB Actions Are Needed to Improve the Security Clearance Process. GAO-06-1070. Washington, D.C.: September 28, 2006. DOD Personnel Clearances: Questions and Answers for the Record Following the Second in a Series of Hearings on Fixing the Security Clearance Process. GAO-06-693R. Washington, D.C.: June 14, 2006. DOD Personnel Clearances: New Concerns Slow Processing of Clearances for Industry Personnel. GAO-06-748T. Washington, D.C.: May 17, 2006. DOD Personnel Clearances: Funding Challenges and Other Impediments Slow Clearances for Industry Personnel. GAO-06-747T. Washington, D.C.: May 17, 2006. DOD Personnel Clearances: Government Plan Addresses Some Long- standing Problems with DOD's Program, but Concerns Remain. GAO-06-233T. Washington, D.C.: November 9, 2005. 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.

Due to concerns about long standing delays in the security clearance process, Congress mandated reforms in the Intelligence Reform and Terrorism Prevention Act of 2004 (IRTPA), which requires, among other things, that the executive branch report annually to Congress. Since 2005, the Department of Defense's (DOD) clearance program has been on GAO's high-risk list due to delays and incomplete documentation. The Office of Personnel Management (OPM) conducts much of the government's clearance investigations. In 2007, the Director of National Intelligence and DOD established a Joint Reform Team to coordinate governmentwide improvement efforts for the process. The Office of Management and Budget (OMB) oversees these efforts. Based on two recent GAO reports, this statement addresses (1) progress in reducing delays at DOD, (2) opportunities for improving executive branch reports to Congress and (3) the extent to which joint reform efforts reflect key factors for reform. GAO independently analyzed DOD clearances granted in fiscal year 2008, assessed the executive branch's 2006-2009 reports to Congress, and compared three joint reform reports to key transformation practices. GAO previously recommended that OMB improve the transparency in executive branch reporting and establish a strategic framework. OMB concurred or partially concurred with these recommendations. DOD and OPM have made significant progress in reducing delays in making security clearance decisions and met statutory timeliness requirements for DOD's initial clearances completed in fiscal year 2008. IRTPA currently requires that decisions on at least 80 percent of initial clearances be made within an average of 120 days. In 2008, GAO found that OPM and DOD made initial decisions on these clearances within 87 days, on average. Opportunities exist for the executive branch to improve its annual reports to Congress. For example, the executive branch's 2009 report to Congress did not reflect the full range of time it took to make all initial clearance decisions and has provided little information on quality. Under the current IRTPA requirements, the executive branch can exclude the slowest 20 percent of clearances and then calculate timeliness based on an average of the remaining clearances. GAO analyzed 100 percent of initial clearances granted in 2008 without taking averages or excluding the slowest clearances and found that 39 percent took more than 120 days. The absence of comprehensive reporting limits full visibility over the timeliness of initial clearance decisions. With respect to quality, although IRTPA grants the executive branch latitude in reporting, the 2006-2009 reports provided little information on quality. However, the 2009 report identified quality measures that the executive branch proposes to collect. GAO has stated that timeliness alone does not provide a complete picture of the clearance process. For example, GAO recently estimated that with respect to initial top secret clearances adjudicated in July 2008, documentation was incomplete for most OPM investigative reports. Greater attention to quality could increase instances of reciprocity--an entity's acceptance of another entity's clearances. Initial joint reform efforts reflect key practices for organizational transformation that GAO has identified, such as having committed leadership and a dedicated implementation team, but the Joint Reform Team's reports do not provide a strategic framework that contains important elements of successful transformation, including long-term goals with outcome-focused performance measures, nor do they identify potential obstacles to progress and possible remedies. Further, GAO's prior work and IRTPA identified several factors key to reforming the clearance process. These include (1) engaging in governmentwide reciprocity, (2) consolidating information technology, and (3) identifying and reporting long-term funding requirements. However, the Joint Reform Team's information technology strategy does not yet define roles and responsibilities for implementing a new automated capability which is intended to be a cross-agency collaborative initiative. Also, the joint reform reports do not contain information on funding requirements or identify funding sources. The reform effort's success will depend upon the extent to which the Joint Reform Team is able to fully address these key factors moving forward. Further, it is imperative that OMB's Deputy Director for Management continue in the crucial role as chair of the Performance Accountability Council, which oversees joint reform team efforts.

The SDB program in various forms has been in existence for the past 14 years. While criteria to qualify as an SDB remained essentially the same during this period, a Supreme Court decision in 1995--Adarand v. Pena-- resulted in the federal government examining how it implemented "affirmative action" programs, including certain procurement preference programs. Subsequently, the federal government established a program to certify SDBs as eligible for preferences when being considered for federal prime and subcontracting opportunities. The SDB program was established by the National Defense Authorization Act of 1987, and applies to the Department of Defense (DOD), the National Aeronautics and Space Administration (NASA), and the U. S. Coast Guard. The implementing regulations define SDBs as small business concerns that are owned and controlled by socially and economically disadvantaged individuals who have been subjected to racial or ethnic prejudice or cultural bias and who have limited capital and credit opportunities. African, Asian, Hispanic, and Native Americans are presumed by regulation to be socially disadvantaged. An individual who is not a member of a designated group presumed to be socially disadvantaged had to establish individual social disadvantage on the basis of clear and convincing evidence which, according to the SBA's OIG audit report, is a difficult standard to meet. Under this standard, an applicant must produce evidence to show that it is highly probable that the applicant is a socially disadvantaged business concern. The regulations further specify that to qualify as an SDB, a small business concern had to (1) be at least 51 percent owned and controlled by a socially and economically disadvantaged individual or individuals; (2) meet the SBA-established size standard based on the business' primary industry as established by the Standard Industrial Classification (SIC) code; and (3) have principals who have a personal net worth, excluding the value of the business and personal home, less than $750,000. The Federal Acquisition Streamlining Act of 1994 (FASA) expanded the program to all federal agencies. In addition to the governmentwide programs, various other federal laws contain provisions designed to assist SDBs that are applicable to specific executive departments or independent agencies. For example, the Surface Transportation and Uniform Relocation Assistance Act of 1987 required the Department of Transportation to expend not less than 10 percent of federal highway and transit funds with disadvantaged business enterprises. Amendments in 1987 and 1992 to the Airport and Airway Improvement Act of 1982 imposed similar requirements with regard to airport programs. Other statutes contain provisions to encourage contracting with SDBs by various departments and agencies, including the Department of Energy, the Department of State, the Environmental Protection Agency, and the Federal Deposit Insurance Corporation. Prior to the recent changes in the SDB program, small business concerns could self-certify that they were small and disadvantaged. According to an SBA official, unless otherwise challenged by an interested party, the contracting agency accepted the self-representation to be accurate. Between 1987 and the Adarand decision, self-certified SDBs were eligible to receive two main benefits: (1) a 10 percent evaluation preference in competitive DOD acquisitions where that award was based on price and price-related factors and (2) the ability to compete for contracts set-aside for SDBs for certain DOD acquisitions where agency officials believed that there was a reasonable expectation that offers would be received from at least two responsible SDBs. Though FASA extended the authority to implement these benefits to all federal agencies, because of the 1995 Adarand decision and the effort to reform federal affirmative action programs in light of the decision, regulations to implement the authority were delayed. In the 1995 Adarand decision, the Supreme Court held that all federal affirmative action programs that use racial classifications are subject to strict judicial scrutiny. To meet this standard, a program must be shown to meet a compelling governmental interest and must be narrowly tailored to meet that interest. The Court questioned whether the program at issue in the Adarand case, which involved highway contracts at the Department of Transportation, met that test. The Court decision resulted in the federal government's examining all affirmative action programs, including procurement preference programs. One issue that was addressed following the Supreme Court decision was the government's policy that allowed firms to self-certify as SDBs. The Supreme Court decision in Adarand resulted in the administration having to make changes to the SDB program. Tasked by the administration, the Department of Justice (DOJ) conducted a review of affirmative action in federal procurement programs. DOD, one of the largest contracting agencies, was the focus of the initial post-Adarand compliance actions by the federal government. DOJ reviewed the procurement mechanisms used by DOD, including set-asides, direct competitive awards, and price evaluations. On May 23, 1996, DOJ issued a proposed structure to reform affirmative action in federal procurement to ensure compliance with the tests of constitutionality established in the Adarand decision. The DOJ proposal included a 2-year ban on DOD's use of set-aside programs for SDBs and the elimination of the SDB set-asides for civilian agencies, allowing only bidding and evaluation credits. The proposal also included standards by which a firm could apply to be certified as an SDB. This proposal also reduced the burden of proof from "clear and convincing evidence" to a "preponderance of the evidence" standard. This lesser evidentiary standard requires that applicants show that they are more likely than not to meet the criteria for social disadvantage. Because of its experience in certifying 8(a) businesses and resolving protests in connection with both the 8(a) and the previous SDB set-aside programs, SBA was chosen to pilot and administer a centralized program for SDB certification. In August 1998, SBA set up the Office of Small Disadvantage Business Certification and Eligibility to implement the DOJ proposal. According to an SBA official, SBA projected that by October 1999, an estimated 30,000 firms would apply to SBA for certification based, in large part, on the number of firms that self-certified as SDBs under the previous program. Under the SDBC program, small businesses seeking to obtain SDB procurement opportunities must first demonstrate that they meet the eligibility criteria to qualify as an SDB. Effective October 1, 1998, small business concerns must receive certification from SBA that they qualify as an SDB for purposes of receiving a price evaluation adjustment when competing for a prime contract. As of January 1, 1999, monetary incentives became available for prime contractors that met and exceeded their subcontracting goals. Also, effective October 1, 1999, SDBs that waived the price evaluation adjustment and large business prime contractors that used certified SDBs as subcontractors in certain industries were eligible for evaluation credits. While the SDB set-aside program was suspended, price and evaluation credits continued with the following three procurement mechanisms: (1) qualified SDBs are eligible for price evaluation adjustments of up to 10 percent when bidding on federal prime contracts in certain industries, (2) prime contractors may receive evaluation credits for their plans to subcontract with SDBs in major authorized SIC groups, and (3) prime contractors that exceed specified targets for SDB subcontracting in the major authorized SIC groups can receive monetary incentives. Although on September 30, 2000, the initial pilot covering civilian agencies' authority to use price and evaluation credits expired, the administration is seeking a 3-year extension of the program as part of SBA's pending Reauthorization Bill. The DOD authority was extended for another 3 years. During this time, SBA, DOD, and the Department of Commerce are to evaluate the performance of the program and determine whether the program has benefited SDBs and whether the reinstitution of set-asides should be considered. As of August 24, 2000, according to SBA officials, 9,034 small business firms were certified as SDBs. Of these firms, 6,405 were grandfathered into the SDBC program due to their 8(a) status. The remaining 2,629, or 29 percent, were small business firms that applied to the program and were certified by SBA. According to SBA, 5,456 small business firms applied to the program, which was a significantly lower number than the 30,000 applications SBA anticipated. Of the 5,456 applications submitted for certification, SBA returned 1,990 applications as incomplete and denied 241 applications for SDB certification. Applicants withdrew 307 applications for unknown reasons. The remaining 289 applications were in various stages of screening and processing. Of the 9,034 certified SDBs, according to an SBA official, 6,405 firms, or 71 percent, were automatically grandfathered into the SDB program due to their 8(a) certification. Of those firms that were grandfathered, 5,689 firms were 8(a) business development firms, and 716 were firms that recently graduated from the 8(a) program but qualified as an SDB because they still met the ownership and personal wealth criteria, according to an SBA official. The official also reported that, as of August 24, 2000, SBA had certified 2,629 firms as SDBs--1,302 firms were certified in the first year of the program from August 24, 1998, through August 23, 1999; and 1,327 firms were certified from August 24, 1999, through August 24, 2000. Table 1 shows the composition of the SDB certifications. According to SBA officials, 5,456 applications were submitted by small businesses for SDB certification from August 24, 1998, to August 24, 2000. Of the 5,456 applications, 3,377, or 62 percent, were determined to be complete and passed the screening phase of the certification process. According to SBA officials, 1,990 applications, or 36 percent, were determined to be incomplete and subsequently returned to the applicant during this period, and 89, or 2 percent, were "in- screening," meaning that the application was being reviewed by an analyst for completeness. Table 2 shows the status of the applications submitted to SBA by small business concerns for SDB certification. SBA certified 2,629, or 78 percent, of the 3,377 applications it considered complete from August 24, 1998, through August 24, 2000. SBA denied certification to 241 applicants, or 7 percent, according to SBA officials. The two primary reasons SBA officials gave for denying certification were either that (1) the designated group members exceeded the economic threshold, or that (2) the nondesignated group members did not meet the social disadvantaged standard. As for the remaining 507 complete applications, SBA officials also reported that applicants withdrew 307 applications for unknown reasons, and 200 were "in process," meaning they were being reviewed to determine whether or not the applicant met the eligibility criteria. Table 3 shows the status of all complete applications submitted to SBA as of August 24, 2000. The number of SDBs that have been certified through the SDBC program is significantly lower than the 30,000 projected by SBA, based on the number of firms that had self-certified as SDBs. Officials from SBA, two federal agencies' Offices of Small and Disadvantaged Business Utilization, the U. S. Chamber of Commerce, the Women's Business Enterprise National Council, the National Minority Supplier Development Council, and the National Small Business United cited four broad factors, which they believed, combine to likely explain the lower-than-anticipated number of SDB certification applications. These factors included, for some firms: (1) confusion about the program's implementation, (2) the administrative and financial burden of applying, (3) questions regarding the benefits of obtaining the SDB certification, and (4) not qualifying as SDBs. SBA officials and officials from other organizations we interviewed agreed that businesses might not have applied for certification due to uncertainty about when or how the SDB certifications would be implemented. Criticisms and lack of buy-in from outside groups on the SDB certification process and changes to the program's implementation dates may have created confusion for some firms, while some others may have adopted a "wait-and-see attitude." Officials from two of the seven organizations that we talked to said that, when developing the certification process, SBA did not solicit the support of small business advocacy organizations that represent the interests of small business concerns. The two officials also stated that some advocacy groups opposed the structure and criteria used to establish SDB certification as well as the onerous documentation requirements. Consequently, those groups have not encouraged their members to participate in the program because these issues are not resolved. One of the officials also believed that SDB owners were not educated about the process, which might have lead them to not apply for certification. Compounding the problem of conflicting or inadequate information about the certification requirements, according to SBA officials, was the shifting of implementation dates. The implementation date for the requirement that prime contractors use only certified SDBs in meeting their subcontracting goals and receive evaluation credits under the SDB participation program also changed several times. For example, the implementation date for the program was originally January 1, 1999, then changed to July 1999 with a final extension to October 1999. Consequently, according to SBA and some of the advocacy group representatives, SDBs may have delayed applying for certification because of uncertainty as to actual deadlines and, in some cases, may have adopted a wait-and-see attitude regarding program requirements and criteria. Officials interviewed from six of the seven organizations agreed that another key factor explaining the lower-than-anticipated number of applicants was that small business owners view the application process as an administrative burden compared with self-certification. Officials from four of the seven organizations interviewed pointed out that the certification requirement was a financial burden compared with the self- certification process. Previously, firms only had to attest that they qualified as SDBs. To be certified as SDBs, firms have to complete and submit one of several different SDB applications, depending on the type of business to be certified. In addition to the administrative burden, businesses can incur significant expenses under the new certification procedures to ensure that their application package is complete and accurate. For example, businesses can go to a private certifier to help them complete their application, but this service can cost up to several thousand dollars, depending on the services performed. According to one small business advocacy official, this expense can be prohibitive for a number of firms. Adding to the issues of confusion about the program's requirements and administrative burden, according to officials interviewed, is the view held by some small businesses and shared by several SBA officials that there is no real benefit to participating in the program. Officials gave different reasons for this view. Two officials we interviewed, as well as officials from SBA, said that some small businesses believe that they are unlikely to receive federal contracts due to both real and perceived restrictions on agencies' use of price evaluation adjustments and therefore questioned the value of obtaining SDB certification. An SBA official pointed out, for example, that DOD, which accounts for about 67 percent of federal procurement dollars spent, is statutorily barred from using price evaluation adjustments once it exceeds its SDB contracting goal. Alternatively, two officials from other organizations we interviewed said that other firms do not see the benefit to certification because they feel confident that they can receive contracts through open competition regardless of their certification status, particularly those that have established contracting relationships. Consequently, small businesses' view that the certification process is an administrative and financial burden combined with the low value placed on SDB certification are factors that may have discouraged small businesses from applying for certification, according to these officials. Finally, an SBA official we interviewed pointed out that, in some cases, firms that had previously self-certified as SDBs might not currently qualify for SDB status. Although she did not have data that could show how many firms fit in this category, the SBA official believed that, based on her experience, exceeding the personal wealth threshold of $750,000 was one reason for firms to either not qualify or no longer qualify as an SDB. We provided a draft of this report to the Administrator of the Small Business Administration, for her review and comment. On December 19, 2000, we received oral comments from the Associate Administrator, Office of Planning and Liaison (formerly Associate Administrator, Office of Government Contracting and Minority Enterprise Development), and from the Assistant Administrator, Office of Outreach and Marketing (formerly Assistant Administrator, Office of Small Disadvantaged Business Certification and Eligibility). Both officials stated that they generally concurred with the information included in the draft report, however, they provided clarifying technical information that we have included in this report as appropriate. To determine the number of businesses that SBA had certified as socially and economically disadvantaged since the implementation of the SDBC program, we met with and obtained information from SBA and reviewed data contained in the SBA Pro-Net database. In addition, we reviewed the SBA OIG's audit report on the SDB certification program, laws and regulations pertaining to SDBs, and a Supreme Court decision. We did not verify data provided by SBA. For our second objective, to obtain views on the reasons for the lower- than-expected SDB certifications, we interviewed officials from SBA, DOJ's Office of the Assistant Attorney General for Civil Rights, as well as officials from the U. S. Chamber of Commerce, the Women's Business Enterprise National Council, the National Minority Supplier Development Council, and the National Small Business United. Also, we sent letters to 30 representatives from federal agencies' Office of Small Disadvantaged Business Utilization requesting their view on reason for the lower-than- expected SDB certifications. Of the 30 federal agency representatives, we received views from Commerce and DOJ within the time frame specified in our letter, which we have included in this report. We did not validate the factors cited by these organizations for explaining the lower-than-expected certifications, nor was there empirical evidence available to validate or refute these views. Also, we did not evaluate the performance and implementation of the SDB program to achieve the governmentwide goal or its effectiveness in certifying SDBs. We conducted our review in Washington, D.C., from July through September 2000 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report for 30 days. At that time, we will send copies of this report to appropriate congressional committees and interested Members of Congress. We will also send copies to the Honorable Aida Alvarez, Administrator, Small Business Administration; the Administrator, General Services Administration; and the Director, Office of Management and Budget. We will also make copies available to others on request. If you have questions regarding this report, please contact me on (202) 512- 8984. Major contributors to this assignment were Hilary Sullivan, Geraldine Beard, William Woods, and Sylvia Schatz. The first copy of each GAO report is free. Additional copies of reports are $2 each. A check or money order should be made out to the Superintendent of Documents. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Orders by visiting: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders by phone: (202) 512-6000 fax: (202) 512-6061 TDD (202) 512-2537 Each day, GAO issues a list of newly available reports and testimony. 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The federal government has an annual, governmentwide procurement goal of at least five percent for small disadvantaged businesses (SDB). SDBs are eligible for various price and evaluation benefits when being considered for federal contract awards. SDB firms must have their SDB status certified by the Small Business Administration (SBA). Because of concerns over reports that fewer businesses were receiving SDB certification than expected, GAO examined the SBA certification processes to (1) determine the number of businesses that SBA had certified as socially and economically disadvantaged since the implementation of the Small Disadvantaged Business Certification program and (2) obtain views on reasons for the current difference in the number of SDB certifications from the number that had previously self-certified as SDBs. SBA records show that 9,034 small business firms were certified as SDBs as of August 24, 2000. According to SDB officials, 6,405 of these were automatically certified because of their 8(a) certification. The number of SDBs that have been certified by SBA is significantly lower than the 30,000 projected by SBA based on the number of firms that had self-certified as SDBs. Possible reasons for this discrepancy include (1) company reluctance to participate because of their uncertainty as to when or how the program would be implemented, (2) the perception by businesses that the application process is burdensome, and (3) the belief by some companies that the benefits do not justify the effort.

Three agencies share responsibility for enforcing ERISA: the Department of Labor (EBSA), the Department of the Treasury's Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC). EBSA enforces fiduciary standards for plan fiduciaries of privately sponsored employee benefit plans to ensure that plans are operated in the best interests of plan participants. EBSA also enforces reporting and disclosure requirements covering the type and extent of information provided to the federal government and plan participants, and seeks to ensure that specific transactions prohibited by ERISA are not conducted by plans. Under Title I of ERISA, EBSA conducts investigations of plans and seeks appropriate remedies to correct violations of the law, including litigation when necessary. IRS enforces the Internal Revenue Code (IRC) and provisions that must be met which give pension plans tax-qualified status, including participation, vesting, and funding requirements. The IRS also audits plans to ensure compliance and can levy tax penalties or revoke the tax-qualified status of a plan as appropriate. PBGC, under Title IV of ERISA, provides insurance for participants and beneficiaries of certain types of tax-qualified pension plans, called defined benefit plans, that terminate with insufficient assets to pay promised benefits. Recent terminations of large, underfunded plans have threatened the long-term solvency of PBGC. As a result, we placed PBGC's single-employer insurance program on our high-risk list of programs needing further attention and congressional action. ERISA and the IRC require plan administrators to file annual reports concerning, among other things, the financial condition and operation of plans. EBSA, IRS, and PBGC jointly developed the Form 5500 so that plan administrators can satisfy this annual reporting requirement. Additionally, ERISA and the IRC provide for the assessment or imposition of penalties for plan sponsors not submitting the required information when due. About one-fifth of Americans' retirement wealth is invested in mutual funds, which are regulated by the Securities and Exchange Commission (SEC), primarily under the Investment Company Act of 1940. The primary mission of the SEC is to protect investors, including pension plan participants investing in securities markets, and maintain the integrity of the securities markets through extensive disclosure, enforcement, and education. In addition, some pension plans use investment managers to oversee plan assets, and these managers may be subject to other securities laws. EBSA's enforcement strategy is a multifaceted approach of targeted plan investigations supplemented by providing education to plan participants and plan sponsors. EBSA allows its regions the flexibility to tailor their investigations to address the unique issues in their regions, within a framework established by EBSA's Office of Enforcement. The regional offices then have a significant degree of autonomy in developing and carrying out investigations using a mixture of approaches and techniques they deem most appropriate. Participant leads are still the major source of investigations. To supplement their investigations, the regions conduct outreach activities to educate both plan participants and sponsors. The purpose of these efforts is to gain participants' help in identifying potential violations and to educate sponsors in properly managing their plans and avoiding violations. The regions also process applications for the Voluntary Fiduciary Correction Program (VFCP) through which plan officials can voluntarily report and correct some violations without penalty. EBSA attempts to maximize the effectiveness of its enforcement efforts to detect and correct ERISA violations by targeting specific cases for review. In doing so, the Office of Enforcement provides assistance to the regional offices in the form of broad program policy guidance, program oversight, and technical support. The regional offices then focus their investigative workloads to address the needs specific to their region. Investigative staff also have some responsibility for selecting cases. The Office of Enforcement identifies national priorities--areas critical to the well-being of employee benefit plan participants and beneficiaries nationwide--in which all regions must target a portion of their investigative efforts. Currently, EBSA's national priorities involve, among other things, investigating defined contribution pension plan and health plan fraud. Officials in the Office of Enforcement said that national priorities are periodically re-evaluated and are changed to reflect trends in the area of pensions and other benefits. On the basis of its national investigative priorities, the Office of Enforcement has established a number of national projects. Currently, there are five national projects pertaining to a variety of issues including employee contributions to defined contribution plans, employee stock ownership plans (ESOP), and health plan fraud. EBSA's increasing emphasis on defined contribution pension plans reflects the rapid growth of this segment of the pension plan universe. In fiscal year 2004, EBSA had monetary results of over $31 million and obtained 10 criminal indictments under its employee contributions project. EBSA's most recent national enforcement project involves investigating violations pertaining to ESOPs, such as the incorrect valuation of employer securities and the failure to provide participants with the specific benefits required or allowed under ESOPs, such as voting rights, the ability to diversify their account balances at certain times, and the right to sell their shares of stock. Likewise, more attention is being given to health plan fraud, such as fraudulent multiple employer welfare arrangements (MEWAs). In this instance, EBSA's emphasis is on abusive and fraudulent MEWAs created by promoters that attempt to evade state insurance regulations and sell the promise of inexpensive health benefit insurance but typically default on their benefit obligations. EBSA regional offices determine the focus of their investigative workloads based on their evaluation of the employee benefit plans in their jurisdiction and guidance from the Office of Enforcement. For example, each region is expected to conduct investigations that cover their entire geographic jurisdiction and attain a balance among the different types and sizes of plans investigated. In addition, each regional office is expected to dedicate some percentage of its staff resources to national and to regional projects--those developed within their own region that focus on local concerns. In developing regional projects, each regional office uses its knowledge of the unique activities and types of plans in its jurisdiction. For example, a region that has a heavy banking industry concentration may develop a project aimed at a particular type of transaction commonly performed by banks. We previously reported that the regional offices spend an average of about 40 percent of their investigative time conducting investigations in support of national projects and almost 25 percentage of their investigative time on regional projects. EBSA officials said that their most effective source of leads on violations of ERISA is from complaints from plan participants. Case openings also originate from news articles or other publications on a particular industry or company as well as tips from colleagues in other enforcement agencies. Computer searches and targeting of Form 5500 information on specific types of plans account for only 25 percent of case openings. In 1994, we reported that EBSA had done little to test the effectiveness of the computerized targeting runs it was using to select cases. Since then, EBSA has scaled down both the number of computerized runs available to staff and its reliance on these runs as a means of selecting cases. Investigative staff are also responsible for identifying a portion of their cases on their own to complete their workloads and address other potentially vulnerable areas. As shown in figure 1, EBSA's investigative process generally follows a pattern of selecting, developing, resolving, and reviewing cases. EBSA officials told us that they open about 4,000 investigations into actual and potential violations of ERISA annually. According to EBSA, its primary goal in resolving a case is to ensure that a plan's assets, and therefore its participants and beneficiaries, are protected. EBSA's decision to litigate a case is made jointly with the Department of Labor's Regional Solicitors' Offices. Although EBSA settles most cases without going to court, both the agency and the Solicitor's Office recognize the need to litigate some cases for their deterrent effect on other providers. As part of its enforcement program, EBSA also detects and investigates criminal violations of ERISA. From fiscal years 2000 through 2004, criminal investigations resulted in an average of 54 cases closed with convictions or guilty pleas annually. Part of EBSA's enforcement strategy includes routinely publicizing the results of its litigation efforts in both the civil and criminal areas as a deterrent factor. To further leverage its enforcement resources, EBSA provides education to plan participants, sponsors, and service providers and allows the voluntary self-correction of certain transactions without penalty. EBSA's education program for plan participants aims to increase their knowledge of their rights and benefits under ERISA. For example, EBSA anticipates that educating participants will establish an environment in which individuals can help protect their own benefits by recognizing potential problems and notifying EBSA when issues arise. The agency also conducts outreach to plan sponsors and service providers about their ongoing fiduciary responsibilities and obligations under ERISA. At the national level, EBSA's Office of Participant Assistance develops, implements, and evaluates agency-wide participant assistance and outreach programs. It also provides policies and guidance to other EBSA national and regional offices involved in outreach activities. EBSA's nationwide education campaigns include a fiduciary education campaign, launched in May 2004, to educate plan sponsors and service providers about their fiduciary responsibilities under ERISA. This campaign also includes educational material on understanding fees and selecting an auditor. EBSA's regional offices also assist in implementing national education initiatives and conduct their own outreach to address local concerns. The regional offices' benefit advisers provide written and telephone responses to participants. Benefit advisers and investigative staff also speak at conferences and seminars sponsored by trade and professional groups and participate in outreach and educational efforts in conjunction with other federal or state agencies. At the national level, several EBSA offices direct specialized outreach activities. As with EBSA's participant-directed outreach activities, its efforts to educate plan sponsors and service providers also rely upon Office of Enforcement staff and the regional offices for implementation. For example, these staff make presentations to employer groups and service provider organizations about their ERISA obligations and any new requirements under the law, such as reporting and disclosure provisions. To supplement its investigative programs, EBSA is promoting the self- disclosure and self-correction of possible ERISA violations by plan officials through its Voluntary Fiduciary Correction Program. The purpose of the VFCP is to protect the financial security of workers by encouraging plan officials to identify and correct ERISA violations on their own. Specifically, the VFCP allows plan officials to identify and correct 18 transactions, such as delinquent participant contributions and participant loan repayments to pension plans. Under the VFCP, plan officials follow a process whereby they (1) correct the violation using EBSA's written guidance; (2) restore any losses or profits to the plan; (3) notify participants and beneficiaries of the correction; and (4) file a VFCP application, which includes evidence of the corrected transaction, with the EBSA regional office in whose jurisdiction it resides. If the regional office determines that the plan has met the program's terms, it will issue a "no action" letter to the applicant and will not initiate a civil investigation of the violation, which could have resulted in a penalty being assessed against the plan. EBSA has taken steps to address many of the recommendations we have made over a number of years to improve its enforcement program, including assessing the level and types of noncompliance with ERISA, improving sharing of best investigative practices, and developing a human capital strategy to better respond changes in its workforce. EBSA reported a significant increase in enforcement results for fiscal year 2004, including $3.1 billion in total monetary results and closing nearly 4,400 investigations, with nearly 70 percent of those cases resulting in corrections of ERISA violations. Despite this progress, EBSA continues to face a number of significant challenges to its enforcement program, including the lack of timely and reliable plan information, restrictive statutory requirements that limit its ability to assess certain penalties, and the need to better coordinate enforcement strategies with the SEC. EBSA has taken a number of steps, including addressing recommendations from our prior reports that have improved its enforcement efforts across a number of areas. For example, EBSA has continued to refine its enforcement strategy to meet changing priorities and provided additional flexibility to its regional office to target areas of investigations. More recently, EBSA implemented a series of recommendations from our 2002 enforcement report that helped it strategically manage its enforcement program, including conducting studies to determine the level of and type of noncompliance with ERISA and developing a Human Capital Strategic Management Plan (see table 1). EBSA has reported a substantial increase in results from its enforcement efforts since our last review. For fiscal year 2004, EBSA closed 4,399 civil investigations and reported $3.1 billion in total results, including $2.53 billion in prohibited transactions corrected and plan assets protected, up from $566 million in fiscal year 2002. Likewise, the percentage of civil investigations closed with results rose from 58 percent to 69 percent. Also, applications received for the VFCP increased from 55 in fiscal year 2002 to 474 in 2004. EBSA has been able to achieve such results with relatively small recent increases in staff. Full-time equivalent (FTE) authorized staff levels increased from 850 in fiscal year 2001 to 887 FTEs in fiscal year 2005. The President's budget for fiscal year 2006 requests no additional FTEs. Previously, we and others have reported that ERISA enforcement was hindered by incomplete, inaccurate, and untimely plan data. We recently reported that the lack of timely and complete of Form 5500 data affects EBSA's use of the information for enforcement purposes, such as computer targeting and identifying troubled plans. EBSA uses Form 5500 information as a compliance tool to identify actual and potential violations of ERISA. Although EBSA has access to Form 5500 information sooner than the general public, the agency is affected by the statutory filing deadlines, which can be up to 285 days after plan year end, and long processing times for paper filings submitted to the ERISA Filing Acceptance System. EBSA receives processed Form 5500 information on individual filings on a regular basis once a form is completely processed. However, agency officials told us that as they still have to wait for a sufficiently complete universe of plan filings from any given plan year to be processed in order to begin their compliance targeting programs. As a result, EBSA officials told us that they are currently using plan year 2002 and 2003 Form 5500 information for computer targeting. They also said that in some cases untimely Form 5500 information affects their ability to identify financially troubled plans whose sponsors may be on the verge of going out of business and abandoning their pension plans, because these plans may no longer exist by the time that Labor receives the processed filing or is able to determine that no Form 5500 was filed by those sponsors. The Form 5500 also lacks key information that could better assist EBSA, IRS, and PBGC in monitoring plans and ensuring that they are in compliance with ERISA. EBSA, IRS and PBGC officials said that they have experienced difficulties when relying on Form 5500 information to identify and track all plans across years. Although EBSA has a process in place to identify and track plans filing a Form 5500 from year to year, problems still arise when plans change employer identification numbers (EIN) and/or plan numbers. Identifying plans is further complicated when plan sponsors are acquired, sold, or merged. In these cases, agency officials said that there is an increased possibility of mismatching of EINs, plans, and their identifying information. As result, EBSA officials said they are unable to (1) verify if all required employers are meeting the statutory requirement to file a Form 5500 annually, (2) identity all late filers, and (3) assess and collect penalties from all plans that fail to file or are late. Likewise, PBGC officials said that must spend additional time each year trying to identify and track certain defined benefit plans so that they can conduct compliance and research activities. EBSA officials said they are considering measures to better track and identify plans but have not reached any conclusions. Our recent report makes a number of recommendations aimed at improving the timeliness and content of Form 5500 that will likely assist EBSA's enforcement efforts. In addition to problems with Form 5500 information, concerns remain about the quality of annual audits of plans' financial statements by independent public accountants. For many years, we, as well as the Department of Labor's Office of Inspector General (OIG), have reported that a significant number of these audits have not met ERISA requirements. For example, in 1992 we found that over a third of the 25 plan audits we reviewed had audit weaknesses so serious that their reliability and usefulness were questionable. We recommended that the Congress amend ERISA to require full-scope audits of employee benefit plans and to require plan administrators and independent public accountants to report on how effective an employee benefit plan's internal controls are in protecting plan assets. Although such changes were subsequently proposed, they were not enacted. In 2004, Labor's OIG reported that although EBSA had reviewed a significant number of employee benefit plan audits and made efforts to correct substandard audits, a significant number of substandard audits remain uncorrected. Furthermore, plan auditors performing substandard work generally continue to audit employee benefit plans without being required to improve the quality of the audits. As a result, these audits have not provided participants and beneficiaries the protections envisioned by Congress. Labor's OIG recommended, among other things, that EBSA propose changes to ERISA so that EBSA has greater enforcement authority over employee benefit plan auditors. As we have previously reported, restrictive legal requirements have limited EBSA's ability to assess penalties against fiduciaries or other persons who knowingly participate in a fiduciary breach. Unlike the SEC, which has the authority to impose a penalty without first assessing and then securing monetary damages, EBSA does not have such statutory authority and must assess penalties based on damages or, more specifically, the restoration of plan assets. Under Section 502(l), ERISA provides for a mandatory penalty against (1) a fiduciary who breaches a fiduciary duty under, or commits a violation of, Part 4 of Title I of ERISA or (2) against any other person who knowingly participates in such a breach or violation. This penalty is equal to 20 percent of the "applicable recovery amount," or any settlement agreed upon by the Secretary or ordered by a court to be paid in a judicial proceeding instituted by the Secretary. However, the applicable recovery amount cannot be determined if damages have not been valued. This penalty can be assessed only against fiduciaries or knowing participants in a breach who, by court order or settlement agreement, restore plan assets. Therefore, if (1) there is no settlement agreement or court order or (2) someone other than a fiduciary or knowing participant returns plan assets, the penalty may not be assessed. For example, last year we reported that ERISA presented legal challenges when developing cases related to proxy voting by plan fiduciaries, particularly with regards to valuing monetary damages. As a result, because EBSA has never found a violation that resulted in monetary damages, it has never assessed a penalty or removed a fiduciary because of a proxy voting investigation. Given the restrictive legal requirements that have limited the use of penalties for violations of ERISA's fiduciary requirements, we recommended that Congress consider amending ERISA to give the Secretary of Labor additional authority with respect to assessing monetary penalties against fiduciaries. We also recommended other changes to ERISA to better protect plan participants and increase the transparency of proxy voting practices by plan fiduciaries. Recent events such as the abusive trading practices of late trading and market timing in mutual funds and new revelations of conflicts of interest by pension consultants highlight the need for EBSA to better coordinate enforcement strategies with SEC. Last year we reported that SEC and EBSA had separately taken steps to address abusive trading practices in mutual funds. At the time we issued our report, SEC had taken a number of actions to address the abuses including: charging some fund companies with defrauding investors by not enforcing their stated policies on market timing, fining some institutions hundreds of millions of dollars (some of this money was to be returned to long-term shareholders who lost money due to abusive practices), permanently barring some individuals from future work with investment companies, and proposing new regulations addressing late trading and market timing. Separate from SEC activities, EBSA began investigating possible fiduciary violations at some large investment companies, including those that sponsor mutual funds, and violations by plan fiduciaries. EBSA also issued guidance suggesting that plan fiduciaries review their relationships with mutual funds and other investment companies to ensure they are meeting their responsibilities of acting reasonably, prudently, and solely in the interest of plan participants. Although SEC's proposed regulations on late trading and market timing could have more adversely affected some plan participants than other mutual fund investors, EBSA was not involved in drafting the regulations because it does not regulate mutual funds. In another example of how EBSA and SEC enforcement responsibilities can intersect, SEC recently found that potential conflicts of interest may affect the objectivity of advice pension consultants are providing to their pension plan clients. The report also raised important issues for plan fiduciaries who often rely on the advice of pension consultants in operating their plans. Recently, EBSA and SEC issued tips to help plan fiduciaries evaluate the objectivity of advice and recommendations provided by pension consultants. Americans face numerous challenges to securing their economic security in retirement, including the long-term fiscal challenges facing Social Security; the uncertainty of promised pension benefits; and the potential volatility of the investments held in their defined contributions plans. Given these concerns, it is important that employees' benefits are adequately protected. EBSA is a relatively small agency facing the daunting challenge of protecting over $4 trillion in assets of pension and welfare benefits for millions of Americans. Over the years, EBSA has taken steps to strengthen its enforcement program and leverage its limited resources. These actions have helped better position EBSA to more effectively enforce ERISA. EBSA, however, continues to face a number of significant challenges to its enforcement program. Foremost, despite improvements in the timeliness and content of the Form 5500, information currently collected does not permit EBSA and the other ERISA regulatory agencies to be in the best position to ensure compliance with federal laws and assess the financial condition of private pension plans. Given the ever-changing complexities of employee benefit plans and how rapidly the financial condition of pension plans can deteriorate, it is imperative that policymakers, regulators, plan participants, and others have more timely and accurate Form 5500 information. In addition, there is a legitimate question as to whether information currently collected on the Form 5500 can be used as an effective enforcement tool by EBSA or whether different information might be needed. Without the right information on plans in a timely manner, EBSA will continue to have to rely on participant complaints as a primary source of investigations rather than being able to proactively identify and target problems areas. Second, in some instances, EBSA's enforcement efforts continue to be hindered by ERISA, the very law it is charged with enforcing. For example, because of restrictive legal requirements, EBSA continues to be hindered in assessing penalties against fiduciaries or others who knowingly participate in a fiduciary breach. Congress may want to amend ERISA to address such limits on EBSA's enforcement authority. Finally, the significant changes that have occurred in pension plans, the growing complexity of financial transactions of such plans, and the increasing role of mutual funds and other investment vehicles in retirement savings plans require enhanced coordination of enforcement efforts with SEC. Furthermore, such changes raise the fundamental question of whether Congress should modify the current ERISA enforcement framework. For example, it is important to consider whether the current division of oversight responsibilities across several agencies is the best way to ensure effective enforcement or whether some type of consolidation or reallocation of responsibilities and resources could result in more effective and efficient ERISA enforcement. We look forward to working with Congress on such crucial issues. Mr. Chairman, this concludes my statement. I would be happy to respond to any questions you or other members of the committee may have. For further information, please contact me at (202) 512-7215. Other individuals making key contributions to this testimony included Joseph Applebaum, Kimberley Granger, Raun Lazier, George Scott, and Roger Thomas. 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.

Congress passed the Employee Retirement Income Security Act of 1974 (ERISA) to address public concerns over the mismanagement and abuse of private sector employee benefit plans by some plan sponsors and administrators. The Department of Labor's Employee Benefits Security Administration (EBSA) shares responsibility with the Internal Revenue Service and the Pension Benefit Guaranty Corporation for enforcing ERISA. EBSA works to safeguard the economic interest of more than 150 million people who participate in an estimated 6 million employee benefit plans with assets in excess of $4.4 trillion. EBSA plays a primary role in ensuring that employee benefit plans operate in the interests of plan participants, and the effective management of its enforcement program is pivotal to ensuring the economic security of workers and retirees. Recent scandals involving abuses by pension plan fiduciaries and service providers, as well as trading scandals in mutual funds that affected plan participants and other investors, highlight the importance of ensuring that EBSA has an effective and efficient enforcement program. Accordingly, this testimony focuses on describing EBSA's enforcement strategy, EBSA's efforts to address weaknesses in its enforcement program along with the challenges that remain. EBSA's enforcement strategy is a multifaceted approach of targeted plan investigations. To leverage its enforcement resources, EBSA provides education to plan participants and plan sponsors. EBSA allows its regional offices the flexibility to tailor their investigations to address the unique issues in the regions, within a framework established by EBSA's Office of Enforcement. The regional offices then have a significant degree of autonomy in developing and carrying out investigations using a mixture of approaches and techniques they deem most appropriate. Participant leads are still the major source of investigations. EBSA officials told us that they open about 4,000 investigations into actual and potential violations of ERISA annually. To supplement their investigations, the regions conduct outreach activities to educate both plan participants and sponsors. The purpose of these efforts is to gain participants' help in identifying potential violations and to educate sponsors in properly managing their plans and avoiding violations. Finally, EBSA maintains a Voluntary Fiduciary Correction Program through which plan officials can voluntarily report and correct some violations without penalty. EBSA has taken steps to address many of the recommendations we have made over the years to improve its enforcement program, including assessing the level and types of noncompliance with ERISA, improving sharing of best investigative practices, and developing a human capital strategy to better respond changes in its workforce. EBSA reported a significant increase in enforcement results for fiscal year 2004, including $3.1 billion in total monetary results and closing about 4,400 investigations, with nearly 70 percent of those cases resulting in corrections of ERISA violations. Despite this progress, EBSA continues to face a number of significant challenges to its enforcement program, including (1) the lack of timely and reliable plan information, which is highlighted by the fact that EBSA is currently using plan year 2002 and 2003 plan information for its computer targeting, (2) restrictive statutory requirements that limit its ability to assess certain penalties, and (3) the need to better coordinate enforcement strategies with the Securities and Exchange Commission, which is highlighted by recent scandals involving the trading practices and market timing in mutual funds and conflicts of interest by pension consultants.

The Congress passed the Communications Satellite Act of 1962 to promote the creation of a global satellite communications system. As a result of this legislation, the United States joined with 84 other nations in establishing the International Telecommunications Satellite Organization--more commonly known as INTELSAT--roughly 10 years later. Each member nation designated a single telecommunications company to represent its country in the management and financing of INTELSAT. These companies were called signatories to INTELSAT, and were typically government- owned telecommunications companies, such as France Telecom, that provided satellite communications services as well as other domestic communications services. Unlike any of the other nations that originally formed INTELSAT, the United States designated a private company, Comsat Corporation, to serve as its signatory to INTELSAT. During the 1970s and early 1980s, INTELSAT was the only wholesale provider of certain types of global satellite communications services such as international telephone calls and relay of television signals internationally. By the mid-1980s, however, the United States began encouraging the development of commercial satellite communications systems that would compete with INTELSAT. In 1988, PanAmSat was the first commercial company to begin launching satellites in an effort to develop a global satellite system. Within a decade after PanAmSat first entered the market, INTELSAT faced global satellite competitors. Moreover, intermodal competition emerged during the 1980s and 1990s as fiber optic networks were widely deployed on the ground and underwater to provide international communications services. As competition to INTELSAT grew, there was considerable criticism from commercial satellite companies because they believed that INTELSAT enjoyed advantages stemming from its intergovernmental status that made it difficult for other companies to compete in the market. In particular, these companies noted that INTELSAT enjoyed immunity from legal liability and was often not taxed in the various countries that it served. By the mid-1990s, competitors began to argue that for the satellite marketplace to become fully competitive, INTELSAT would need to be privatized so that it would operate like any other company and no longer enjoy such advantages. At about the same time, INTELSAT recognized that privatization would be best for the company. Decision-makers within INTELSAT noted that the cumbersome nature of the intergovernmental decision-making process left the company unable to rapidly respond to changing market conditions. In 1999, INTELSAT announced its decision to privatize and thus become a private corporation. By the late 1990s, the United States government also decided that it would be in the interests of consumers and businesses in the United States for INTELSAT to privatize. The ORBIT Act, enacted in March 2000, was designed to promote a competitive global satellite communication services market. It did so primarily by calling for INTELSAT to be fully privatized. The ORBIT Act required, for example, that INTELSAT be transformed into a privately held, for-profit corporation with a board of directors that would be largely independent of former INTELSAT signatories. Moreover, the act required that the newly privatized Intelsat retain no privileges or other benefits from governments that had previously owned or controlled it. To ensure that this transformation occurred, the Congress imposed certain restrictions on the granting of licenses that allow Intelsat to provide services within the United States. The Congress coupled the issuance of licenses granted by FCC to INTELSAT's successful privatization under the ORBIT Act. That is, FCC was told to consider compliance with provisions of the ORBIT Act as it made decisions about licensing Intelsat's domestic operations in the United States. Moreover, FCC was empowered to restrict any satellite operator's provision of certain new services from the United States to any country that limited market access exclusively to that satellite operator. Market access for satellite firms to non-U.S. markets was also affected by trade agreements that were negotiated during the 1990s. Specifically, the establishment of the World Trade Organization (WTO) on January 1, 1995, with its numerous binding international trade agreements formalized global efforts to open markets to the trade of services. Since that time, WTO has become the principal international forum for discussion, negotiation, and resolution of trade issues. For example, the first global trade agreement that promotes countries' open and nondiscriminatory market access to services was the General Agreement on Trade in Services (GATS), which provides a legal framework for addressing barriers to international trade and investment in services, and includes specific commitments by member countries to restrict their use of these barriers. Since adoption of a basic telecommunications services protocol by the GATS in 1998, telecommunications trade commitments have also been incorporated into the WTO rules. Such commitments resulted in member countries agreeing to open markets to telecommunications services, such as global satellite communications services. FCC determined that INTELSAT's July 2001 privatization was in accordance with the ORBIT Act's requirements and licensed the new private company to provide services within the United States. FCC's grant of these licenses was conditioned on Intelsat holding an initial public offering (IPO) of securities by October 1, 2001. The Congress and FCC have extended this date three times and the current deadline for the IPO is June 30, 2005. Because Intelsat has not yet completed the IPO, some competing satellite companies have stated that the privatization is not fully complete. Some parties have pointed out that there was a possibility that implementation of the ORBIT Act could have given rise to action arguably inconsistent with commitments that the United States made in international trade agreements. However, we were told that actual implementation avoided such outcomes and no disputes arose. On July 18, 2001, INTELSAT transferred virtually all of its financial assets and liabilities to a private company called Intelsat, Ltd., a holding company incorporated in Bermuda. Intelsat, Ltd. has several subsidiaries, including a U.S.-incorporated indirect subsidiary called Intelsat, LLC. Upon their execution of privatization, INTELSAT signatories received shares of Intelsat, Ltd. in proportion to their investment in the intergovernmental INTELSAT. Two months before the privatization, FCC determined that INTELSAT's privatization plan was consistent with the requirements of the ORBIT Act for a variety of reasons, including the following. Intelsat, Ltd.'s Shareholders' Agreement provided sufficient evidence that the company would conduct an IPO, which would in part satisfy the act's requirement that Intelsat be an independent commercial entity. Intelsat, Ltd. no longer enjoyed the legal privileges or immunities of the intergovernmental INTELSAT, since it was organized under Bermuda law and subject to that country's tax and legal liability requirements. Both Intelsat, Ltd. and Intelsat, LLC are incorporated in countries that are signatories to the WTO and have laws that secure competition in telecommunications services. Intelsat, Ltd. converted into a stock corporation with a fiduciary board of directors. In particular, FCC said that the boards of directors of both Intelsat, Ltd. and Intelsat, LLC were subject to the laws of Bermuda and the United States, respectively, and that the laws of these countries require boards of directors to have fiduciary obligations to the company. Measures taken to ensure that a majority of the members of Intelsat, Ltd.'s board of directors were not directors, employees, officers, managers, or representatives of any signatory or former signatory of the intergovernmental INTELSAT were consistent with the requirements of the ORBIT Act. Intelsat, Ltd. and its subsidiaries had only arms-length business relationships with certain other entities that obtained INTELSAT's assets. In light of these findings, FCC conditionally authorized Intelsat, LLC to use its U.S. satellite licenses to provide services within the United States. However, FCC conditioned this authorization on Intelsat, Ltd.'s conducting an IPO of securities as mandated by the ORBIT Act. In December 2003, FCC noted that if Intelsat, Ltd. did not conduct an IPO by the statutory deadline, the agency would limit or deny Intelsat, LLC's applications or requests and revoke the previous authorizations granting Intelsat, LLC the authority to provide satellite services in the United States. In March 2004, Intelsat, Ltd. filed a registration statement with the Securities and Exchange Commission (SEC) indicating its intention to conduct an IPO. Since that time, however, the Congress further extended the required date by which the IPO must occur. In May 2004, the Congress extended the IPO deadline to June 30, 2005, and authorized FCC to further extend that deadline to December 31, 2005, under certain conditions. In late May 2004, Intelsat withdrew its filing with SEC regarding its registration to conduct an IPO. On August 16, 2004, Intelsat, Ltd. announced that its Board of Directors approved the sale of the company to a consortium of four private investors; the sale requires the approval of shareholders holding 60 percent of Intelsat's outstanding shares and also regulatory approval. According to an Intelsat official, this transaction, if approved, would eliminate former signatories' ownership in Intelsat. Most companies and experts that we interviewed believe that, to date, Intelsat's privatization has been in accordance with the ORBIT Act's requirements, and some of these companies and experts that we interviewed believe that FCC is fulfilling its duties to ensure that the privatization is consistent with the act. These parties noted that the ORBIT Act set forth many requirements for Intelsat and that most of these requirements have been fulfilled. However, some companies and experts believe that the IPO is a key element to complete Intelsat's privatization. According to some parties, the IPO would further dilute signatory ownership in Intelsat, Ltd. as envisioned by the ORBIT Act, which would reduce any incentive that former signatories might have to favor Intelsat when selecting a company to provide satellite services. Table 1 compares Intelsat, Ltd.'s ownership on the day of privatization in 2001 with the ownership as of May 6, 2004. As indicated in the table, in May 2004, more than 50 percent of Intelsat, Ltd. was owned by the former signatories to the intergovernmental INTELSAT; although, as mentioned above, the recently announced purchase of Intelsat by four private investors, if approved, would eliminate former signatory ownership in Intelsat, according to an Intelsat official. We were told that there were potential inconsistencies between the ORBIT Act and obligations the United States made in international trade agreements. In particular, the ORBIT Act set requirements for INTELSAT's privatization that, if not met, could have triggered FCC's denial of licenses that would allow a successor private company to INTELSAT to provide services in the United States once that company was incorporated under foreign law. Some stakeholders told us that, had this occurred, FCC's actions could have been viewed as inconsistent with U.S. obligations in international trade agreements. In fact, on August 1, 2000, following the enactment of the ORBIT Act, the European Commission (EC) stated that the ORBIT Act raised a general concern regarding its compatibility with the U.S. obligations in the WTO. The EC further emphasized that if the act was going to be used against European Union (EU) interests, the EU would consider exercising its rights to file a trade dispute under the WTO. While we were told that potential inconsistencies could have arisen, INTELSAT privatized according to the ORBIT Act removing any need for FCC to act in a manner that might be inconsistent with U.S. international trade obligations, and no trade disputes arose. Most stakeholders we spoke with generally stated that the ORBIT Act's requirements have not conflicted with international trade agreements during the privatizations of INTELSAT. Officials from FCC, USTR, the Department of State, as well as satellite company representatives and experts on telecommunications issues, told us that INTELSAT privatized according to the act's requirements. Several stakeholders emphasized that trade disputes had not arisen because INTELSAT privatized in accordance with the ORBIT Act. As of June 2004, WTO and USTR documentation showed that no trade complaints had been filed at the WTO about the ORBIT Act and INTELSAT's privatization. Finally, several stakeholders noted that the act had the effect of complementing international trade agreements by seeking to further open and liberalize trade in international satellite communications services. According to most stakeholders and experts we spoke with, access to non- U.S. satellite markets has generally improved during the past decade. In particular, global satellite companies appear less likely now than they were in the past to encounter government restraints or business practices that limit their ability to provide service in non-U.S. markets. All five satellite companies that we spoke with indicated that access to non-U.S. satellite markets has generally improved. Additionally, four experts that we spoke with also told us that market access has generally improved. Most stakeholders that we spoke with attributed the improved access in non-U.S. satellite markets to the WTO and global trade agreements and the trend towards privatization in the global telecommunications industry, rather than to the ORBIT Act. Five satellite companies and four of the experts that we spoke with said that agreements negotiated through the WTO, such as the basic telecommunications commitments, helped improve access in non-U.S. satellite markets. Additionally, two of the satellite companies and one expert told us that the trend towards privatization in the telecommunications industry--such as governments privatizing state- controlled telephone companies--has helped improve market access. At the same time, many stakeholders noted that the ORBIT Act had little to no impact on improving market access. According to several stakeholders, market access was already improving when the ORBIT Act was passed. While some of those we spoke with noted that the ORBIT Act might have complemented the ongoing trends in improved market access, only one satellite company we interviewed stated that the act itself improved market access. This company noted that, by breaking the ownership link between state-owned or monopoly telecommunications companies and Intelsat, the ORBIT Act encouraged non-U.S. telecommunications companies to consider procuring services from competitive satellite companies. Some satellite companies have stated that some market access problems still exist, which they attribute to foreign government policies that limit or slow entry. Some of the companies and experts we spoke with attribute any continuing preference that governments and foreign telecommunications companies may have for doing business with Intelsat to the long-standing business relationships that were forged over a period of time. While some satellite companies believe that FCC should be taking a more proactive approach toward addressing any remaining market access problems in non-U.S. markets, FCC has stated that concerns about these issues provided to them have not been specific enough to warrant an FCC proceeding. Additionally, FCC has stated that many concerns about market access issues would be most appropriately filed with USTR. USTR has received no complaints about access problems by satellite companies in non-U.S. markets in either their annual review of compliance with telecommunications trade agreements, or in comments solicited in the context of ongoing WTO services negotiations. Despite the general view that market access has improved, some satellite companies and experts expressed concerns that market access issues still exist. These companies and experts generally attributed any remaining market access problems to foreign government policies that limit or slow satellite competitors' access to certain markets. For example: Some companies and experts we spoke with said that some countries have policies that favor domestic satellite providers over other satellite systems and that this can make it difficult for nondomestic companies to provide services in these countries. For example, we were told that some countries require satellite contracts to go first to any domestic satellite providers that can provide the service before other providers are considered. Some companies and one expert we spoke with said that because some countries carefully control and monitor the content that is provided within their borders, the countries' policies may limit certain satellite companies' access to their markets. Several companies and an expert we interviewed said that many countries have time-consuming or costly approval processes for satellite companies. In particular, we were told that some countries have bureaucratic processes for licensing and other necessary business activities that make it time-consuming and costly for satellite companies to gain access to these markets. Some stakeholders believe that Intelsat may benefit from legacy business relationships. For approximately 30 years, INTELSAT was the dominant provider of global satellite services. Moreover, until 2001, INTELSAT was an intergovernmental organization, funded and controlled through signatories--often state-controlled telecommunications companies--of the member governments. Several stakeholders noted that Intelsat may benefit from the long-term business relationships that were forged over the decades, since telecommunications companies in many countries will feel comfortable continuing to do business with Intelsat as they have for years. Additionally, two of the satellite companies noted that because some of these companies have been investors in the privatized Intelsat, there may be an incentive to favor Intelsat over other satellite competitors. One global satellite company told us that Intelsat's market access advantages continue because of inertia--inertia that will only dissipate with time. Two stakeholders also noted that because companies--including domestic telecommunications providers as well as direct customers of satellite services--have plant and equipment as well as proprietary satellite technology in place to receive satellite services from Intelsat, it might cost a significant amount of money for companies to replace equipment in order to use satellite services from a different satellite provider. These legacy advantages can make it more difficult for satellite companies to convince telecommunications companies to switch from Intelsat's service to their service. However, some other companies have a different view on whether Intelsat has any preferential or exclusive market access advantages. Representatives of Intelsat, Ltd. told us that Intelsat seeks market access on a transparent and nondiscriminatory basis and that Intelsat has participated with other satellite operators, through various trade organizations, to lobby governments to open their markets. Representatives of Intelsat, Ltd. also told us that former signatories of Intelsat own such small percentages of Intelsat, Ltd. that such ownership interests would not likely influence market access decisions in countries in which the government still controls the former signatory. Some companies and many of the experts that we interviewed told us that, in their view, Intelsat does not have preferential access to non-U.S. satellite markets. Further, all five satellite companies as well as several experts that we spoke with said that they have no knowledge that Intelsat in any way seeks or accepts exclusive market access arrangements or attempts to block competitors' access to non-U.S. satellite markets. While Intelsat is the sole provider of satellite service into certain countries, we were generally told that traffic into some countries is "thin"--that is, there is not much traffic, and therefore there is little revenue potential. In such cases, global satellite companies other than Intelsat may not be interested in providing service to these countries. Thus, the lack of competition in some non-U.S. satellite markets does not necessarily indicate the presence of barriers to market access for competitive satellite companies. Some of the companies we spoke with believe that FCC should take a more proactive role in improving access for satellite companies in non-U.S. markets. In particular, some satellite companies and an expert we spoke with indicated that FCC has not done enough to appropriately implement the ORBIT Act because, in their view, the ORBIT Act shifted the burden to FCC to investigate and prevent access issues, rather than solely to adjudicate concerns brought before it. One satellite company said that section 648 of the ORBIT Act, which prohibits any satellite operator from acquiring or enjoying an exclusive arrangement for service to or from the United States, provides a vehicle for FCC to investigate the status of access for satellite companies to other countries' markets. If FCC were to find a violation of section 648, it would have the authority to withdraw or modify the relevant company's licenses to provide services within the U.S. market. Another satellite company told us that FCC should conduct an ORBIT Act inquiry under the privatization sections of the act to address any market access issues that might arise if Intelsat has preferential market access related to any remaining advantages from its previous intergovernmental status. Certain other companies, experts, and FCC told us that nothing to date has occurred that would require additional FCC actions regarding the implementation of the ORBIT Act. FCC officials told us that they do not believe that FCC should undertake investigations of market access concerns without specific evidence of violations of section 648 of the ORBIT Act. While some comments filed with FCC in proceedings on Intelsat's licensing and for FCC's annual report on the ORBIT Act raise concerns about market access, FCC has stated that these filings amount only to general allegations and fall short of alleging any specific statutory violation that would form a basis sufficient to trigger an FCC enforcement action. Some companies and experts that we spoke with agreed that no evidence of a market access problem has been put forth that would warrant an FCC investigation under the ORBIT Act. Even the satellite companies that complained to FCC in the context of Intelsat's licensing proceedings told us that they had not made any formal complaints of ORBIT Act violations or asked FCC to initiate a proceeding on the matter. Additionally, FCC told us that broad market access concerns are most appropriately handled by USTR through the WTO. USTR has received no complaints about access problems by satellite companies in non-U.S. markets in either their annual review of compliance with telecommunications trade agreements, or in comments solicited in the context of ongoing WTO services negotiations. We provided a draft of this report to the Federal Communications Commission (FCC), the Department of State, the National Telecommunications and Information Administration (NTIA) of the Department of Commerce, and the United States Trade Representative (USTR) for their review and comment. FCC did not provide comments. USTR and the Department of State provided technical comments that were incorporated into the report. NTIA also provided technical comments that were incorporated into the report as appropriate and also sent formal comments in a letter, which appears in appendix II. In its formal comments, NTIA stated that they generally agree with the findings of our report and remain interested in developments regarding Intelsat's further plans to pursue a private equity buyout. We also invited representatives from five companies to review and comment on a draft of this report. These companies included: Intelsat, Ltd.; Lockheed Martin Corporation; PanAmSat Corporation; SES Americom Inc.; and New Skies Satellites N.V. New Skies and PanAmSat did not provide comments on the draft report. Both Lockheed Martin and Intelsat provided technical comments that we incorporated as appropriate. SES Americom provided both technical comments--which we addressed as appropriate-- and substantive comments that expressed concerns about our characterization of some of the issues discussed in this report. The comments from SES Americom and our response are contained in appendix I. As agreed with your offices, unless you publicly release its contents earlier, we plan no further distribution of this report until 15 days after the date of this letter. At that time, we will provide copies to interested congressional committees; the Chairman, FCC; and other interested parties. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512-2834 or [email protected] or Amy Abramowitz at (202) 512-2834. Major contributors to this report include Amy Abramowitz, Michael Clements, Emil Friberg, Bert Japikse, Logan Kleier, Richard Seldin, and Juan Tapia-Videla. SES Americom Inc. provided several comments on the draft report. While several were minor technical comments, which we incorporated as appropriate, some of the comments were of a more substantive nature. This appendix provides a summary of the substantive comments and GAO's response to those comments. SES Americom stated that while GAO notes that several companies have stated that Intelsat's privatization is not complete until the IPO occurs, GAO fails to note that FCC's International Bureau has also stated this to be the case. GAO response: Our discussion of FCC's authorization of licenses for Intelsat to operate in the U.S. makes clear that FCC provided these licenses on a conditional basis because the required IPO had yet to occur. SES Americom states that GAO's discussion of possible preferences countries and businesses may have for doing business with Intelsat does not fully explain why this may occur. While SES notes that GAO correctly attributes possible preferences to long term business relationships companies/countries may have with Intelsat, SES Americom believes that GAO should mention that possible preferences also arise because Intelsat's customers have equipment suitable solely for use with Intelsat satellites. GAO response: Regarding customer equipment, we mention that companies have plant and equipment in place to receive service from Intelsat that might cost a significant amount of money to replace, which we believe adequately addresses this point. SES Americom states that GAO should preface our discussion of the required IPO with the word "equity". GAO response: The ORBIT Act's requirement for an IPO does not specifically state "equity IPO," but states that Intelsat must hold an "IPO of securities." Nevertheless, in the context of Inmarsat's required IPO, which is also required under the ORBIT Act, FCC is currently reviewing this very issue--that is, whether the IPO must be an offering of equity securities. Thus, FCC's decision will determine how this will be interpreted. The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through GAO's Web site (www.gao.gov). 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In 2000, the Congress passed the Open-market Reorganization for the Betterment of International Telecommunications Act (ORBIT Act) to help promote a more competitive global satellite services market. The ORBIT Act called for the full privatization of INTELSAT, a former intergovernmental organization that provided international satellite services. GAO agreed to provide federal officials' and stakeholders' views on (1) whether the privatization steps required by the ORBIT Act have been implemented and whether there were potential inconsistencies between ORBIT Act requirements and U.S. obligations made in international trade agreements; (2) whether access by global satellite companies to non-U.S. markets has improved since the enactment of the ORBIT Act and, if so, to what is this generally attributed; and (3) if any market access problems remain, what role does the Federal Communications Commission (FCC) have in addressing those problems under the ORBIT Act. Most of INTELSAT's privatization steps have taken place and a variety of stakeholders told us that implementation of the ORBIT Act was not inconsistent with the commitments that the United States made in international trade agreements. In July 2001, INTELSAT transferred its satellite and financial assets to a private company. FCC determined that this and other actions satisfied the ORBIT Act requirements for INTELSAT's privatization but noted that the company must hold an initial public offering (IPO) of securities by a required date. The current deadline for the IPO is June 30, 2005. Because Intelsat has not completed the IPO, some satellite companies assert that privatization is not fully complete. Some parties have pointed out that there was a possibility that implementation of the ORBIT Act could have given rise to action arguably inconsistent with commitments that the United States made in international trade agreements. However, we were told that actual implementation avoided such outcomes and no disputes arose. Most stakeholders and experts that GAO spoke with believe that access to non-U.S. satellite markets has improved, but few attribute this improvement to the ORBIT Act. These stakeholders and experts said that global trade agreements, such as the WTO's basic telecommunications commitments, and the global trend towards privatization of telecommunications companies have improved access in non-U.S. markets. Several stakeholders and experts told GAO that improvements in market access were already underway when the Congress passed the ORBIT Act and that the act has complemented ongoing trends towards more open satellite markets. Some satellite companies report continuing market access problems, but there are disagreements regarding whether FCC should investigate and resolve these problems. Some satellite companies that GAO spoke with report problems with access to non-U.S. satellite markets, which they attribute to countries with policies that favor domestic and regional satellite companies, countries exercising control over content, bureaucratic processes in various countries, and long-term business relationships between INTELSAT and various telecommunications companies. Most companies GAO spoke with report that Intelsat does not take active steps to acquire preferential or exclusive market access, and Intelsat itself stated that it does not seek nor, if offered, would accept preferential market access. Finally, some companies suggest that FCC should take a more proactive role in investigating market access problems, rather than assuming an adjudicative role. FCC said that evidence provided to the agency has not been sufficient to warrant action and also suggested that trade disputes are more appropriately addressed by the United States Trade Representative.

Prepositioned equipment and supplies are strategic assets, along with sealift and airlift, for projecting military power. These assets include combat equipment, spare parts, and sustainment supplies that are stored on ships and on land in locations around the world to enable the rapid fielding of combat-ready forces. (App. I provides an overview of the military services' prepositioned assets and their locations.) DOD has made significant investments in its military prepositioning programs, totaling several billion dollars in annual acquisition costs. In addition, the services have collectively used an average of over $1 billion each year to operate and maintain these assets. For example, in fiscal year 2005, the Army spent $386.1 million for storage and maintenance of prepositioned assets, including $76.5 million for assets in South Korea and $38.3 million for assets in Southwest Asia. Prepositioned assets have been used extensively to support operations in Iraq and Afghanistan. The Marine Corps used equipment from two of its three prepositioned squadrons to support these operations. The Army used nearly all of its prepositioned ship stocks and land-based stocks in Kuwait and Qatar, in addition to drawing some equipment from Europe. Military equipment and infrastructure are often located in corrosive environments that increase the deterioration of assets and shorten their useful life. The extensive and long-term deployments of U.S. troops in Southwest Asia are likely to magnify the effects of corrosion on military equipment, including prepositioned assets, because of the region's harsh operating environment. Higher rates of corrosion result in increased repairs and replacements, drive up costs, and take critical systems out of action, reducing mission readiness. Corrosion can also reduce the safety of equipment items. Although reliable cost data are not available, estimates of corrosion costs DOD-wide have ranged from $10 billion to $20 billion annually. We have found in our prior work that DOD and the military services did not have an effective management approach to mitigate and prevent corrosion. We recommended that DOD develop a departmentwide strategic plan with clearly defined goals, measurable outcome-oriented objectives, and performance measures. DOD concurred and in December 2003 issued its corrosion strategy. According to DOD's corrosion strategy, knowing the costs of corrosion is essential to adequately implementing the strategy, and having corrosion data helps the department learn what works so it can be more effective in reducing corrosion. In addition, the Defense Science Board in 2004 stated that "accurate and objective corrosion data collection and new incentives to reward life-cycle cost reduction efforts must be implemented" as part of an effective corrosion control program and that such data are critical "not only to understand the depth of the problem, but to enable a quantitative corrosion mitigation strategy, which is founded on fact." The Army and Marine Corps have taken some measures to reduce the impact of corrosion on prepositioned assets, but the Army could increase its use of storage facilities for land-based assets. Prepositioned equipment drawn by Army and Marine Corps units for military operations in Iraq during 2003 had mostly been stored in humidity-controlled facilities and was reported to be in good operating condition and was not degraded by corrosion. The primary measure taken to reduce corrosion and achieve this good operating condition was the use of humidity-controlled storage facilities. However, we identified several locations where the Army is currently storing a substantial portion of its prepositioned equipment outdoors. Temporary shelters may be a feasible option to address immediate storage needs. When prepositioned equipment was drawn by Army and Marine Corps units in military operations in Iraq during 2003, it was reported to be in good working condition and was not degraded by corrosion. Army officials from the 3rd Infantry Division have stated that with the exception of rubber seals on some vehicles, prepositioned equipment entering Southwest Asia was in good shape and had minimal, if any, corrosion. These officials said they did not experience any corrosion that affected their ability to perform operations. Similarly, officials with the 1st and 2nd Marine Expeditionary Forces who used or observed the use of prepositioned equipment in Southwest Asia found it was in a high state of readiness and could not recall any instance where corrosion affected their ability to perform operations. Furthermore, officials with the 3rd Marine Expeditionary Force said the equipment on the prepositioning ship USNS Lummus that was used in a 2004 training exercise in South Korea was generally in the same good operating condition it was when first uploaded about 2 years previously. These officials stated that subsequent maintenance in August 2005 confirmed that the equipment continued to be in good operating condition based on a detailed examination of about 200 pieces of this equipment. They told us that with the exception of minor hydraulic leaks and o-ring deterioration, the equipment was generally free of corrosion problems. The primary measure to reduce corrosion of Army and Marine Corps prepositioned assets has been the use of humidity-controlled storage facilities. Most of the prepositioned equipment drawn for military operations in Iraq during 2003 had been stored, either afloat or on land, in such facilities. Under Army policy, the preferred method for storing prepositioned assets is in humidity-controlled facilities because such storage is considered highly effective in preserving equipment. Maintaining low humidity levels reduces corrosion because moisture is a primary cause of corrosion. Similarly, Marine Corps policies indicate that equipment should be sheltered in climate-controlled facilities to the greatest extent possible. Army and Marine Corps officials told us that the use of humidity-controlled facilities is effective at minimizing equipment corrosion and maintaining high readiness levels. Army equipment on prepositioning ships is stored below deck in humidity-controlled cargo space. In addition, the Army stores some of its land-based prepositioned equipment in humidity-controlled warehouses. Marine Corps prepositioned assets are stored in humidity-controlled facilities either on ships or in caves in Norway. Humidity levels, particularly on ships, are required under Army and Marine Corps guidelines to stay within a specific range on a continuous basis and are closely monitored. In addition to humidity-controlled storage, the Army and Marine Corps have taken other measures intended to help reduce the impact of corrosion on prepositioned assets. Army and Marine Corps policies require that repaired equipment be restored to good condition before being placed in prepositioned status. Specifically, Army maintenance regulations require prepositioned equipment to be maintained at "10/20" standards, the highest standard the Army has for equipment maintenance. Army maintenance regulations also provide for the use of lubricants and preservatives, as well as regular inspections. Marine Corps policy indicates that all equipment generally will be in "Code A" condition at the time it is placed in storage. Code A means the equipment is serviceable without any limitation or restriction. Marine Corps officials told us equipment meeting this standard would have little to no corrosion. Marine Corps maintenance guidance for prepositioned equipment consists of a variety of corrosion prevention and mitigation measures, including visual inspections for leaks, corrosion removal and recoating, and preservation. For equipment stored on the prepositioned ships, inspections are conducted on a periodic basis. Both Army and Marine Corps officials said corrosion is routinely treated as part of the maintenance process for restoring equipment to meet standards. We identified several locations where the Army is storing a significant amount of land-based prepositioned assets outdoors without adequate sheltering. Specifically, we found equipment being stored outdoors at Camp Carroll, South Korea; Camp Arifjan, Kuwait; and Goose Creek, South Carolina. At these locations, assets are left relatively unprotected from moisture, sand, and other elements that contribute to corrosion. Army officials noted that unprotected equipment corrodes faster and will more quickly fall below required maintenance condition standards. At Camp Carroll in South Korea, about 30 percent of the Army's Heavy Brigade Combat Team equipment--mostly sustainment stock--is stored outdoors in an often damp and humid region. The remaining equipment is stored in humidity-controlled facilities. Army officials told us that the equipment had been poorly maintained and, as a result, experienced many significant defects and readiness shortfalls, with corrosion being one of the primary problems. These officials said some of the equipment corroded faster and more severely because of being stored outside and, as a result, the Army incurred additional maintenance costs. Army officials in South Korea noted that it costs more to maintain equipment that is stored outside in part because the equipment needs to be inspected three times more often than equipment in humidity-controlled storage. Large amounts of Army prepositioned equipment are also stored outside in Kuwait where, according to DOD and Army officials, the environment is highly corrosive because of the humid climate, sand with high salinity levels, and strong winds. As of April 2006, the Army was storing outside nearly all of its prepositioned assets (numbering about 11,000 items) in Southwest Asia. At the Army's prepositioning afloat facility in Goose Creek, South Carolina, equipment is stored outside during the time it is not undergoing maintenance because of a lack of storage facilities. The amount of time equipment is stored outside ranges, on average, from 1 month to more than 3 months. In some cases, equipment is stored outside well over 3 months. For example, 44 M1A1 tanks and 10 fuel tankers sat outdoors for more than a year after undergoing maintenance and experienced a total of $1.2 million in corrosion-related damage. Army officials said that prolonged periods of outdoor storage as happened in this case rarely occur, but that some period of outdoor storage is expected for equipment waiting upload. Army officials acknowledged having an immediate need for additional sheltering, preferably with humidity control capability, for prepositioned equipment located in South Korea, Kuwait, and South Carolina. However, under current construction plans, additional storage facilities will not be available at all three sites until 2012 at the earliest. In South Korea and Kuwait, Army officials said that even with the additional planned storage facilities, substantial amounts of equipment will still be stored outdoors. For example, officials estimated about 20 percent of equipment in Kuwait will remain outside. Officials cited competing funding priorities as the primary reason for not providing indoor storage for all land-based prepositioned assets. Army officials also cited uncertainties regarding the number and type of equipment and length of time it is stored, which make it difficult to accurately define storage requirements and justify funding for construction of additional storage facilities. In South Korea, Army officials told us the lack of available land limits their ability to construct new, or expand existing, facilities. These officials also said that estimating storage needs is difficult because of uncertainties regarding the consolidation and reconfiguration of U.S. Forces Korea facilities related to future force restructuring. Army prepositioning afloat officials said that the Goose Creek facility primarily is a maintenance facility and is not meant for the storage of equipment, which makes it difficult to justify the building of new storage space. Although building additional storage will require Army investment, the use of humidity-controlled storage in general has been shown to provide a substantial return on investment. According to a study by the Army Cost and Economic Analysis Center, sheltering Army National Guard equipment in a humidity-controlled facility had a potential return on investment of a minimum of $8 for every $1 invested. The Army National Guard also estimates that it will have achieved a total of over $1.2 billion in cost savings by fiscal year 2010. Most of the projected savings is based on having to perform less maintenance on equipment that is being preserved better in humidity-controlled facilities. The humidity-controlled sheltering program includes combat vehicles, trailers, radar systems, and other equipment located at Guard facilities in 45 states and U.S. territories. According to Army storage and maintenance guidelines, storage of equipment in facilities without humidity control--particularly in open storage without protection--not only invites greater and more rapid deterioration because of corrosion but requires increased surveillance, inspections, and maintenance. For example, whereas combat vehicles in humidity-controlled facilities need to be exercised and road tested every 30 months, vehicles stored without humidity control require exercising every 12 months. One of the benefits of humidity control is avoiding or at least minimizing these increased maintenance requirements. Given the competing funding priorities and other constraints cited by Army officials in providing additional storage facilities for prepositioned equipment, temporary shelters may be a feasible option to address immediate storage needs. Temporary shelters are available in a range of sizes, materials, and features, including humidity control. For example, "K-SPAN" temporary shelters are steel structures constructed on-site and set over a concrete foundation. These shelters may be dismantled, packaged, and relocated. Army officials told us that temporary shelters are used primarily in situations where immediate storage is required but may be durable enough to last for several years. Furthermore, they can be acquired faster than permanent facilities, which may take several years to plan, fund, and build. The military services have made prior use of temporary shelters in several locations, for both prepositioned and non- prepositioned equipment. For example, the Marine Corps uses temporary humidity-controlled facilities in Florida to store some of its prepositioned assets awaiting maintenance and upload to ships. In addition, the Army has stored prepositioned equipment in temporary shelters located in Livorno, Italy, and Camp Carroll, South Korea. The Marine Corps has also used temporary shelters to store non-prepositioned equipment in Hawaii. The lack of available corrosion data impairs the ability of the Army and Marine Corps to achieve long-term costs savings through corrosion prevention and mitigation efforts. The Army and Marine Corps consider collection of corrosion data on prepositioned assets to be a low priority and, consequently, do not systematically collect them. These data could be used to support additional prevention and mitigation efforts that achieve long-term cost savings, similar to the Army's previous success using corrosion data regarding non-prepositioning programs. Corrosion-related data that could enhance efforts to prevent and mitigate corrosion of prepositioned assets is unavailable because the Army and Marine Corps consider collection of this information to be a low priority and, consequently, do not systematically collect it. Army regulations require units to collect corrosion-related data as part of their equipment maintenance and storage programs, while the Marine Corps generally lacks requirements for collection of corrosion-related data. For example, the Army's Corrosion Prevention and Control Program regulation includes a requirement for a corrosion-related survey of all divisions and separate combat brigades to be conducted at least every 4 years. In addition, Army policy on reporting equipment quality deficiencies includes a requirement to report problems that are corrosion related. The Marine Corps, on the other hand, does not require the collection of corrosion information for all equipment, but believes it to be beneficial. The mission of the Marine Corps' Corrosion Prevention and Control Program is to reduce maintenance requirements and costs associated with corrosion, and the program seeks to identify and assess current and projected corrosion problems for all tactical ground and ground support equipment. Marine Corps officials said that the desire for the collection of corrosion information applies to all Marine Corps activities, including prepositioning programs, but acknowledge that data are not collected on prepositioned assets because they have a low priority. Corrosion data could be used to help identify underlying causes of maintenance problems and obtain a better understanding of the costs of corrosion and the extent it affects readiness. Despite Army corrosion data collection requirements and the establishment of corrosion prevention and control programs in the Army and Marine Corps, we found that information about corrosion of prepositioned assets is generally lacking in both services. We reviewed a wide range of reports and other documentation on Army and Marine Corps prepositioned equipment and found these to be almost devoid of corrosion-related data. For example, we examined information on the maintenance condition and repair actions for prepositioned equipment from the Army Maintenance Management System, but this system did not contain information regarding the extent and nature of equipment corrosion. Likewise, the cost data on prepositioned equipment contained in the Marine Corps' Standard Accounting, Budgeting and Reporting System, which contains total maintenance and repair costs for all prepositioned equipment, also did not include information specifically on corrosion costs. We also asked the Army and Marine Corps for information regarding the impact of corrosion on maintenance costs, equipment deficiencies, inventory levels, and readiness rates. In almost every instance, this corrosion information was not available. As we have previously reported, DOD and the military services generally have a limited amount of corrosion data related to cost estimates, readiness, and safety data. According to Army and Marine Corps officials, corrosion information on prepositioned assets is unavailable primarily because it has low priority. Although Army guidance for documenting equipment maintenance includes detailed instructions for reporting corrosion issues, Army officials said most of those responsible for documenting the maintenance action do not want to take the extra time to include corrosion information because they see it as having minimal value and have no incentive to collect it. Similarly, Marine Corps officials stated that there is minimal incentive to capture and report corrosion costs for prepositioned equipment because maintenance costs are typically managed at more general levels, such as the costs to repair or replace a piece of equipment. Officials from both the Army and the Marine Corps said that corrosion is routinely treated as part of the overall maintenance process, and corrosion-related data are not tracked separately. For example, Army officials at Camp Carroll, South Korea, told us that corrosion observed on the engine blocks in 5-ton trucks would be repaired during maintenance performed on the entire engine and would not be noted in the maintenance logs. Instead, documentation of the maintenance actions would include a description of the equipment or component and why it was not functional--such as being broken or cracked--but would not include the reason for the repair, such as corrosion. According to Marine Corps officials, corrosion information has value but not enough to be included with more critical information, such as the amount of equipment in the inventory and amount in serviceable condition. Although the Army and Marine Corps are not collecting data about the current costs to prevent and mitigate corrosion of prepositioned assets, the military services have estimated that at least 25 percent of overall maintenance costs are corrosion related and that as much as one-third of these costs could be reduced through more effective corrosion prevention and mitigation. Army and Marine Corps officials told us that this estimate applies to both prepositioned and non-prepositioned assets because corrosion affects both types of equipment in similar ways. Because of the lack of available cost data, the Army, at our request, conducted a limited review of maintenance records for about 2,000 pieces of prepositioned stock in South Korea. The Army determined that about $8.7 million (31 percent) of the estimated $28 million spent to restore this equipment to serviceable condition was used to address corrosion-related problems. As another indication of corrosion costs, Marine Corps officials estimated that corrosion costs make up at least 50 percent of the $110,000 needed, on average, to repair motorized lighterage prepositioned equipment. The additional information that would be obtained through the collection of corrosion data could support the Army's and Marine Corps' efforts to more effectively prevent and mitigate corrosion and achieve long-term cost savings, which could be significant given the resources the military services devote each year to addressing corrosion-related problems. Corrosion prevention measures may reduce the amount of maintenance needed, thereby extending the availability of equipment items over their life cycle. The Army has had previous success using corrosion data regarding non-prepositioning programs to support corrosion prevention and mitigation efforts that achieved long-term cost savings. For example, the Army National Guard began the initial phase of a humidity-controlled storage program for its vehicles and equipment in 1994. Guard officials told us that they collected and analyzed an extensive amount of information on corrosion and its cost impacts on selected pieces of equipment and estimated that a significant amount of corrosion-related costs could be avoided by using humidity-controlled storage facilities. Program officials currently estimate that the sheltering and preservation effort will save a total of about $1.2 billion through fiscal year 2010, which reflects a 9 to 1 return on investment. Army officials cited similar results after collecting corrosion data on Hellfire missile launchers. The types and areas of the launchers that were most prone to corrosion--such as missile safety/arming switches--were identified and documented. Based on this research, maintenance technicians knew better to look for corrosion and how to control it before it worsened. The Army Missile Command's tactical missile program executive office attributed a large portion of its $3.2 billion overall long-term life cycle savings to the Hellfire corrosion prevention measures. Collection of corrosion data for prepositioned equipment could better enable the Army and Marine Corps to support similar corrosion prevention and mitigation efforts in their prepositioning programs. Effectively addressing corrosion on prepositioned stocks of equipment can enable the services to achieve significant cost savings and increase readiness and safety for rapidly fielding combat-ready forces around the world. Although the Army and Marine Corps have taken measures to reduce the impact of corrosion on prepositioned assets, there are immediate opportunities for taking additional action. Sheltering assets-- especially sheltering in humidity-controlled facilities--has been shown to be a key anticorrosion practice, yet large amounts of Army land-based prepositioned assets are stored outdoors without adequate sheltering. This practice is wasteful given the large investment in acquiring the equipment and the annual costs of maintaining it. Furthermore, while the Army and Marine Corps do not collect corrosion data for prepositioned equipment, the collection of such data could provide additional information to identify the underlying causes of maintenance problems and develop solutions to address these problems. Without such data, the services may lack the incentive to support efforts to more effectively prevent and mitigate corrosion and achieve long-term cost savings. Until the Army and Marine Corps take additional actions to prevent corrosion, such as implementing use of temporary shelters to the greatest extent feasible and collecting corrosion-related data, prepositioned equipment stored outdoors will continue to corrode at an accelerated pace and the services will continue to incur unnecessary costs for maintaining equipment and repairing corrosion damage. To reduce the impact of corrosion on prepositioned assets and support additional corrosion prevention and mitigation efforts, we recommend that the Secretary of Defense take the following three actions: Direct the Secretary of the Army to examine the feasibility of using temporary shelters, including humidity-controlled facilities, to store land-based prepositioned assets currently stored outdoors, and if such use is determined to be feasible, to take appropriate actions to implement the use of shelters to the maximum extent possible. Direct the Secretary of the Army to collect corrosion-related data, as required in existing Army regulations, and use these data to support additional corrosion prevention and mitigation efforts. Direct the Commandant of the Marine Corps to require the collection of corrosion-related data and use these data to support additional corrosion prevention and mitigation efforts. We also recommend that the Secretary of Defense direct the Under Secretary of Defense for Acquisition, Technology, and Logistics to specify the department's planned actions, milestones, and resources for completing an Army feasibility study on the use of temporary shelters to store land-based prepositioned assets and for collecting and using Army and Marine Corps corrosion-related data to support additional corrosion prevention and mitigation efforts. In commenting on a draft of this report, DOD concurred with our recommendations that the Army consider the feasibility of using temporary shelters, including humidity-controlled facilities, to store land- based prepositioned assets currently stored outdoors and that the Army and Marine Corps collect and use corrosion-related data to support additional corrosion prevention and mitigation efforts. However, DOD did not provide specific information on planned actions, milestones, and resources for implementing the recommendations. With respect to the Marine Corps, DOD stated that collection of adequate data is not a matter of being a low priority but a funding issue. As noted in our report, we were told by Marine Corps officials that collection of these data has been a low priority. We believe that funding and priorities should be aligned to the greatest extent possible to provide greater assurance that the department's resources are being used prudently. As stated in our report, DOD can achieve long-term cost savings by investing in additional corrosion prevention and mitigation efforts. In addition, investments in corrosion prevention measures may reduce the amount of maintenance needed on equipment items, thereby extending the availability of equipment items over their life cycle. On the basis of our evaluation of DOD's comments, we have added a recommendation that DOD specify actions, milestones, and resources for implementing our recommendations to the Army and the Marine Corps. DOD's comments are reprinted in appendix II. We focused our review on the prepositioned assets managed by the Army and Marine Corps because these two services have the majority of the military's prepositioned assets, and these services provided most of the equipment used in current operations in Southeast Asia. To assess the measures taken by the Army and Marine Corps to reduce the impact that corrosion has on prepositioned assets, we met with DOD and service command officials responsible for managing and maintaining prepositioned assets; obtained their assessments and perspectives on corrosion prevention and mitigation programs and strategies; and obtained and reviewed DOD and service policies, procedures, and practices, including technical orders and manuals, for managing and maintaining prepositioned assets. We met with DOD officials involved with developing DOD's long-term strategy to prevent and control corrosion. We also discussed additional actions that could be taken to further prevent and mitigate corrosion. In addition, we visited selected prepositioning locations and maintenance facilities, including the Army's facilities in Goose Creek, South Carolina, and Camp Carroll, South Korea, and the Marine Corps Logistics Command in Albany, Georgia, and Blount Island Command in Jacksonville, Florida. To assess the availability of corrosion-related data to the Army and Marine Corps to support corrosion prevention and mitigation efforts for prepositioned assets, we met with DOD and service command officials responsible for managing and maintaining prepositioned assets, and obtained and reviewed DOD and military service policies and procedures for collecting and reporting maintenance costs and related equipment material condition information. We obtained and analyzed various cost and maintenance reports on these assets, including inspection and maintenance logs, databases and assessments, and after-action reports. In particular, we discussed the barriers that exist to identifying and quantifying the impact of corrosion on prepostioned assets' maintenance costs and material condition, and the metrics and related information systems needed to better collect, track, report, and manage efforts to prevent and mitigate corrosion as well as quantify the related funding requirements to address this issue. We interviewed officials and obtained documentation at the following locations: Office of the Secretary of Defense Corrosion Policy and Oversight Office Headquarters, Department of the Army U.S. Army Materiel Command, Fort Belvoir, Virginia Tank-Automotive and Armaments Command, Warren, Michigan, and Rock Island, Illinois U.S. Army Field Support Command, Rock Island, Illinois U.S. III Army Corps, Fort Hood, Texas U.S. Army Field Support Battalion Afloat, Goose Creek, South U.S. Forces Korea and Eighth U.S. Army, Yongsan Garrison, South U.S. Army Field Support Battalion Far East, Camp Carroll, Materiel Support Center Korea, Camp Carroll, Waegwan, South Korea 19th Theater Support Command, Camp Walker, Daegu, South Korea U.S. Army Pacific, Fort Shafter, Hawaii U.S. Marine Corps Headquarters U.S. Marine Corps Forces, Pacific, Hawaii I Marine Expeditionary Force, Camp Pendleton, California II Marine Expeditionary Force, Camp Lejune, North Carolina III Marine Expeditionary Force, Okinawa, Japan Marine Corps Systems Command, Quantico, Virginia Marine Corps Logistics Command, Albany, Georgia Blount Island Command, Jacksonville, Florida Office of the Inspector General of the Marine Corps Bureau of Medicine and Surgery Naval Facilities Engineering Command CNA Corporation, Alexandria, Virginia U.S. Navy Inspector General Naval Air Systems Command, Office of the Inspector General, Naval Audit Service Naval Medical Logistics Command, Fort Detrick, Maryland Navy Expeditionary Medical Command, Cheatham Annex, Headquarters, Seventh Air Force, South Korea United States Pacific Command United States Forces Korea We conducted our work from May 2005 through February 2006 in accordance with generally accepted government auditing standards. We reviewed available data for inconsistencies and discussed the data with DOD and service officials. We determined that the data used for our review were sufficiently reliable for our purposes. We are sending copies of this report to the Secretary of Defense, the Secretary of the Army, and the Commandant of the Marine Corps. We will also make copies available to others upon request. In addition, this report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions, please contact me at (202) 512- 8365. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. The military services have prepositioning programs to store combat or support equipment and supplies near areas with a high potential for conflict and to speed response times and reduce the strain on other mobility assets. The Army's program involves three primary categories of stocks: combat brigade sets, operational projects, and war reserve sustainment stocks stored at land sites and aboard prepositioning ships around the world. The Marine Corps also prepositions equipment and supplies aboard prepositioning ships and at land sites in Norway. The Navy's prepositioning efforts are comparatively small, used mainly to support the Marine Corps' prepositioning program and deploying forces. The Navy prepositions equipment and supplies at land sites and aboard the maritime prepositioning ships. The Air Force prepositions stocks of war reserve equipment and supplies to meet initial contingency requirements and to sustain early deploying forces. The Air Force's prepositioned war reserve stocks include bare base sets; vehicles; munitions; and a variety of consumable supplies, such as rations, fuel, support equipment, aircraft accessories, and medical supplies. The services' prepositioning programs are briefly described in table 1. The military services store these stocks of equipment and supplies at several land sites and aboard prepositioning ships around the world. Most of the military services store equipment and supplies in Southwest Asia, the Pacific theater, Europe, and aboard prepositioning ships. Figure 1 shows the major locations of prepositioned stocks. In addition to the contact named above, Thomas Gosling, Assistant Director; Larry Bridges; Renee Brown; Lisa Canini; Amy Sheller; Allen Westheimer; and Tim Wilson were major contributors to this report.

The military services store prepositioned stocks of equipment and material on ships and land in locations around the world to enable the rapid fielding of combat-ready forces. GAO's prior work has shown that the readiness and safety of military equipment can be severely degraded by corrosion and that the Department of Defense (DOD) spends billions of dollars annually to address corrosion. GAO was asked to review the impact of corrosion on prepositioned assets. GAO's specific objectives were to assess (1) the measures taken by the Army and the Marine Corps to reduce the impact of corrosion on prepositioned assets and (2) the availability of corrosion-related data to the Army and the Marine Corps to support corrosion prevention and mitigation efforts for prepositioned assets. The Army and Marine Corps have taken some measures to reduce the impact of corrosion on prepositioned assets, primarily through the use of humidity-controlled storage facilities on ships and in some land-based locations, but a substantial portion of Army land-based prepositioned assets are stored outdoors and are left relatively unprotected from elements that contribute to corrosion. When equipment was drawn for military operations for Operation Iraqi Freedom during 2003, it was reported in good operating condition and not degraded by corrosion. Most of this equipment had been stored in humidity-controlled facilities. However, whereas all Marine Corps prepositioned assets are stored in humidity-controlled facilities, the Army currently stores a significant amount of its land-based prepositioned assets outdoors. Under Army policy, the preferred method for storing prepositioned assets is in humidity-controlled facilities because outdoor storage makes equipment more susceptible to corrosion and increases maintenance requirements and costs. One Army study showed that sheltering equipment in a humidity-controlled facility had a return on investment, at minimum, of $8 for every $1 invested. In South Korea, the Army has recently completed an intensive effort to repair prepositioned assets and correct some long-standing problems, but almost one-third of the assets continue to be stored outside. Similarly, as the Army reconstitutes its prepositioned equipment in Southwest Asia, thousands of Army equipment items in Kuwait are stored outdoors in harsh environmental conditions. Army officials cited competing funding priorities and other factors as reasons for not providing indoor storage for all land-based prepositioned assets. However, temporary shelters may be a feasible option to address immediate storage needs. The Army has used temporary shelters and humidity-controlled storage for some prepositioned assets. Although the Army requires corrosion-related data collection for equipment items and Marine Corps officials believe them to be beneficial, data that could help reduce corrosion of prepositioned assets are not available. They are not available because the services consider this information to be a low priority and do not systematically collect it. Without these data, the services are not in a position to identify causes of corrosion, support efforts to more effectively reduce corrosion, and achieve long-term cost savings. Army and Marine Corps documents include information on the maintenance condition, actions, and costs for prepositioned equipment, but provide little data on corrosion. While cost data are limited, the services have estimated that about 25 percent of overall equipment maintenance costs are corrosion related and perhaps as much as one-third of these costs could be reduced through more effective corrosion prevention and mitigation. An Army review of maintenance records for about 2,000 pieces of prepositioned stock in South Korea found that $8.7 million (31 percent) of the estimated $28 million spent to restore this equipment was used to address corrosion. The Army has had previous success using corrosion data on non-prepositioned equipment programs to support corrosion prevention and mitigation.

In our testimony, we stated that our audit and investigative work on FEMA disaster relief payments associated with hurricanes Katrina and Rita identified additional indications of fraud, waste, and abuse. Specifically, we found that FEMA made nearly $17 million in potentially improper and/or fraudulent rental assistance payments to individuals after they had moved into FEMA trailers. For example, after FEMA provided a trailer to a household--in January 2006--FEMA provided rental assistance payments to the same household in late January, February, and April of 2006 totaling approximately $5,500. In addition, FEMA provided potentially improper and/or fraudulent rental assistance payments to individuals living in FEMA-provided apartments. For example, FEMA made nearly $46,000 in rental assistance payments to at least 10 individuals living in apartments at the same time that the apartments were being paid for by FEMA through the city of Plano, Texas. Seven of 10 in this group self-certified to FEMA that they needed rental assistance, despite the fact that they were living in rent-free housing. Because of limitations in FEMA data, we were not able to identify the full extent of potentially improper rental assistance payments made to individuals in FEMA-provided apartments. We also found that nearly $20 million in potentially improper and/or fraudulent payments went to individuals who, using the same property, registered for assistance for both hurricanes Katrina and Rita. With few exceptions, FEMA officials explained that victims of both disasters are entitled to only one set of IHP payments for the same damaged property. However, FEMA officials told us that to increase the speed with which FEMA could distribute disaster assistance, they turned off the system edits that should have identified these types of duplicate payments. Consequently, FEMA paid over 7,000 individuals IHP assistance twice for the same property--once for Hurricane Katrina and once for Hurricane Rita. These individuals received double payments for expedited assistance, rental assistance, and/or housing replacement. For example, FEMA records showed that one registrant received two housing replacement payments of $10,500 each, despite the fact that he had only one property to replace. Millions of dollars of improper and potentially fraudulent payments also went to nonqualified aliens, including foreign students and temporary workers. For example, FEMA improperly paid at least $3 million in IHP assistance to more than 500 ineligible foreign students at four universities. Further, FEMA provided IHP payments that included expedited assistance and personal property totaling more than $156,000 to 25 individuals who claimed to be foreign workers on temporary visas. FEMA made these payments despite having copies of the work visas for several individuals, which should have alerted FEMA that the temporary workers were not eligible for financial assistance. Social Security Administration records also showed many of the individuals used invalid Social Security numbers, which could have alerted FEMA about the individuals' ineligibility. In addition, several students and university officials stated that FEMA personnel encouraged all students--including international students who did not qualify for IHP assistance--that they were eligible for IHP financial assistance. Because we did not obtain information from all universities in the Gulf region and because of unavailability of detailed data on other nonqualified legal aliens, we were not able to determine the magnitude of improper and/or fraudulent payments in this area. Our findings also showed that the small amount of money that FEMA has been able to collect from improper payments further demonstrates the need to have adequate preventive controls. We previously reported that inadequate preventive controls related to the IHP application process resulted in an estimated $1 billion of potentially improper and/or fraudulent payments through February 2006. In contrast, as of November 2006, FEMA had detected through its own processes about $290 million in overpayments. This overpayment amount, which FEMA refers to as recoupments, represents the improper payments that FEMA had detected and had issued letters requesting repayments. However, through November FEMA had only collected nearly $7 million. Collection of only $7 million of an estimated $1 billion of fraudulent and improper payments clearly supports the basic point we have previously made that fraud prevention is far more efficient and effective than detection and collection. With respect to findings regarding the DHS purchase card program, we found weaknesses and breakdowns in accountability for property items bought for hurricanes Katrina and Rita relief efforts using government purchase cards. For example, FEMA is still unable to locate 48 of the 143 missing items (e.g., laptop computers, printers, and GPS units) identified in our July 2006 testimony. Moreover, 37 items were missing from an additional 103 items that we investigated for the July testimony. Thus, over a year after they were purchased, FEMA could not locate 85 of the 246 items (34 percent) that we investigated; we presume these items are now lost or stolen. Our investigation also revealed that although FEMA was in possession of 18 of the 20 flat-bottom boats it had purchased for hurricane relief efforts, FEMA had not received the title to any of these boats. FEMA could not provide any information about the location of the remaining two boats. In response to our December testimony, FEMA acknowledged weaknesses in the processes and systems that resulted in ineligible individuals receiving assistance. FEMA stated that in the 15 months since Hurricane Katrina, FEMA has made great strides in correcting its deficiencies. Examples of improvements FEMA has informed us that it put into service include an upgraded registration application that FEMA expects will prevent duplicate registrations and an identity verification process so that all registrations for assistance are subjected to the same stringent criteria. FEMA believes that the stringent controls it instituted this past year improve its safeguards and will help eliminate processing errors and fraudulent abuse. FEMA further stated that it will consider and evaluate any new findings that can assist in improving its processes and procedures. Based on the findings in our testimony of December 6, 2006, we are recommending that the Secretary of Homeland Security direct the Director of FEMA to take a number of actions to reduce the potential for fraud and abuse. Recommendations include developing controls to prevent duplicate rental assistance benefits, increasing controls to prevent ineligible nonqualified aliens from receiving payments, and enabling controls to prevent duplicate payments to the same individual across multiple disasters. FEMA concurred with all recommendations and responded that it had taken, or is in the process of taking, actions to implement these recommendations. However, in its response FEMA indicated that on two of the recommendations it planned to perform investigations to determine the extent of the problems identified prior to implementing the recommendations. Ineffective preventive controls for FEMA's IHP have resulted in substantial fraudulent and improper payments. The additional examples of potentially fraudulent and improper payments, totaling tens of millions of dollars, that we highlighted in our December 2006 testimony further show that our estimate of $1 billion in potentially improper and/or fraudulent payments through February is likely understated. In addition, we did not include in this total potentially improper and/or fraudulent payments to individuals who received disaster assistance from FEMA even though they also received insurance payments for damaged property. With respect to property bought with government purchase cards, FEMA's inability to find items 1 year after they were purchased, including laptop computers, printers, and GPS units, shows that FEMA property accountability controls are ineffective and possibly resulted in the loss or theft of government property. We have previously provided 25 recommendations to DHS and FEMA to improve management of IHP and the purchase card program. FEMA and DHS had fully concurred with 19 recommendations, and substantially or partially concurred with the remaining 6 recommendations. DHS and FEMA also reported that they have taken actions, or plan to take actions, to implement all our recommendations. While we have not performed work to determine whether FEMA's actions adequately address our recommendations, if properly implemented, our recommendations from previous and current work should allow DHS and FEMA to rapidly provide assistance to disaster victims while at the same time providing reasonable assurance that disaster assistance payments are accurate and properly authorized. As we have stated in prior reports addressing IHP improper and fraudulent payments, these recommendations only address specific weakness identified in this report and are only part of a comprehensive fraud prevention program that should be in place. Further, FEMA should ensure that there are adequate manual processes in place to allow registrants who are incorrectly denied assistance to expeditiously appeal the decision and receive aid. Also, FEMA should fully field test all changes to provide assurance that valid registrants are able to apply for and receive IHP payments. We recommend that the Secretary of Homeland Security direct the Director of FEMA to take the following six actions to address weaknesses identified in the administration of IHP. To prevent rental assistance payments from being provided at the same time that FEMA provides free housing (including trailers, mobile homes, and apartments), FEMA should develop processes for comparing IHP registrant data with FEMA direct housing assistance data to prevent IHP registrants from receiving payments for rental assistance covering the time they are living in FEMA-provided housing and provide clear guidance to IHP registrants, including rental assistance registrants, indicating how the payments are to be used. With respect to duplicate assistance payments across multiple disasters, FEMA should implement and/or enable controls to prevent duplicate payments to the same individual from different disasters for the same damage done to the same address. To prevent improper payments to nonqualified aliens, FEMA should provide clear guidance and training to FEMA and contractor employees on the specific types of aliens eligible for financial disaster assistance, and identify nonqualified aliens, and develop processes to identify and deny assistance to nonqualified aliens who register for IHP assistance using valid Social Security numbers through data comparisons with agencies that maintain data on legal aliens with Social Security numbers. With respect to property bought with DHS purchase cards, if FEMA cannot locate this property in a reasonable time period, it should work with DHS to reconcile its tracking system data and declare these items lost or stolen. On February 15, 2007, FEMA provided written comments on a draft of this report in which it outlined actions it plans to take or has taken that are designed to address each of our six recommendations. FEMA's comments are reprinted in appendix II. FEMA provided examples of several planned actions to address identified weaknesses. For example, concerning our recommendation to provide clear guidance to victims receiving IHP rental assistance on how funds should be used, FEMA stated that it is conducting a comprehensive review of existing communications policies and is developing a more effective strategy to ensure that registrants understand IHP and its purpose. Additionally, in response to our recommendation to develop processes to identify and deny assistance to nonqualified aliens who register for IHP assistance, FEMA stated that it is reaching out to other federal agencies and commercial vendors in order to enhance FEMA's ability to screen out applications from nonqualified aliens. FEMA's response indicates that it is attempting to address problems we identified in IHP. As the federal government prepares for future disasters, it will be important for FEMA to establish effective controls to prevent fraudulent and improper payments before they occur. However, in its responses to our recommendations concerning actions to prevent duplicate housing assistance and housing damage repair assistance, FEMA also stated it planned to perform additional investigations to confirm that the conditions described in our draft report are in fact representative of systemic problems before initiating appropriate corrective actions. Nonetheless, we continue to believe, as discussed in our testimony (see app. I), that our work amply demonstrates the systemic nature of the problems identified and the need for the recommended corrective actions. Specifically, with respect to our recommendation on preventing individuals from receiving rental assistance payments while residing in FEMA-provided housing (apartments and trailers), we continue to believe our work demonstrates a systemic problem exists. In fact the $17 million in potentially duplicate rental assistance paid to thousands of IHP registrants is conservative and may even understate the extent of the problems. In addition, our case studies clearly showed payments that were at least improper and potentially fraudulent. Further, our work included steps to minimize the possibility that, as FEMA asserted, many of these cases could be explained by the fact that rental assistance payments could have been made retroactively to cover rental expenses prior to the date of payment. Specifically, in arriving at our estimate of the extent of a systemic problem in this area, we took the following steps to ensure that our reported estimate of the extent of potentially duplicate payments in this area did not overstate the problem. We only included payments as potential duplicates when they were made to an IHP registrant at the same time that the registrant was residing in FEMA-provided housing. We did not consider payments made before a registrant moved in to FEMA-provided housing as duplicates even though FEMA often makes advance rental assistance payments. For example, FEMA provided more than $3 million in rental assistance payments to FEMA trailer registrants in the week before they moved into FEMA trailers. These payments averaged more than $1,700, which indicates they were likely for multiple months of rental assistance and could have been duplicate assistance payments because they would have covered the time the registrants were in FEMA trailers. We conducted field investigations on case studies to ensure that conclusions reached were accurate. We excluded from our analysis any payments made to IHP registrants living in FEMA-provided apartments. Those payments were excluded from the analysis because FEMA failed to maintain detailed reliable data on individuals living in FEMA-provided apartments. Thus there are potentially millions more in duplicate rental assistance payments associated with IHP registrants living in FEMA-provided apartments, as supported by our case study investigations. As discussed in our testimony, our work also clearly demonstrates a systemic problem and our recommended corrective action with respect to controls to prevent duplicate payments to the same individual for the same damage across multiple disasters. FEMA stated it was unsure whether all payments we identified as duplicates were in fact duplicate payments to the same individual for the same damage across multiple disasters. FEMA stated that some payments could have resulted from damage from Hurricane Katrina, and then future payments were made based on different damage caused by Hurricane Rita. However, this assertion is contrary to representations FEMA made to us during the course of the audit. Specifically, FEMA told us during the audit that with few exceptions, registrants would only be entitled to one payment for each damage and/or need. We acknowledge that a registrant could have had a house damaged by Hurricane Katrina, and could have repaired the damage and moved back into the original house--only to have it damaged again by Hurricane Rita. However, this it is an extremely unlikely scenario given the severity of the damage caused by Hurricane Katrina and the fact that Hurricane Rita occurred shortly after, leaving very little time for inspectors to inspect and certify housing damage between storms, especially given there were more than 7,000 registrants we identified. According to our case studies, FEMA performed the first inspection of the properties in question after both hurricanes affected the area. Our case studies also showed that FEMA used two different inspectors to look at damaged properties, once for Hurricane Katrina and once for Hurricane Rita. Without having an inspection performed before Hurricane Rita hit, or having the same inspector review the claim to determine what damage was from Hurricane Rita and what damage was from Hurricane Katrina, FEMA is not in a position to know whether it paid for the same damaged items twice. Therefore, we continue to believe our work demonstrates a systemic problem for which FEMA should institute our recommendation to institute controls that prevent duplicate payments to the same individual for the same damage registered for under different disasters. We are sending copies of this report to the Secretary of Homeland Security, and the Director of the Federal Emergency Management Agency. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. If you or your staffs have questions about this report, please contact me at (202) 512-7455 or [email protected]; or contact John Kelly at (202) 512-6926 or [email protected]. Other individuals who made major contributions to this report were Gary Bianchi, Jennifer Costello, Jason Kelly, Barbara Lewis, Jonathan Meyer, Andrew McIntosh, John Ryan, and Tuyet-Quan Thai. Hrran Ktrina anRidetroed homes and dispced mllns of inuas. Whle the Federl EmerManagemet A (FEMA) coinu to respd to thisisaster, GAO's prevus work deed signiant cotrol wess--speclly in FEMA's Iua and Household Prom (IHP) anin the Departmet of HomelanSecy's (DHS) purchase crd rom--resulting in signiant fraud, waste, anabus. FEMA coinued to loe tens of mllns of doll througoteially iroer and/or fraulepayme from oth hrran Ktrina anRia. Thepayme inclde $17 mll in reassisance paid to inuato whom FEMA hlre rovded free housing through trailer or apartmes. Ie case, FEMA rovded free housing to 10 inua in apartme in Plano, Texas, whle t the same tme t theinua$46,000 to cover ot-of-ocket housingxpnss. I dd, everl of theinuacerted to FEMA tht the eeded reassisance. Today's temonyll ddress whether FEMA rovded roer anoteiall fraulet (1) reassisance payme to registran t the same tme t was proving free housing ia trailer anapartmes; (2) dupte assisance payme to inuawho claimed dag to the same roert for oth hrranKtrina anRia; and (3) IHP payme to -U.S. residewho dot qua for IHP. This temonyll o disuss (1) the ortance of frauden anreve, and (2) the resultof oinveiga into roertFEMA ught using DHS purchase crds. FEMA mde rl $20 mll inupte payme to thousan of inua who claimed dag to the same roert from oth hrran Ktrina anRia. FEMA o mde mllns in oteiall roer and/or fraulepayme to uaed ns who were ot eligible for IHP. For exale, FEMA pait least $3 mll to more than ineligible foreign de t founiversi in the ffected reas. This mount lkel underte the totpayme to ineligible foreign de ecaust doe ot cover ll colle anuniversis in the rea. FEMA rovded oteiall roer and/or fraulet IHP assisance to other ineligible -U.S. reside, despite hing docme ining theineligibiy. Finall, FEMA'sfflt in deying and collecting roer paymerther emasized the ortance of lemeing an effectve fraud, waste, anabusreve system. For exale, GAO revusted roer anoteiall fraulepayme relted to the IHP app rocess to e $1 bill through Feua. A of Novemer 2006, FEMA deed abt $290 mll in roer payme and collected abt $7 mlln. www..gov/cg-bin/getrpt?GAO-07-252T. To vew the fll prodct, nclng the cope nd methodology, clck on the lnk above. For more nformon, contct Gregory Ktz t (202) 512-7455 or [email protected]. GAO's revus work o the DHS purchase crd howed signianrolemth roert ccounabiy. Of 246 tem we inveigated tht FEMA purchased for hrrane relef effort using DHS's purchase crd, 8tem--or 34 ercet--re ll missing anresumed lot or tolen.

The Federal Emergency Management Agency (FEMA) continues to respond to hurricanes Katrina and Rita. GAO's previous work identified suspected fraud, waste, and abuse resulting from control weaknesses associated with FEMA's Individuals and Households Program (IHP) and the Department of Homeland Security's (DHS) purchase card program. Congress asked GAO to follow up on this previous work to determine whether potentially improper and/or fraudulent payments continued to be made. GAO testified on the results of our audit and investigative efforts on December 6, 2006. This report summarizes the results of our follow-up work. In our December 6, 2006, testimony, GAO stated that FEMA made tens of millions of dollars of potentially improper and/or fraudulent payments associated with both hurricanes Katrina and Rita. These payments include $17 million in rental assistance paid to individuals to whom FEMA had already provided free housing through trailers or apartments. In one case, FEMA provided free housing to 10 individuals in apartments in Plano, Texas, while at the same time it sent these individuals $46,000 to cover out-of-pocket housing expenses. In addition, several of these individuals certified to FEMA that they needed rental assistance. FEMA made nearly $20 million in duplicate payments to thousands of individuals who claimed damages to the same property from both hurricanes Katrina and Rita. FEMA also made millions in potentially improper and/or fraudulent payments to nonqualified aliens who were not eligible for IHP. For example, FEMA paid at least $3 million to more than 500 ineligible foreign students at four universities in the affected areas. This amount likely understates the total payments to ineligible foreign students because it does not cover all colleges and universities in the area. FEMA also provided potentially improper and/or fraudulent IHP assistance to other ineligible non-U.S. residents, despite having documentation indicating their ineligibility. Finally, FEMA's difficulties in identifying and collecting improper payments further emphasized the importance of implementing an effective fraud, waste, and abuse prevention system. For example, GAO previously estimated improper and potentially fraudulent payments related to the IHP application process to be $1 billion through February 2006. As of November 2006, FEMA identified about $290 million in overpayments and collected about $7 million. Finally, GAO's work on DHS purchase cards showed continuing problems with property accountability, including items GAO investigated that could not be located 1 year after they were purchased.

As of the time of this hearing, the CDFI Fund in the Department of the Treasury has authorized $21 billion of the $26 billion in tax credit authority to be awarded between 2001 and 2009 to CDEs that manage NMTC investments in low-income community development projects. Eligible organizations may apply for and receive NMTC allocations once they have been certified as a CDE by the CDFI Fund (a CDE that receives an allocation is often referred to as an allocatee). After the CDFI Fund makes allocations to CDEs, investors make equity investments by acquiring stock or a capital interest in the CDEs, called qualified equity investments (QEI), in exchange for the right to claim tax credits that total 39 percent of their original investment over 7 years. The CDEs, in turn, are required to invest "substantially all" of the proceeds they receive into qualified low-income community investments (QLICI). Qualified low- income community investments include (but are not limited to) investments in businesses, referred to as qualified active low-income community businesses (QALICB), to be used for residential, commercial and industrial projects, and other types of investments, such as purchasing loans from other CDEs. The CDFI Fund directs CDEs to classify themselves as minority if more than 50 percent of the CDE is owned or controlled by members of a minority ethnic group. In the case of a for-profit CDE, more than 50 percent of the CDE's owners must be minorities; if the entity applying is a nonprofit organization, more than 50 percent of its board of directors must be minorities (or its Chief Executive Officer, Executive Director, General Partner, or Managing Member must be a minority). Representatives from several minority-owned entities and industry associations that we interviewed indicated that minority CDEs and other locally-based community lending organizations may have a better understanding of the economic conditions and availability of capital in the communities they serve than other investment organizations serving those same communities. However, in addition to minority CDEs obtaining NMTC authority and making investments in low-income communities, minority populations may benefit from the NMTC in other ways. For example, non- minority CDEs have also made investments in minority businesses that serve residents in low-income communities. Minority-owned businesses located in eligible NMTC census tracts may hire or provide services to minority residents in low-income communities. According to CDFI Fund officials, it is frequently the case that non-minority-owned businesses located in NMTC-eligible census tracts with highly concentrated minority populations could provide economic benefits to minority residents. Since we issued the report on which this statement is based, the CDFI Fund announced on May 27, 2009 an additional 32 NMTC awards to 2008 applicants totaling $1.5 billion under authority granted by the American Recovery and Reinvestment Act of 2009 (ARRA). According to our analysis, minority CDEs received three of these awards totaling $135 million. Non-minority CDEs received the other 29 of these awards totaling about $1.4 billion. The analysis presented in our report was limited to NMTC awards made from 2005 through the original 2008 awards; our analysis did not include the NMTC awards made in accordance with ARRA. From 2005 through 2008, minority-owned CDEs were successful with about 9 percent of the NMTC applications that they submitted to the CDFI Fund and received about $354 million of the $8.7 billion for which they applied, or about 4 percent. By comparison, non-minority CDEs were successful with about 27 percent of their applications and received $13.2 billion of the $89.7 billion for which they applied, or about 15 percent. Since 2005, the first year in which the CDFI Fund collected data on minority CDEs, CDFI Fund application data indicate that 68 minority CDEs have applied for NMTC allocations from the CDFI Fund for a total of 88 applications. Fifteen minority CDEs applied for NMTC allocations in multiple years. From 2005 through 2008, the CDFI Fund received 934 NMTC applications from 566 different CDEs. Of the 68 minority CDEs that applied, 6 CDEs received a total of eight NMTC allocations (2 minority CDEs each received two separate allocations). Minority applicants received about 2.6 percent of the $13.5 billion in total NMTC allocation authority that the CDFI Fund awarded from 2005 through 2008. The CDFI Fund's process for making NMTC awards takes place in two phases. NMTC applications are first reviewed and scored by a group of external reviewers selected by the CDFI Fund who have demonstrated experience in business, real estate, or community development finance. CDEs that meet or exceed minimum thresholds in each of the four main application sections (business strategy, community impact, management capacity, and capitalization strategy) and an overall scoring threshold (out of a total of 25 points in each application section) advance to the second phase where they are re-ranked based on their scores in the business strategy and community impact sections of the application and half of the priority points awarded to CDEs that demonstrate a track record of investing in low-income communities and investing in unrelated entities. CDFI Fund staff review the amount of allocation authority that the CDE requested and, based on the information in the application materials, award allocation amounts in the descending order of CDEs' final ranking based on their re-ranked scores. According to our analysis of NMTC application data, of the 88 applications submitted by minority CDEs, 31 applications met the minimum threshold scores to advance to the second phase of the NTMC review process from 2005 to 2008. By comparison, during this same time period 518 of the 846 applications submitted by non-minority CDEs met the minimum thresholds to advance to the second phase of the review process. Overall, non-minority CDEs scored about 11 points higher than minority CDEs on NMTC applications from 2005 through 2008. As figure 1 shows, minority CDEs' scores differed the most from non-minority CDEs' scores in the capitalization strategy section of the application, where non-minority CDEs scored 25 percent higher than minority CDEs. Non-minority CDEs scored between 15 percent and 17 percent higher than minority CDEs in the business strategy, community impact, and management capacity sections of the application. To identify challenges minority and non-minority CDEs face in obtaining NMTC allocations, we interviewed representatives from minority and non- minority CDEs, and we analyzed CDFI Fund application data. While both our testimonial evidence and statistical analysis have limitations, they generally show that a CDE's capacity, measured by asset size in this case, is associated with an increased probability of obtaining an award. CDEs we interviewed generally said it can be difficult on the NMTC application to demonstrate the capacity to effectively use the NMTC and the experience in investing in low-income communities necessary to obtain allocations. According to officials from several CDEs we interviewed, demonstrating the relative impact of NMTC projects through the NMTC application may be particularly difficult when smaller, community-based CDEs compete for allocations against large banks and financial institutions that may have the capacity to undertake larger projects with more easily identifiable economic impacts. Our statistical analysis of all CDEs that applied from 2005 through 2008 demonstrates that the probability that a NMTC applicant will receive an award is associated with certain factors. For example, after controlling for other characteristics, larger CDEs, as measured by asset size, appear to be more likely to receive NMTC awards, while smaller CDEs are less likely to receive awards. When controlling for factors we could, our analysis also shows that minority status is associated with a lower probability of receiving an allocation. It is not clear from our analysis why minority status is associated with a lower probability of obtaining an allocation or whether any actions taken or not taken by the Department of the Treasury or the CDFI Fund contributed to this statistical relationship. Other factors for which our statistical analysis is unable to account, such as experience with the application process, may also be reasons why minority CDEs have not been as successful in obtaining NMTC allocations as non- minority CDEs. For example, according to our 2006 report, certain minority-owned banks have higher loan loss reserves and operating costs than non-minority owned peers. These types of characteristics could potentially affect the competitiveness of minority CDE NMTC applications, particularly in the business strategy and management capacity sections of the applications. Also, according to industry association representatives, minority-owned banks have traditionally had a more difficult time accessing capital markets than their non-minority peers, and our analysis of the CDFI Fund application data show that minority CDEs score lowest in the capitalization strategy section of the application. Our analysis indicates that these differences are not explained by the size of the CDE--that is, they are not problems shared, on average, by other small, non-minority CDEs that applied for NMTC allocations. However, these differences could be associated with some other feature that minority CDEs share with non- minority CDEs for which we do not have data to include in our analysis. According to CDFI Fund officials, the CDFI Fund has conducted outreach intended to reach all CDEs that may have an interest in applying for NMTCs and CDFI Fund staff have given presentations to industry associations, such as the New Markets Tax Credit Coalition; the National Bankers Association (NBA), an industry organization that represents minority-owned banks; and at FDIC conferences targeted to minority- owned institutions. According to CDFI Fund officials, they have more recently developed a relationship with the Department of Commerce's Minority Business Development Agency that they hope will lead to additional applications by minority CDEs. The CDFI Fund also provides a written debriefing to each CDE that does not receive an allocation to assist the CDE in future application rounds. This debriefing provides the unsuccessful CDE with information about its scores in each of the application sections and written comments on areas of weakness within each of the four main application sections. Officials from some CDEs we interviewed noted that the debriefing document helped them submit more competitive application materials in future rounds. Officials from a few CDEs noted that the debriefing comments were not consistent from one year to another. External stakeholders, including representatives from industry associations we identified, hold conferences and offer varying degrees of assistance to CDEs submitting competitive NMTC applications. In addition, CDEs often hire consultants to assist them with completing their NMTC applications. Consultants offer a range of services to CDEs, including reviewing NMTC applications for completeness and depth of responses to completing the entire NMTC application for an applicant. According to CDEs we interviewed, fees charged by consultants cover a broad range based on the services that the consultant provides. For example, officials from several CDEs indicated that they paid consultants less than $5,000 to review their NMTC applications while others paid consultants as much as $50,000 for a more complete set of services. The legislative history for the NMTC does not address whether Congress intended for minority CDEs to benefit directly from the NMTC program. However, if Congress intends for minority CDEs' participation in the NMTC program to exceed the current levels and Congress believes that minority CDEs have unique characteristics that position them to target the NMTC to its most effective use, Congress may want to consider legislative changes to the program should the New Markets Tax Credit be extended beyond 2009. Potential changes that could be considered include, but would not be limited to the following: (1) similar to provisions for certain federal grant programs, requiring that a certain portion of the overall amount of allocation authority be designated for minority CDEs; (2) in accordance with information we obtained in discussions with several experts in economic development, exploring the potential for creating a pool of NMTC allocation authority to be dedicated specifically for community banks (minority banks that are certified CDEs, in most cases, would likely compete with non-minority community banks with similar characteristics for NMTC allocations); or (3) similar to other federal programs where preferences are given to targeted populations, offering priority points to minority CDEs that apply for NMTC allocations. In addition, a fourth option would be for Congress to direct the Department of the Treasury and the CDFI Fund to explore options for providing technical assistance in applying for and using NMTC allocations to minority CDEs. Although these options could increase the amount of NMTC authority awarded to minority CDEs, in part because we could not definitively identify the reasons why minority CDEs have scored lower on the NMTC application than non-minority CDEs, the options may not address the underlying reasons for lower minority CDE success. In addition, implementing these changes would require addressing a number of issues, including legal and administrative concerns, associated with such changes in the NMTC application process. The CDFI Fund reviewed a draft of our report and agreed with our key conclusion that minority CDEs have not received awards in proportion to their representation in the application pool, but did not comment on our options. The CDFI Fund's response letter is reprinted in appendix VII of our report. The CDFI Fund also provided several technical comments on our report, which we incorporated as appropriate. Chairmen, this concludes my remarks. As I noted earlier, the more detailed findings and conclusions of our review of minority CDEs' participation in the New Markets Tax Credit program can be found in our recently issued report (GAO-09-536). I would be happy to answer any questions you or other members of the subcommittees may have. For further information on this testimony, please contact Michael Brostek at (202) 512-9110 or [email protected]. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. In addition to the individual named above, Kevin Daly, Assistant Director; LaKeshia Allen; Don Brown; Thomas Gilbert; Cristian Ion; Jean McSween; Ed Nannenhorn; and Cheryl Peterson made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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 Community Development Financial Institutions (CDFI) Fund in the Department of the Treasury has awarded $21 billion of the $26 billion in New Markets Tax Credits (NMTC) authorized to be awarded to Community Development Entities (CDE) between 2001 and 2009. CDEs use the NMTC to make qualified investments in low-income communities. Recent congressional interest has focused on participation by minority CDEs. This testimony is based on a recent GAO report (GAO-09-536). As requested, the report (1) identified the number of minority and non-minority CDEs that applied to the CDFI Fund and received NMTC awards, (2) explained the process by which the CDFI Fund makes awards and summarized application scores, (3) described challenges minority and non-minority CDEs face in applying for and receiving awards and, (4) identified efforts the CDFI Fund and others have taken to assist minority CDEs in applying for awards. GAO analyzed CDFI Fund application data and interviewed officials from minority and non-minority CDEs, the CDFI Fund, and industry groups. From 2005 through 2008, minority-owned CDEs were successful with about 9 percent of the NMTC applications that they submitted to the CDFI Fund and received about $354 million of the $8.7 billion for which they applied, or about 4 percent. Non-minority CDEs were successful with about 27 percent of their applications and received $13.2 billion of the $89.7 billion for which they applied, or about 15 percent. Since GAO issued the report on which this statement is based, the CDFI Fund made 32 NMTC awards totaling $1.5 billion under authority provided in the American Recovery and Reinvestment Act. Minority CDEs received 3 of those awards, totaling $135 million. The CDFI Fund relies primarily on its scoring of applications to determine which CDEs receive awards. As the figure shows, minority CDEs received lower scores than non-minority CDEs in each of the four application sections. Although a CDE's resources and experience in applying are important factors in a CDE's success rate with the NMTC program, when controlling for factors that GAO could measure, minority status is associated with a lower probability of receiving an allocation. It is not clear from GAO's analysis why this relationship exists or whether any actions taken or not taken by the Department of the Treasury contributed to minority CDEs' lower probability of success. Characteristics associated with minority status of some CDEs for which data are unavailable may affect this relationship. If Congress views increased participation by minority CDEs as a goal for the NMTC program, options, such as providing certain preferences in the application process that may benefit minority CDEs, could be considered. The CDFI Fund provides assistance that is available to all CDEs applying for awards, including a written debriefing to CDEs that do not receive awards detailing some of the weaknesses in the applications. Other stakeholders, including industry associations and consultants, hold conferences and offer services to help CDEs submit competitive applications. Should Congress view additional assistance to minority CDEs as important to increasing minority CDEs' participation in the NMTC program, it could consider requiring the CDFI Fund to provide assistance to minority CDEs.

The federal-state UI program, created in part by the Social Security Act of 1935, is administered under state law based on federal requirements. The primary objectives of the program are to provide temporary, partial compensation for lost earnings of eligible individuals who become unemployed through no fault of their own and to stabilize the economy during downturns. Applicants for UI benefits must have earned at least a certain amount in wages and/or have worked a certain number of weeks to be eligible. In addition, these individuals must, with limited exceptions, be available for and able to work, and actively search for work. The federal-state structure of the program places primary responsibility for its administration on the states, and gives them wide latitude to administer the programs in a manner that best suits their needs within the guidelines established by federal law. Within the context of the federal- state partnership, Labor has general responsibility for overseeing the UI program to ensure that the program is operating effectively and efficiently. For example, Labor is responsible for monitoring state operations and procedures, providing technical assistance and training, and analyzing UI program data to diagnose potential problems. State agencies rely extensively on IT systems to carry out their UI program functions. These include systems for administering benefits and for collecting and administering the taxes used to fund the programs. Benefit systems are used for determining eligibility for benefits; recording claimant filing information, such as demographic information, work history, and qualifying wage credits; determining updates as needed, such as changes in work-seeking status; and calculating state-specific weekly and maximum benefit amounts. Tax systems are used for online reporting and payment of employers' tax and wage reports; calculating tax, wage, and payment adjustments, and any penalties or interest accrued; processing quarterly tax and wage amounts; determining and processing late payment penalties, interest, civil penalties, or fees; and adjusting previously filed tax and wage reports as a result of a tax audit, an amended report submitted by the employer, or an erroneously keyed report. However, the majority of the states' existing systems for UI operations were developed in the 1970s and 1980s. Although some agencies have performed upgrades throughout the years, most of the state legacy systems have aged considerably. As they have aged, the systems have presented challenges to the efficiency of states' existing IT environments. In a survey published by the National Association of State Workforce Agencies (NASWA) in 2010, states reported the following issues: Over 90 percent of the systems run on outdated hardware and software programming languages, such as Common Business Oriented Language (COBOL), which is one of the oldest computer programming languages. The systems are costly and difficult to support. The survey found, for example, that over two-thirds of states face growing costs for mainframe hardware and software support of their legacy systems. Most states' systems cannot efficiently handle current workload demands, including experiencing difficulties implementing new federal or state laws due to constraints imposed by the systems. States have realized an increasing need to transition to web-based online access for UI data and services. States also cited specific issues with their legacy systems, including the fact that they cannot be reprogrammed quickly enough to respond to changes resulting from legislative mandates. In addition, states have developed one or more stand-alone ancillary systems to fulfill specific needs, but these systems are not integrated with their legacy mainframe systems, decreasing efficiency. Finally, according to the states, existing legacy systems cannot keep up with advances in technology, such as the move to place more UI services online. In addition to providing general oversight of the UI program, the Department of Labor plays a role in facilitating the modernization of states' UI IT systems. This role consists primarily of providing funding and technical support to the state agencies. In this regard, Labor distributes federal funds to each state for the purpose of administering its UI program, including funds that can be used for IT modernization. Through supplemental budget funds, Labor has supported the establishment of state consortiums, in which three or four states work together to develop and share a common system. These efforts are intended to allow multiple states to pool their resources and reduce risk in the pursuit of a single common system that they can each use after applying state-specific programming and configuration settings. Labor also helps to provide technical assistance to the states by supporting and participating in two key groups--NASWA and the Information Technology Support Center (ITSC). NASWA provides a forum for states to exchange information and ideas about how to improve program operations; serves as a liaison between state workforce agencies and federal government agencies, Congress, businesses, and intergovernmental groups; and is the collective voice of state agencies on workforce policies and issues. ITSC is funded by Labor and the states to provide technical services, core projects, and a central capacity for exploring the latest technology for all states. ITSC's core services to states include application development, standards development, and UI modernization services, among others. Our September 2012 report noted that selected states had made varying progress in modernizing the IT systems supporting their UI programs. Specifically, we found that each of the three states that were part of a multistate consortium were in the initial phases of planning that included defining business needs and requirements; two individual states were in the development phase--that is, building the system based on requirements; two were in a "mixed" phase where part of the system was in development and part was in the operations and maintenance phase; and two were completed and in operations and maintenance. These efforts had, among other things, enhanced states' UI technology to support web-based services with more modern databases and replaced outdated programming languages. They also included the development of auxiliary systems, such as document management systems and call center processing systems. Nevertheless, while the states had made progress, we found that they faced a number of challenges related to their modernization efforts. In particular, individual states encountered the following challenges, among others: All nine states cited limited funding and/or the increasing cost of UI systems as a major challenge. For example, they said that the economic downturn had resulted in smaller state budgets, which limited state funds for IT modernization. Moreover, once funds were identified or obtained, it often took a considerable amount of time to complete the IT project. Officials added that developing large state or multistate systems may span many years, and competing demands on resources can delay project implementation. As a result, states may fund one phase of a project with the hope that funds will be available in the future for subsequent phases. This lack of consistent funding potentially hinders effective IT project planning. Seven of the nine states cited a lack of staff in their UI offices with the expertise necessary to manage IT modernization efforts: Several states said they lacked sufficient subject matter experts knowledgeable in the extensive rules and requirements of the UI program. Such experts are essential to helping computer designers and programmers understand the program's business processes, supporting an effective transition to the reengineered process, and identifying system requirements and needs. States also identified challenges in operating and maintaining a system developed by vendors because state employees may have lacked the needed expertise to maintain the new system once the vendor staff leave. The states added that their staffs may implement larger-scale systems only once every 10 to 15 years, leading to gaps in required knowledge and skills, process maturity and discipline, and executive oversight. States further stressed that their staffs may have expertise in an outdated computer language, while modernization efforts require them to learn new skills and more modern programming languages. According to a 2011 workforce survey, over 78 percent of state chief information officers confirmed that state salary rates and pay grade structures presented a challenge in attracting and retaining skilled IT talent. According to Labor, the limited staff resources facing states have required that subject matter experts be pulled off projects to address the workload demands of daily operations. Six of the nine states noted that continuing to operate their legacy systems while simultaneously implementing new UI systems required them to balance scarce staff resources between the two major efforts. In addition to the challenges facing individual states, we found that states participating in multistate consortiumschallenges: encountered a separate set of Representatives from all three consortiums indicated that differences among states in procurement, communication, and implementation of best practices; the involvement of each state's IT office; and the extent to which the state's IT is centralized could impact the effort to design and develop a common system. As a result, certain state officials told us that consortiums were not practical; one official questioned whether a common platform or system could be successfully built and made transferable among states in an economically viable way. States within a consortium often had different views on the best approach to developing and modernizing systems. State officials said that using different approaches to software development is not practical when developing a common system, but that it was difficult to reach consensus on a single approach. In one case, a state withdrew from a consortium because it disagreed with the development approach being taken by the consortium. States had concerns about liabilities in providing services to another state. IT representatives from one consortium's lead state noted that decisions taken by the lead state could result in blame for outcomes that other states were unsatisfied with, and there was a concern that the lead state's decision making could put other states' funds at risk. One state withdrew from its leadership position because of such concerns about liability. Reaching agreement on the location of system resources could also be a challenge. For example, one consortium encountered difficulty in agreeing on the location of a joint data center to support the states and on the resources that should be dedicated to operating and managing the facility, while complying with individual state requirements. All three consortium representatives we spoke to noted that obtaining an independent and qualified leader for a multistate modernization effort was challenging. State IT project managers and chief information officers elaborated that while each state desires to successfully reach a shared goal, the leader of a consortium must keep the interests of each state in balance and have extensive IT experience that goes beyond his or her own state's technology environment. Both individual states and consortium officials had developed methods to mitigate specific challenges and identified lessons learned. For example, several states were centralizing and standardizing their IT operations to address technical challenges; found that a standardized, statewide enterprise architecture could provide a more efficient way to leverage project development; and took steps to address consortium challenges they encountered, such as ensuring that each state's IT department is involved in the project. In our report, we noted that ITSC had been tasked with preparing an assessment of lessons learned from states' modernization efforts, but at the time of our review, this assessment had not been completed. Moreover, the scope of the assessment was limited to ITSC's observations and had not been formally reviewed by the states or Labor. A comprehensive assessment would include formal input from states and consortiums, the ITSC Steering Committee, and Labor. Accordingly, we recommended that Labor (1) perform a comprehensive analysis of lessons learned and (2) distribute the analysis to each state through an information-sharing platform or repository, such as a website. Labor generally agreed with the first recommendation; it did not agree or disagree with the second recommendation but said it was committed to sharing lessons learned. In addition, the nine states in our review had established, to varying degrees, certain IT management controls that aligned with industry- accepted program management practices. These controls included the following: establishing aspects of a project management office for centralized and coordinated management of projects under its domain; incorporating industry-standard project management processes, tools, and techniques into their modernization UI efforts; adopting independent verification and validation to verify the quality of the modernization projects; and employing IT investment management standards, such as those called for in our IT investment management framework. If effectively implemented, these controls could help successfully guide the states' UI modernization efforts. In summary, while states have taken steps to modernize the systems supporting their UI programs, they face a number of challenges in updating their aging legacy systems and moving program operations to a modern web-based IT environment. Many of the challenges pertain to inconsistent funding, a lack of sufficient staff with adequate expertise, and in some cases, the difficulty of effective interstate collaboration. States have begun to address some of these challenges, and the nine states in our review had established some IT management controls, which are essential to successful modernization efforts. In addition, the Department of Labor can continue to play a role in supporting and advising states in their efforts. Chairman Reichert, Ranking Member Doggett, and Members of the Subcommittee, this concludes my statement. I would be happy to answer any questions at this time. If you have any questions concerning this statement, please contact Valerie C. Melvin, Director, Information Management and Technology Resources Issues, at (202) 512-6304 or [email protected]. Other individuals who made key contributions include Christie Motley, Assistant Director; Lee A. McCracken; and Charles E. Youman. 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 joint federal-state unemployment insurance program is the Department of Labor's largest income maintenance program, and its benefits provide a critical source of income for millions of unemployed Americans. The program is overseen by Labor and administered by the states. To administer their UI programs, states rely heavily on IT systems--both to collect and process revenue from taxes and to determine eligibility and administer benefits. However, many of these systems are aging and were developed using outdated computer programming languages, making them costly and difficult to support and incapable of efficiently handling increasing workloads. Given the importance of IT to state agencies' ability to process and administer benefits, GAO was asked to provide testimony summarizing aspects of its September 2012 report on UI modernization, including key challenges states have encountered in modernizing their tax and benefit systems. To develop this statement, GAO relied on its previously published work. As GAO reported in September 2012, nine selected states had made varying degrees of progress in modernizing the information technology (IT) systems supporting their unemployment insurance (UI) programs. Specifically, the states' modernization efforts were at various stages--three were in early phases of defining business needs and requirements, two were in the process of building systems based on identified requirements, two were in a "mixed" phase of having a system that was partly operational and partly in development, and two had systems that were completely operational. The enhancements provided by these systems included supporting web-based technologies with more modern databases and replacing outdated programming languages, among others. Nevertheless, while taking steps to modernize their systems, the selected states reported encountering a number of challenges, including the following: Limited funding and the increasing cost of UI systems . The recent economic downturn resulted in smaller state budgets, limiting what could be spent on UI system modernization. In addition, competing demands and fluctuating budgets made planning for system development, which can take several years, more difficult. A lack of sufficient expertise among staff . Selected states reported that they had insufficient staff with expertise in UI program rules and requirements, the ability to maintain IT systems developed by vendors, and knowledge of current programming languages needed to maintain modernized systems. A need to continue to operate legacy systems while simultaneously implementing new systems . This required states to balance scarce resources between these two efforts. In addition, a separate set of challenges arose for states participating in multistate consortiums, which were established to pool resources for developing joint systems that could be used by all member states: Differences in state laws and business processes impacted the effort to design and develop a common system. States within a consortium differed on the best approach for developing and modernizing systems and found it difficult to reach consensus. Decision making by consortium leadership raised concerns about liability for outcomes that could negatively affect member states. Consortiums found it difficult to obtain a qualified leader for a multistate effort who was unbiased and independent. Both consortium and individual state officials had taken steps intended to mitigate challenges. GAO also noted that a comprehensive assessment of lessons learned could further assist states' efforts. In addition, the states in GAO's review had established certain IT management controls that can help successfully guide modernization efforts. These controls include establishing a project management office, using industry-standard project management guidance, and employing IT investment management standards, among others. In its prior report on states' UI system modernization efforts, GAO recommended that the Department of Labor conduct an assessment of lessons learned and distribute the analysis to states through an information-sharing platform such as a website. Labor agreed with the first recommendation; it neither agreed nor disagreed with the second recommendation, but stated that it was committed to sharing lessons learned.

To improve federal efforts to assist state and local personnel in preparing for domestic terrorist attacks, H.R. 525 would create a single focal point for policy and coordination--the President's Council on Domestic Terrorism Preparedness--within the Executive Office of the President. The new council would include the President, several cabinet secretaries, and other selected high-level officials. An Executive Director with a staff would collaborate with executive agencies to assess threats; develop a national strategy; analyze and prioritize governmentwide budgets; and provide oversight of implementation among the different federal agencies. In principle, the creation of the new council and its specific duties appear to implement key actions needed to combat terrorism that we have identified in previous reviews. Following is a discussion of those actions, executive branch attempts to implement them, and how H.R. 525 would address them. In our May 2000 testimony, we reported that overall federal efforts to combat terrorism were fragmented. There are at least two top officials responsible for combating terrorism and both of them have other significant duties. To provide a focal point, the President appointed a National Coordinator for Security, Infrastructure Protection and Counterterrorism at the National Security Council. This position, however, has significant duties indirectly related to terrorism, including infrastructure protection and continuity of government operations. Notwithstanding the creation of this National Coordinator, it was the Attorney General who led interagency efforts to develop a national strategy. H.R. 525 would set up a single, high-level focal point in the President's Council on Domestic Terrorism Preparedness. In addition, H.R. 525 would require that the new council's executive chairman--who would represent the President as chairman--be appointed with the advice and consent of the Senate. This last requirement would provide Congress with greater influence and raise the visibility of the office. We testified in July 2000 that one step in developing sound programs to combat terrorism is to conduct a threat and risk assessment that can be used to develop a strategy and guide resource investments. Based upon our recommendation, the executive branch has made progress in implementing our recommendations that threat and risk assessments be done to improve federal efforts to combat terrorism. However, we remain concerned that such assessments are not being coordinated across the federal government. H.R. 525 would require a threat, risk, and capability assessment that examines critical infrastructure vulnerabilities, evaluates federal and applicable state laws used to combat terrorist attacks, and evaluates available technology and practices for protecting critical infrastructure against terrorist attacks. This assessment would form the basis for the domestic terrorism preparedness plan and annual implementation strategy. In our July 2000 testimony, we also noted that there is no comprehensive national strategy that could be used to measure progress. The Attorney General's Five-Year Plan represents a substantial interagency effort to develop a federal strategy, but it lacks desired outcomes. The Department of Justice believes that their current plan has measurable outcomes about specific agency actions. However, in our view, the plan needs to go beyond this to define an end state. As we have previously testified, the national strategy should incorporate the chief tenets of the Government Performance and Results Act of 1993 (P.L. 130-62). The Results Act holds federal agencies accountable for achieving program results and requires federal agencies to clarify their missions, set program goals, and measure performance toward achieving these goals. H.R. 525 would require the new council to publish a domestic terrorism preparedness plan with objectives and priorities, an implementation plan, a description of roles of federal, state and local activities, and a defined end state with measurable standards for preparedness. In our December 1997 report, we reported that there was no mechanism to centrally manage funding requirements and to ensure an efficient, focused governmentwide approach to combat terrorism. Our work led to legislation that required the Office of Management and Budget to provide annual reports on governmentwide spending to combat terrorism. These reports represent a significant step toward improved management by providing strategic oversight of the magnitude and direction of spending for these programs. Yet we have not seen evidence that these reports have established priorities or identified duplication of effort as the Congress intended. H.R. 525 would require the new council to develop and make budget recommendations for federal agencies and the Office of Management and Budget. The Office of Management and Budget would have to provide an explanation in cases where the new council's recommendations were not followed. The new council would also identify and eliminate duplication, fragmentation, and overlap in federal preparedness programs. In our April 2000 testimony, we observed that federal programs addressing terrorism appear in many cases to be overlapping and uncoordinated. To improve coordination, the executive branch has created organizations like the National Domestic Preparedness Office and various interagency working groups. In addition, the annual updates to the Attorney General's Five-Year Plan track individual agencies' accomplishments. Nevertheless, we have still noted that the multitude of similar federal programs have led to confusion among the state and local first responders they are meant to serve. H.R. 525 would require the new council to coordinate and oversee the implementation of related programs by federal agencies in accordance with the domestic terrorism preparedness plan. The new council would also make recommendations to the heads of federal agencies regarding their programs. Furthermore, the new council would provide written notification to any department that it believes is not in compliance with its responsibilities under the plan. Federal efforts to combat terrorism are inherently difficult to lead and manage because the policy, strategy, programs, and activities to combat terrorism cut across more than 40 agencies. Congress has been concerned with the management of these programs and, in addition to H.R. 525, two other bills have been introduced to change the overall leadership and management of programs to combat terrorism. On March 21, 2001, Representative Thornberry introduced H.R. 1158, the National Homeland Security Act, which advocates the creation of a cabinet-level head within the proposed National Homeland Security Agency to lead homeland security activities. On March 29, 2001 Representative Skelton introduced H.R. 1292, the Homeland Security Strategy Act of 2001, which calls for the development of a homeland security strategy developed by a single official designated by the President. In addition, several other proposals from congressional committee reports and various commission reports advocate changes in the structure and management of federal efforts to combat terrorism. These include Senate Report 106-404 to Accompany H.R. 4690 on the Departments of Commerce, Justice, and State, the Judiciary, and Related Agencies Appropriation Bill 2001, submitted by Senator Gregg on September 8, 2000; the report by the Gilmore Panel (the Advisory Panel to Assess Domestic Response Capabilities for Terrorism Involving Weapons of Mass Destruction, chaired by Governor James S. Gilmore III) dated December 15, 2000; the report of the Hart-Rudman Commission (the U.S. Commission on National Security/21st Century, chaired by Senators Gary Hart and Warren B. Rudman) dated January 31, 2001; and a report from the Center for Strategic and International Studies (Executive Summary of Four CSIS Working Group Reports on Homeland Defense, chaired by Messrs. Frank Cilluffo, Joseph Collins, Arnaud de Borchgrave, Daniel Goure, and Michael Horowitz) dated 2000. The bills and related proposals vary in the scope of their coverage. H.R. 525 focuses on federal programs to prepare state and local governments for dealing with domestic terrorist attacks. Other bills and proposals include the larger issue of homeland security that includes threats other than terrorism, such as military attacks. H.R. 525 would attempt to resolve cross-agency leadership problems by creating a single focal point within the Executive Office of the President. The other related bills and proposals would also create a single focal point for programs to combat terrorism, and some would have the focal point perform many of the same functions. For example, some of the proposals would have the focal point lead efforts to develop a national strategy. The proposals (with one exception) would have the focal point appointed with the advice and consent of the Senate. However, the various bills and proposals differ in where they would locate the focal point for overall leadership and management. The two proposed locations for the focal point are in the Executive Office of the President (like H.R. 525) or in a Lead Executive Agency. Table 1 shows various proposals regarding the focal point for overall leadership, the scope of its activities, and it's location. Location of focal point Executive Office of the President Lead Executive Agency (National Homeland Security Agency) Lead Executive Agency (Department of Justice) Lead Executive Agency (National Homeland Security Agency) Homeland security (including domestic terrorism, maritime and border security, disaster relief and critical infrastructure activities) Homeland security (including antiterrorism and protection of territory and critical infrastructures from unconventional and conventional threats by military or other means) Domestic terrorism preparedness (crisis and consequence management) Domestic and international terrorism (crisis and consequence management) Homeland security (including domestic terrorism, maritime and border security, disaster relief, and critical infrastructure activities) Homeland Defense (including domestic terrorism and critical infrastructure protection) Based upon our analysis of legislative proposals, various commission reports, and our ongoing discussions with agency officials, each of the two locations for the focal point--the Executive Office of the President or a Lead Executive Agency--has its potential advantages and disadvantages. An important advantage of placing the position with the Executive Office of the President is that the focal point would be positioned to rise above the particular interests of any one federal agency. Another advantage is that the focal point would be located close to the President to resolve cross agency disagreements. A disadvantage of such a focal point would be the potential to interfere with operations conducted by the respective executive agencies. Another potential disadvantage is that the focal point might hinder direct communications between the President and the cabinet officers in charge of the respective executive agencies. Alternately, a focal point with a Lead Executive Agency could have the advantage of providing a clear and streamlined chain of command within an agency in matters of policy and operations. Under this arrangement, we believe that the Lead Executive Agency would have to be one with a dominant role in both policy and operations related to combating terrorism. Specific proposals have suggested that this agency could be either the Department of Justice (per Senate Report 106-404) or an enhanced Federal Emergency Management Agency (per H.R. 1158 and its proposed National Homeland Security Agency). Another potential advantage is that the cabinet officer of the Lead Executive Agency might have better access to the President than a mid-level focal point with the Executive Office of the President. A disadvantage of the Lead Executive Agency approach is that the focal point--which would report to the cabinet head of the Lead Executive Agency--would lack autonomy. Further, a Lead Executive Agency would have other major missions and duties that might distract the focal point from combating terrorism. Also, other agencies may view the focal point's decisions and actions as parochial rather than in the collective best interest. H.R. 525 would provide the new President's Council on Domestic Terrorism Preparedness with a variety of duties. In conducting these duties, the new council would, to the extent practicable, rely on existing documents, interagency bodies, and existing governmental entities. Nevertheless, the passage of H.R. 525 would warrant a review of several existing organizations to compare their duties with the new council's responsibilities. In some cases, those existing organizations may no longer be required or would have to conduct their activities under the supervision of the new council. For example, the National Domestic Preparedness Office was created to be a focal point for state and local governments and has a state and local advisory group. The new council has similar duties that may eliminate the need for the National Domestic Preparedness Office. As another example, we believe the overall coordinating role of the new council may require adjustments to the coordinating roles played by the Federal Emergency Management Agency, the Department of Justice's Office of State and Local Domestic Preparedness Support, and the National Security Council's Weapons of Mass Destruction Preparedness Group in the policy coordinating committee on Counterterrorism and National Preparedness. In our ongoing work, we have found that there is no consensus--either in Congress, the Executive Branch, the various commissions, or the organizations representing first responders--as to whether the focal point should be in the Executive Office of the President or a Lead Executive Agency. Developing such a consensus on the focal point for overall leadership and management, determining its location, and providing it with legitimacy and authority through legislation, is an important task that lies ahead. We believe that this hearing and the debate that it engenders, will help to reach that consensus. This concludes our testimony. We would be pleased to answer any questions you may have. For future questions about this statement, please contact Raymond J. Decker, Director, Defense Capabilities and Management at (202) 512-6020. Individuals making key contributions to this statement include Stephen L. Caldwell and Krislin Nalwalk. Combating Terrorism: Observations on Options to Improve the Federal Response (GAO-01-660T, Apr. 24, 2001). Combating Terrorism: Accountability Over Medical Supplies Needs Further Improvement (GAO-01-463, Mar. 30, 2001). Combating Terrorism: Federal Response Teams Provide Varied Capabilities; Opportunities Remain to Improve Coordination (GAO-01-14, Nov. 30, 2000). Combating Terrorism: Linking Threats to Strategies and Resources (GAO/T-NSIAD-00-218, July 26, 2000). Combating Terrorism: Comments on Bill H.R. 4210 to Manage Selected Counterterrorist Programs (GAO/T-NSIAD-00-172, May 4, 2000). Combating Terrorism: How Five Foreign Countries Are Organized to Combat Terrorism (GAO/NSIAD-00-85, Apr. 7, 2000). Combating Terrorism: Issues in Managing Counterterrorist Programs (GAO/T-NSIAD-00-145, Apr. 6, 2000). Combating Terrorism: Need to Eliminate Duplicate Federal Weapons of Mass Destruction Training (GAO/NSIAD-00-64, Mar. 21, 2000). Critical Infrastructure Protection: Comprehensive Strategy Can Draw on Year 2000 Experiences (GAO/AIMD-00-1, Oct. 1, 1999). Combating Terrorism: Need for Comprehensive Threat and Risk Assessments of Chemical and Biological Attack (GAO/NSIAD-99-163, Sept. 7, 1999). Combating Terrorism: Observations on Growth in Federal Programs (GAO/T-NSIAD-99-181, June 9, 1999). Combating Terrorism: Issues to Be Resolved to Improve Counterterrorist Operations (GAO/NSIAD-99-135, May 13, 1999). Combating Terrorism: Observations on Federal Spending to Combat Terrorism (GAO/T-NSIAD/GGD-99-107, Mar. 11, 1999). Combating Terrorism: Opportunities to Improve Domestic Preparedness Program Focus and Efficiency (GAO/NSIAD-99-3, Nov. 12, 1998).

This testimony discusses the Preparedness Against Domestic Terrorism Act of 2001 (H.R. 525). To improve federal efforts to help state and local personnel prepare for domestic terrorist attacks, H.R. 525 would create a single focal point for policy and coordination--the President's Council on Domestic Terrorism Preparedness--within the White House. The new council would include the President, several cabinet secretaries, and other selected high-level officials. H.R. 525 would (1) create an executive director position with a staff that would collaborate with other executive agencies to assess threats, (2) require the new council to develop a national strategy, (3) require the new council to analyze and review budgets, and (4) require the new council to oversee implementation among the different federal agencies. Other proposals before Congress would also create a single focal point for terrorism. Some of these proposals place the focal point in the Executive Office of the President and others place it in a lead executive agency. Both locations have advantages and disadvantages.

In response to global challenges the government faces in the coming years, we have a unique opportunity to create an extremely effective and performance-based organization that can strengthen the nation's ability to protect its borders and citizens against terrorism. There is likely to be considerable benefit over time from restructuring some of the homeland security functions, including reducing risk and improving the economy, efficiency, and effectiveness of these consolidated agencies and programs. Realistically, however, in the short term, the magnitude of the challenges that the new department faces will clearly require substantial time and effort, and will take additional resources to make it fully effective. The Comptroller General has testified that the Congress should consider several very specific criteria in its evaluation of whether individual agencies or programs should be included or excluded from the proposed department. Those criteria include the following: Mission Relevancy: Is homeland security a major part of the agency or program mission? Is it the primary mission of the agency or program? Similar Goals and Objectives: Does the agency or program being considered for the new department share primary goals and objectives with the other agencies or programs being consolidated? Leverage Effectiveness: Does the agency or program being considered for the new department promote synergy and help to leverage the effectiveness of other agencies and programs or the new department as a whole? In other words, is the whole greater than the sum of the parts? Gains Through Consolidation: Does the agency or program being considered for the new department improve the efficiency and effectiveness of homeland security missions through eliminating duplications and overlaps, closing gaps, and aligning or merging common roles and responsibilities? Integrated Information Sharing/Coordination: Does the agency or program being considered for the new department contribute to or leverage the ability of the new department to enhance the sharing of critical information or otherwise improve the coordination of missions and activities related to homeland security? Compatible Cultures: Can the organizational culture of the agency or program being considered for the new department effectively meld with the other entities that will be consolidated? Field structures and approaches to achieving missions vary considerably between agencies. Impact on Excluded Agencies: What is the impact on departments losing components to the new department? What is the impact on agencies with homeland security missions left out of the new department? In the President's proposal, the new Department of Homeland Security would be responsible for conducting a national scientific research and development program, including developing national policy and coordinating the federal government's civilian efforts to counter chemical, biological, radiological, and nuclear weapons or other emerging terrorist threats. The new department would carry out its civilian health-related biological, biomedical, and infectious disease defense research and development through agreements with HHS, unless otherwise directed by the President. As part of this responsibility, the new department would establish priorities and direction for programs of basic and applied research on the detection, treatment, and prevention of infectious diseases such as those programs conducted by NIH. NIH supports and carries out biomedical research to study, prevent, and treat infectious and immunologic human diseases. Infectious diseases include those caused by new, emerging, and reemerging infectious agents, including those that are intentionally introduced as an act of bioterrorism. The emphasis of antiterrorism research supported by NIH has been in four areas: (1) design and testing of new diagnostic tools; (2) design, development, and clinical evaluation of therapies; (3) design, development, and clinical evaluation of vaccines; and (4) other basic research, including genome sequencing. The President's proposal also would transfer the select agent program from HHS to the new department. Currently administered by CDC, this program's mission is ensuring the security of those biologic agents that pose a severe threat to public health and safety and could be used by terrorists. The proposal provides for the new department to consult with appropriate agencies, which would include HHS, in maintaining the select agent list and to consult with HHS in carrying out the program. The proposed Department of Homeland Security would be tasked with developing national policy for and coordinating the federal government's civilian research and development efforts to counter chemical, biological, radiological, and nuclear threats. The new department also could improve coordination of biomedical research and development efforts. In addition to coordination, the role of the new department would need to include forging collaborative relationships with programs at all levels of government and developing a strategic plan for research and development. We have previously reported that the limited coordination among federal research and development programs may result in a duplication of efforts. Coordination is hampered by the extent of compartmentalization of efforts because of the sensitivity of the research and development programs, security classification of research, and the absence of a single coordinating entity to help prevent duplication. For example, the Department of Defense's (DOD) Defense Advanced Research Projects Agency was unaware of U.S. Coast Guard plans to develop methods to detect a biological agent on an infected cruise ship and therefore was unable to share information on its research to develop biological detection devices that could have been applicable to buildings infected this way. The new department would need to develop mechanisms to coordinate and integrate information about ongoing research and development being performed across the government related to chemical, biological, radiological, and nuclear terrorism, as well as harmonize user needs. Although the proposal tasks the new department with coordinating the federal government's "civilian efforts" only, the new department also would need to coordinate with DOD because DOD conducts biomedical research and development efforts designed to detect and respond to weapons of mass destruction. Although DOD's efforts are geared toward protecting armed services members, they may also be applicable to the civilian population. Currently, NIH is working with DOD on biomedical research and development efforts, and it is important for this collaboration to continue. An example of NIH and DOD's efforts is their support of databases to compare the sequences and functions of poxvirus genes. These searchable databases enable researchers to select targets for designing antiviral drugs and vaccines, and serve as repositories for information on well documented poxvirus strains to aid in detection and diagnosis. The President's proposal could help improve coordination of federal research and development by giving one person the responsibility for a single national research and development strategy that could address coordination, reduce potential duplication, and ensure that important issues are addressed. In 2001, we recommended the creation of a unified strategy to reduce duplication and leverage resources, and suggested that the plan be coordinated with federal agencies performing the research as well as with state and local authorities. Such a plan would help to ensure that research gaps are filled, unproductive duplication is minimized, and that individual agency plans are consistent with the overall goals. We are concerned about the implications of the proposed transfer of control and priority setting for dual-purpose research programs. For example, some research programs have broad missions that are not easily separated into homeland security research and research for other purposes. We are concerned that such dual-purpose research activities may lose the synergy arising from their current placement. The President's proposal would transfer the responsibility for civilian biomedical defense research and development programs to the new department, but the programs would continue to be carried out through HHS. These programs, now primarily sponsored by NIH, include a variety of efforts to understand basic biological mechanisms of infection and to develop and test rapid diagnostic tools, vaccines, and antibacterial and antiviral drugs. These efforts have dual-purpose applicability. The scientific research on biologic agents that could be used by terrorists cannot be readily separated from research on emerging infectious diseases. For example, research being carried out on antiviral drugs in the NIH biodefense research program is expected to be useful in the development of treatments for hepatitis C. NIH biodefense research on enhanced immunologic responses to protect against infection and disease is critical in the development of interventions against both naturally occurring and man-made pathogens. The proposal to transfer to the new department responsibility for research and development programs that would continue to be carried out by HHS raises many concerns. Although there is a clear need for the new department to have responsibility for setting policy, developing a strategy, providing leadership, and coordinating research and development efforts in these areas, we are concerned that control and priority-setting responsibility will not be vested in those programs best positioned to understand the potential of basic research efforts or the relevance of research being carried out in other, nonbiodefense programs. For example, NIH-funded research on a drug to treat cytomegalovirus complications in patients with HIV is now being investigated as a prototype for developing antiviral drugs against smallpox. There is the potential that the proposal would allow the new department to direct, fund, and conduct research related to chemical, biological, radiological, nuclear, and other emerging threats on its own. This raises the potential for duplication of effort, lack of efficiency, and an increased need for coordination with other departments that would continue to carry out relevant research. Design and implementation of a research agenda is most efficient at the level of the mission agency where scientific and technical expertise resides. Building and duplicating the existing facilities and expertise in the current federal laboratories needed to conduct this research would be inefficient. The proposal would transfer the Laboratory Registration/Select Agent Transfer Program from HHS to the new department. The select agent program, recently revised and expanded by the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, generally requires the registration of persons and laboratory facilities possessing specific biologic agents and toxins--called select agents--that have the potential to pose a serious threat to public health and safety. Select agents include approximately 40 viruses, bacteria, rickettsia, fungi, and toxins. Examples include Ebola, anthrax, botulinum, and ricin. The 2002 act expanded the program's requirements to include facilities that possess the agents as well as the facilities that transfer the agents. The mission of the select agent program appears to be closely aligned with homeland security. As we stated earlier, one key consideration in evaluating whether individual agencies or programs should be included or excluded from the proposed department is the extent to which homeland security is a major part of the agency or program mission. By these criteria, the transfer of the select agent program would enhance efficiency and accountability. The President's proposal would address some shortcomings noted earlier in this statement. Better coordination could reduce wasteful duplication and increase efficiency. The mission of the select agent program is aligned with the new department and, therefore, the transfer of the program would enhance efficiency and accountability. However, we are concerned about the broad control the proposal grants to the new department for biomedical research and development. Although there is a need to coordinate these activities with the other homeland security preparedness and response programs that would be brought into the new department, there is also a need to maintain the priorities for current dual-purpose biomedical research. The President's proposal does not adequately address how to accomplish both objectives or how to maintain a priority- setting role for those best positioned to understand the relevance of biomedical research. We are also concerned that the proposal has the potential to create an unnecessary duplication of federal research capacity. Mr. Chairman, this completes 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 about this testimony, please contact me at (202) 512-7118. Robert Copeland, Marcia Crosse, and Deborah Miller also made key contributions to this statement. Homeland Security: Intergovernmental Coordination and Partnership Will Be Critical to Success. GAO-02-901T. Washington, D.C.: July 3, 2002. Homeland Security: Intergovernmental Coordination and Partnership Will Be Critical to Success. GAO-02-900T. Washington, D.C.: July 2, 2002. Homeland Security: Intergovernmental Coordination and Partnership Will Be Critical to Success. GAO-02-899T. Washington, D.C.: July 1, 2002. Homeland Security: New Department Could Improve Coordination but May Complicate Priority Setting. GAO-02-893T. Washington, D.C.: June 28, 2002. Homeland Security: Proposal for Cabinet Agency Has Merit, but Implementation Will Be Pivotal to Success. GAO-02-886T. Washington, D.C.: June 25, 2002. Homeland Security: New Department Could Improve Coordination but May Complicate Public Health Priority Setting. GAO-02-883T. Washington, D.C.: June 25, 2002. Homeland Security: Key Elements to Unify Efforts Are Underway but Uncertainty Remains. GAO-02-610. Washington, D.C.: June 7, 2002. Homeland Security: Responsibility and Accountability for Achieving National Goals. GAO-02-627T. Washington, D.C.: April 11, 2002. Homeland Security: Progress Made; More Direction and Partnership Sought. GAO-02-490T. Washington, D.C.: March 12, 2002. Homeland Security: Challenges and Strategies in Addressing Short- and Long-Term National Needs. GAO-02-160T. Washington, D.C.: November 7, 2001. Homeland Security: A Risk Management Approach Can Guide Preparedness Efforts. GAO-02-208T. Washington, D.C.: October 31, 2001. Homeland Security: Need to Consider VA's Role in Strengthening Federal Preparedness. GAO-02-145T. Washington, D.C.: October 15, 2001. Homeland Security: Key Elements of a Risk Management Approach. GAO-02-150T. Washington, D.C.: October 12, 2001. Homeland Security: A Framework for Addressing the Nation's Efforts. GAO-01-1158T. Washington, D.C.: September 21, 2001. Bioterrorism: The Centers for Disease Control and Prevention's Role in Public Health Protection. GAO-02-235T. Washington, D.C.: November 15, 2001. Bioterrorism: Review of Public Health Preparedness Programs. GAO-02- 149T. Washington, D.C.: October 10, 2001. Bioterrorism: Public Health and Medical Preparedness. GAO-02-141T. Washington, D.C.: October 9, 2001. Bioterrorism: Coordination and Preparedness. GAO-02-129T. Washington, D.C.: October 5, 2001. Bioterrorism: Federal Research and Preparedness Activities. GAO-01- 915. Washington, D.C.: September 28, 2001. Chemical and Biological Defense: Improved Risk Assessment and Inventory Management Are Needed. GAO-01-667. Washington, D.C.: September 28, 2001. West Nile Virus Outbreak: Lessons for Public Health Preparedness. GAO/HEHS-00-180. Washington, D.C.: September 11, 2000. Chemical and Biological Defense: Program Planning and Evaluation Should Follow Results Act Framework. GAO/NSIAD-99-159. Washington, D.C.: August 16, 1999. Combating Terrorism: Observations on Biological Terrorism and Public Health Initiatives. GAO/T-NSIAD-99-112. Washington, D.C.: March 16, 1999. National Preparedness: Technologies to Secure Federal Buildings. GAO- 02-687T. Washington, D.C.: April 25, 2002. National Preparedness: Integration of Federal, State, Local, and Private Sector Efforts Is Critical to an Effective National Strategy for Homeland Security. GAO-02-621T. Washington, D.C.: April 11, 2002. Combating Terrorism: Intergovernmental Cooperation in the Development of a National Strategy to Enhance State and Local Preparedness. GAO-02-550T. Washington, D.C.: April 2, 2002. Combating Terrorism: Enhancing Partnerships Through a National Preparedness Strategy. GAO-02-549T. Washington, D.C.: March 28, 2002. Combating Terrorism: Critical Components of a National Strategy to Enhance State and Local Preparedness. GAO-02-548T. Washington, D.C.: March 25, 2002. Combating Terrorism: Intergovernmental Partnership in a National Strategy to Enhance State and Local Preparedness. GAO-02-547T. Washington, D.C.: March 22, 2002. Combating Terrorism: Key Aspects of a National Strategy to Enhance State and Local Preparedness. GAO-02-473T. Washington, D.C.: March 1, 2002. Chemical and Biological Defense: DOD Should Clarify Expectations for Medical Readiness. GAO-02-219T. Washington, D.C.: November 7, 2001. Anthrax Vaccine: Changes to the Manufacturing Process. GAO-02-181T. Washington, D.C.: October 23, 2001. Chemical and Biological Defense: DOD Needs to Clarify Expectations for Medical Readiness. GAO-02-38. Washington, D.C.: October 19, 2001. Combating Terrorism: Considerations for Investing Resources in Chemical and Biological Preparedness. GAO-02-162T. Washington, D.C.: October 17, 2001. Combating Terrorism: Selected Challenges and Related Recommendations. GAO-01-822. Washington, D.C.: September 20, 2001. Combating Terrorism: Actions Needed to Improve DOD Antiterrorism Program Implementation and Management. GAO-01-909. Washington, D.C.: September 19, 2001. Combating Terrorism: Comments on H.R. 525 to Create a President's Council on Domestic Terrorism Preparedness. GAO-01-555T. Washington, D.C.: May 9, 2001. Combating Terrorism: Accountability Over Medical Supplies Needs Further Improvement. GAO-01-666T. Washington, D.C.: May 1, 2001. Combating Terrorism: Observations on Options to Improve the Federal Response. GAO-01-660T. Washington, DC: April 24, 2001. Combating Terrorism: Accountability Over Medical Supplies Needs Further Improvement. GAO-01-463. Washington, D.C.: March 30, 2001. Combating Terrorism: Comments on Counterterrorism Leadership and National Strategy. GAO-01-556T. Washington, D.C.: March 27, 2001. Combating Terrorism: FEMA Continues to Make Progress in Coordinating Preparedness and Response. GAO-01-15. Washington, D.C.: March 20, 2001. Combating Terrorism: Federal Response Teams Provide Varied Capabilities; Opportunities Remain to Improve Coordination. GAO-01- 14. Washington, D.C.: November 30, 2000. Combating Terrorism: Need to Eliminate Duplicate Federal Weapons of Mass Destruction Training. GAO/NSIAD-00-64. Washington, D.C.: March 21, 2000. Combating Terrorism: Chemical and Biological Medical Supplies Are Poorly Managed. GAO/T-HEHS/AIMD-00-59. Washington, D.C.: March 8, 2000. Combating Terrorism: Chemical and Biological Medical Supplies Are Poorly Managed. GAO/HEHS/AIMD-00-36. Washington, D.C.: October 29, 1999. Combating Terrorism: Observations on the Threat of Chemical and Biological Terrorism. GAO/T-NSIAD-00-50. Washington, D.C.: October 20, 1999. Combating Terrorism: Need for Comprehensive Threat and Risk Assessments of Chemical and Biological Attacks. GAO/NSIAD-99-163. Washington, D.C.: September 14, 1999. Chemical and Biological Defense: Coordination of Nonmedical Chemical and Biological R&D Programs. GAO/NSIAD-99-160. Washington, D.C.: August 16, 1999. Combating Terrorism: Use of National Guard Response Teams Is Unclear. GAO/T-NSIAD-99-184. Washington, D.C.: June 23, 1999. Combating Terrorism: Observations on Growth in Federal Programs. GAO/T-NSIAD-99-181. Washington, D.C.: June 9, 1999. Combating Terrorism: Analysis of Potential Emergency Response Equipment and Sustainment Costs. GAO/NSIAD-99-151. Washington, D.C.: June 9, 1999. Combating Terrorism: Use of National Guard Response Teams Is Unclear. GAO/NSIAD-99-110. Washington, D.C.: May 21, 1999. Combating Terrorism: Observations on Federal Spending to Combat Terrorism. GAO/T-NSIAD/GGD-99-107. Washington, D.C.: March 11, 1999. Combating Terrorism: Opportunities to Improve Domestic Preparedness Program Focus and Efficiency. GAO/NSIAD-99-3. Washington, D.C.: November 12, 1998. Combating Terrorism: Observations on the Nunn-Lugar-Domenici Domestic Preparedness Program. GAO/T-NSIAD-99-16. Washington, D.C.: October 2, 1998. Combating Terrorism: Observations on Crosscutting Issues. GAO/T- NSIAD-98-164. Washington, D.C.: April 23, 1998. Combating Terrorism: Threat and Risk Assessments Can Help Prioritize and Target Program Investments. GAO/NSIAD-98-74. Washington, D.C.: April 9, 1998. Combating Terrorism: Spending on Governmentwide Programs Requires Better Management and Coordination. GAO/NSIAD-98-39. Washington, D.C.: December 1, 1997. Disaster Assistance: Improvement Needed in Disaster Declaration Criteria and Eligibility Assurance Procedures. GAO-01-837. Washington, D.C.: August 31, 2001. Chemical Weapons: FEMA and Army Must Be Proactive in Preparing States for Emergencies. GAO-01-850. Washington, D.C.: August 13, 2001.

Title III of the proposed Homeland Security Act of 2002 would transfer responsibility for certain chemical, biological, radiological, and nuclear research and development programs and activities to the new department. The proposed Department of Homeland Security would develop national policy for, and coordination of, the federal government's civilian research and development efforts to counter chemical, biological, radiological, and nuclear threats. Although the new department could improve coordination of existing research and development programs, the proposed transfer of control and priority setting for research from the organizations where the research would be conducted could be disruptive. Transferring control over these programs, including priority setting, to the new department has the potential to disrupt some programs that are critical to basic public health. The President's proposal is not clear on how both the homeland security and the biomedical research objectives would be accomplished. However, if an agency's mission fits with homeland security, its transfer to the new department is appropriate.

Figure 1 compares original cost estimates and current cost estimates for the broader portfolio of major space acquisitions for fiscal years 2008 through 2013. The wider the gap between original and current estimates, the fewer dollars DOD has available to invest in new programs. As shown in the figure, estimated costs for the major space acquisition programs have increased by about $10.9 billion from initial estimates for fiscal years 2008 through 2013. The declining investment in the later years is the result of the Evolved Expendable Launch Vehicle (EELV) program no longer being considered a major acquisition program and the cancellation and proposed cancellation of two development efforts which would have significantly increased DOD's major space acquisition investment. Figures 2 and 3 reflect differences in total life-cycle costs and unit costs for satellites from the time the programs officially began to their most recent cost estimate. As figure 3 notes, in several cases, DOD has had to cut back on quantity and capability in the face of escalating costs. For example, two satellites and four instruments were deleted from National Polar-orbiting Operational Environmental Satellite System (NPOESS) and four sensors are expected to have fewer capabilities. This will reduce some planned capabilities for NPOESS as well as planned coverage. Figure 4 highlights the additional estimated months needed to complete programs. These additional months represent time not anticipated at the programs' start dates. Generally, the further schedules slip, the more DOD is at risk of not sustaining current capabilities. For this reason, DOD began a follow-on system effort, known as the Third Generation Infrared Satellite to run in parallel with the Space Based Infrared System (SBIRS) program. This fiscal year, DOD launched the second Wideband Global SATCOM (WGS) satellite. WGS had previously been experiencing technical and other problems, including improperly installed fasteners and data transmission errors. When DOD finally resolved these issues, it significantly advanced capability available to warfighters. Additionally, the EELV program had its 23rd consecutive successful operational launch earlier this month. However, other major space programs have had setbacks. For example: In September 2008, the Air Force reported a Nunn-McCurdy unit cost breach of the critical cost growth threshold for the Advanced Extremely High Frequency (AEHF) satellite because of cost growth brought on by technical issues, schedule delays, and increased costs for the procurement of a fourth AEHF satellite. The launch of the first satellite has slipped further by almost 2 years from November 2008 to as late as September 2010. Further, the program office estimates that the fourth AEHF satellite could cost more than twice the third satellite because some components that are no longer manufactured will have to be replaced and production will have to be restarted after a 4-year gap. Because of these delays, initial operational capability has slipped 3 years--from 2010 to 2013. The Mobile User Objective System (MUOS) communications satellite estimates an 11-month delay--from March 2010 to February 2011--in the delivery of on-orbit capability from the first satellite. Further, contractor costs for the space segment have increased about 48 percent because of the additional labor required to address issues related to satellite design complexity, satellite weight, and satellite component test anomalies and associated rework. Despite the contractor cost increases, the program has been able to remain within its baseline program cost estimate. The Global Positioning System (GPS) IIF satellite is now expected to be delayed almost 3 years from its original date to November 2009. Also, the cost of GPS IIF is now expected to be about $1.6 billion--about $870 million over the original cost estimate of $729 million. (This approximately 119 percent cost increase is not that noticeable in figures 2 and 3 because the GPS II modernization program includes the development and procurement of 33 satellites, only 12 of which are IIF satellites.) The Air Force has had difficulty in the past building GPS satellites within cost and schedule goals because of significant technical problems, which still threaten its delivery schedule and because of challenges it faced with a different contractor for the IIF program, which did not possess the same expertise as the previous GPS contractor. Further, while the Air Force is structuring the new GPS IIIA program to prevent mistakes made on the IIF program, the Air Force is aiming to deploy the GPS IIIA satellites 3 years faster than the IIF satellites. We believe the IIIA schedule is optimistic given the program's late start, past trends in space acquisitions, and challenges facing the new contractor. Total program cost for the SBIRS program is estimated around $12.2 billion, an increase of $7.5 billion over the original program cost, which included 5 geosynchronous earth orbit (GEO) satellites. The first GEO satellite has been delayed roughly 7 years in part because of poor oversight, technical complexities, and rework. Although the program office set December 2009 as the new launch goal for the satellite, a recent assessment by the Defense Contract Management Agency anticipates an August 2010 launch date, adding an additional 8 months to the previous launch estimate. Subsequent GEO satellites have also slipped as a result of the flight software design issues. The NPOESS program has experienced problems with replenishing its aging constellation of satellites and was restructured in July 2007 in response to a Nunn-McCurdy unit cost breach of the critical cost growth threshold. The program was originally estimated to cost about $6.5 billion for six satellites from 1995 through 2018. The restructured program called for reducing the number of satellites from six to four and included an overall increase in program costs, delays in satellite launches, and deletions or replacements of satellite sensors. Although the number of satellites has been reduced, total costs have increased by almost 108 percent since program start. Specifically, the current estimated life cycle cost of the restructured program is now about $13.5 billion for four satellites through 2026. This amount is higher than what is reflected in figure 2 as it represents the most recent GAO estimate as opposed to the DOD estimates used in the figure. We reported last year that poor workmanship and testing delays caused an 8-month slip in the delivery of a complex imaging sensor. This late delivery caused a delay in the expected launch date of a demonstration satellite, moving it from late September 2009 to early January 2011. This year it is also becoming more apparent that space acquisition problems are leading to potential gaps in the delivery of critical capabilities. For example, DOD faces a potential gap in protected military communications caused by delays in the AEHF program and the proposed cancellation of the TSAT program, which itself posed risks in schedule delays because of TSAT's complexity and funding cuts designed to ensure technology objectives were achievable. DOD faces a potential gap in ultra high frequency (UHF) communications capability caused by the unexpected failures of two satellites already in orbit and the delays resulting from the MUOS program. DOD also faces potential gaps or decreases in positioning, navigation and timing capabilities because of late delivery of the GPS IIF satellites and the late start of the GPS IIIA program. There are also concerns about potential gaps in missile warning and weather monitoring capabilities because of delays in SBIRS and NPOESS. Addressing gaps in any one of these areas is not a simple matter. While there may be opportunities to build less complex "gap filler" satellites, for example, these still require time and money that may not be readily available because of commitments to the longer-term programs. There may also be opportunities to continue production of "older" generation satellites, but such efforts also require time and money that may not be readily available and may face other challenges such as restarting production lines and addressing issues related to obsolete parts and materials. Further, satellites on orbit can be made to last longer by turning power off at certain points in time, but this may also present unacceptable tradeoffs in capability. Our past work has identified a number of causes behind the cost growth and related problems, but several consistently stand out. First, on a broad scale, DOD starts more weapon programs than it can afford, creating a competition for funding that encourages low cost estimating, optimistic scheduling, overpromising, suppressing bad news, and, for space programs, forsaking the opportunity to identify and assess potentially more executable alternatives. Programs focus on advocacy at the expense of realism and sound management. Invariably, with too many programs in its portfolio, DOD is forced to continually shift funds to and from programs--particularly as programs experience problems that require additional time and money to address. Such shifts, in turn, have had costly, reverberating effects. Second, DOD has tended to start its space programs too early, that is, before it has the assurance that the capabilities it is pursuing can be achieved within available resources and time constraints. This tendency is caused largely by the funding process, since acquisition programs attract more dollars than efforts concentrating solely on proving technologies. Nevertheless, when DOD chooses to extend technology invention into acquisition, programs experience technical problems that require large amounts of time and money to fix. Moreover, when this approach is followed, cost estimators are not well positioned to develop accurate cost estimates because there are too many unknowns. Put more simply, there is no way to accurately estimate how long it would take to design, develop, and build a satellite system when critical technologies planned for that system are still in relatively early stages of discovery and invention. While our work has consistently found that maturing technologies before program start is a critical enabler of success, it is important to keep in mind that this is not the only solution. Both the TSAT and the Space Radar development efforts, for example, were seeking to mature critical technologies before program start, but they faced other risks related to the systems' complexity, affordability, and other development challenges. Ultimately, Space Radar was cancelled and DOD has proposed the cancellation of TSAT. Last year, we cited the MUOS program's attempts to mature critical technologies before program start as a best practice, but the program has since encountered technical problems related to design issues and test anomalies. Third, programs have historically attempted to satisfy all requirements in a single step, regardless of the design challenge or the maturity of the technologies necessary to achieve the full capability. DOD has preferred to make fewer but heavier, larger, and more complex satellites that perform a multitude of missions rather than larger constellations of smaller, less complex satellites that gradually increase in sophistication. This has stretched technology challenges beyond current capabilities in some cases and vastly increased the complexities related to software. Programs also seek to maximize capability because it is expensive to launch satellites. A launch using a medium- or intermediate-lift evolved expendable launch vehicle, for example, would cost roughly $65 million. Fourth, several of today's high-risk space programs began in the late 1990s, when DOD structured contracts in a way that reduced government oversight and shifted key decision-making responsibility onto contractors. This approach--known as Total System Performance Responsibility, or TSPR--was intended to facilitate acquisition reform and enable DOD to streamline its acquisition process and leverage innovation and management expertise from the private sector. Specifically, TSPR gave a contractor total responsibility for the integration of an entire weapon system and for meeting DOD's requirements. However, because this reform made the contractor responsible for day-to-day program management, DOD did not require formal deliverable documents--such as earned value management reports--to assess the status and performance of the contractor. The resulting erosion of DOD's capability to lead and manage the space acquisition process magnified problems related to requirements creep and poor contractor performance. Further, the reduction in government oversight and involvement led to major reductions in various government capabilities, including cost-estimating and systems-engineering staff. The loss of cost-estimating and systems- engineering staff in turn led to a lack of technical data needed to develop sound cost estimates. We have not performed a comprehensive review of the space industrial base, but our prior work has identified a number of pressures associated with contractors that develop space systems for the government that have hampered the acquisition process. Many of these have been echoed in other studies conducted by DOD and congressionally chartered commissions. We and others have reported that industry--including both prime contractors and subcontractors--has been consolidated to a point where there may be only one company that can develop a needed capability or a specific component for a satellite system. In the view of DOD and industry officials we have interviewed, this condition has enabled contractors to hold some programs hostage and has made it difficult to inject competition into space programs. We also have identified cases where space programs experienced unanticipated problems resulting from consolidations in the supplier base. For example, contractors took cost- cutting measures that reduced the quality of parts. In the case of GPS IIF, contractors lost key technical personnel as they consolidated development and manufacturing facilities, causing inefficiencies in the program. In addition, space contractors are facing workforce pressures similar to those experienced by the government, that is, there is not enough technical expertise to develop highly complex space systems. A number of studies have found that both industry and the U.S. government face substantial shortages of scientists and engineers and that recruitment of new personnel is difficult because the space industry is one of many sectors competing for the limited number of trained scientists and engineers. Security clearance requirements make competing for talented personnel even more difficult for military and intelligence space programs as opposed to civil space programs. In a 2006 review of space cost estimating, we also found that the government has made erroneous assumptions about the space industrial base when it started the programs that are experiencing the most challenges today. In a review for this subcommittee, for instance, we found that the original contracting concept for the EELV program was for the Air Force to piggyback on the anticipated launch demand of the commercial sector. Furthermore, the Air Force assumed that it would benefit financially from competition among commercial vendors. However, the commercial demand never materialized, and the government decided to bear the cost burden of maintaining the industrial base in order to maintain launch capability, and assumed savings from competition were never realized. Over the past decade, we have identified best practices that DOD space programs can benefit from. DOD has taken a number of actions to address the problems on which we have reported. These include initiatives at the department level that will affect its major weapons programs, as well as changes in course within specific Air Force programs. Although these actions are a step in the right direction, additional leadership and support are still needed to ensure that reforms that DOD has begun will take hold. Our work--which is largely based on best practices in the commercial sector--has recommended numerous actions that can be taken to address the problems we identified. Generally, we have recommended that DOD separate technology discovery from acquisition, follow an incremental path toward meeting user needs, match resources and requirements at program start, and use quantifiable data and demonstrable knowledge to make decisions to move to next phases. We have also identified practices related to cost estimating, program manager tenure, quality assurance, technology transition, and an array of other aspects of acquisition program management that space programs could benefit from. Table 1 highlights these practices. Several of these practices could also benefit the space industrial base. For instance, applying an evolutionary approach to development would likely provide a steadier pipeline of government orders and thus enable suppliers to maintain their expertise and production lines. More realistic cost estimating and full funding would reduce funding instability, which could reduce fits and starts that create planning difficulties for suppliers. Longer tenure and more authority for program managers would provide more continuity in relationships between the government and its suppliers. DOD is attempting to implement some of these practices for its major weapon programs. For example, as part of its strategy for enhancing the roles of program managers in major weapon system acquisitions, the department has established a policy that requires formal agreements among program managers, their acquisition executives, and the user community that set forth common program goals. These agreements are intended to be binding and to detail the progress a program is expected to make during the year and the resources the program will be provided to reach these goals. DOD is also requiring program managers to sign tenure agreements so that their tenure will correspond to the next major milestone review closest to 4 years. Over the past few years, DOD has also been testing portfolio management approaches in selected capability areas--command and control, net-centric operations, battlespace awareness, and logistics--to facilitate more strategic choices for resource allocation across programs. Within the space community, cost estimators from industry and agencies involved in space have been working together to improve the accuracy and quality of their estimates. In addition, on specific programs, actions have been taken to prevent mistakes made in the past. For example, on the GPS IIIA program, the Air Force is using an incremental development approach, where it will gradually meet the needs of its users; using military standards for satellite quality; conducting multiple design reviews; exercising more government oversight and interaction with the contractor and spending more time at the contractor's site; and using an improved risk management process. On the SBIRS program, the Air Force acted to strengthen relationships between the government and the SBIRS contractor team, and to implement more effective software development practices as it sought to address problems related to the systems flight software system. Correspondingly, DOD's Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics is asking space programs passing through milestone reviews to take specific measures to better hold contractors accountable through award and incentive fees, to require independent technology readiness assessments at particular points in the acquisition process, and to hold requirements stable. Furthermore, the Air Force, U.S. Strategic Command, and other key organizations have made progress in implementing the Operationally Responsive Space (ORS) initiative. This initiative encompasses several separate endeavors with a goal to provide short-term tactical capabilities as well as identifying and implementing long-term technology and design solutions to reduce the cost and time of developing and delivering simpler satellites in greater numbers. ORS provides DOD with an opportunity to work outside the typical acquisition channels to more quickly and less expensively deliver these capabilities. In 2008, we found that DOD has made progress in putting a program management structure in place for ORS as well as executing ORS-related research and development efforts, which include development of low-cost small satellites, common design techniques, and common interfaces. Legislation introduced in recent years has also focused on improving space and weapon acquisitions. In February, the Senate Committee on Armed Services introduced an acquisition reform bill which contains provisions that could significantly improve DOD's management of space programs. For instance, the bill focuses on increasing emphasis on systems engineering and developmental testing, instituting earlier preliminary design reviews, and strengthening independent cost estimates and technology readiness assessments. Taken together, these measures could instill more discipline in the front end of the acquisition process when it is critical for programs to gain knowledge. The bill also requires greater involvement by the combatant commands in determining requirements and requiring greater consultation among the requirements, budget, and acquisition processes. In addition, several of the bill's sections, as currently drafted, would require in law what DOD policy already calls for, but it is not being implemented consistently in weapon programs. Last week, the House Committee on Armed Services announced it would be introducing a bill to similarly reform DOD's system for acquiring weapons by providing for, among other things, oversight early in product development and for appointment of independent officials to review acquisition programs. However, we did not have time to assess the bill for this statement. The actions that the Air Force and Office of the Secretary of Defense have been taking to address acquisition problems are good steps. But, there are still more, significant changes to processes, policies, and support needed to ensure reforms can take hold. In particular, several studies have recently concluded that there is a need to strengthen leadership for military and intelligence space efforts. The Allard Commission reported that responsibilities for military space and intelligence programs are scattered across the staffs of the DOD and the Intelligence Community and that it appears that "no one is in charge" of national security space. The HPSCI expressed similar concerns in its report, focusing specifically on difficulties in bringing together decisions that would involve both the Director of National Intelligence and the Secretary of Defense. Prior studies, including those conducted by the Defense Science Board and the Commission to Assess United States National Security Space Management and Organization (Space Commission) have identified similar problems, both for space as a whole and for specific programs. While these studies have made recommendations for strengthening leadership for space acquisitions, no major changes to the leadership structure have been made in recent years. In fact, an "executive agent" position within the Air Force that was designated in 2001 in response to a Space Commission recommendation to provide leadership has not been filled since the last executive resigned in 2007. In addition, more actions may be needed to address shortages of personnel in program offices for major space programs. We recently reported that personnel shortages at the EELV program office have occurred particularly in highly specialized areas, such as avionics and launch vehicle groups. Program officials stated that 7 of 12 positions in the engineering branch for the Atlas group were vacant. These engineers work on issues such as reviewing components responsible for navigation and control of the rocket. Moreover, only half the government jobs in some key areas were projected to be filled. These and other shortages in the EELV program office heightened concerns about DOD's ability to use a cost-reimbursement contract acquisition strategy for EELV since that strategy required greater government attention to the contractor's technical, cost, and schedule performance information. In previous reviews, we cited personnel shortages at program offices for TSAT as well as for cost estimators across space. While increased reliance on contractor employees has helped to address workforce shortages, it could ultimately create gaps in areas of expertise that could limit the government's ability to conduct oversight. Further, while actions are being undertaken to make more realistic cost estimates, programs are still producing schedule estimates that are optimistic and promising that they will not miss their schedule goals. The GPS IIIA program, for example, began 9 months later than originally anticipated because of funding delays, but the delivery date remained the same. The schedule is 3 years shorter than the one achieved so far on GPS IIF. We recognize that the GPS IIIA program has built a more solid foundation for success than the IIF, which offers the best course to deliver on time, but setting an ambitious schedule goal should not be the Air Force's only measure for mitigating potential capability gaps. Last year, we also reported that the SBIRS program's revised schedule estimates for addressing software problems appeared too optimistic. For example, software experts, independent reviewers, as well as the government officials we interviewed agreed that the schedule was aggressive, and the Defense Contract Management Agency has repeatedly highlighted the schedule as high risk. In conclusion, senior leaders managing DOD's space portfolio are working in a challenging environment. There are pressures to deliver new, transformational capabilities, but problematic older satellite programs continue to cost more than expected, constrain investment dollars, pose risks of capability caps, and thus require more time and attention from senior leaders than well-performing efforts. Moreover, military space is at a critical juncture. While there are concerns about the United States losing its competitive edge in the development of space technology, there are critical capabilities that are at risk of falling behind their current level of service. To best mitigate these circumstances and put future programs on a better path, DOD needs to focus foremost on sustaining current capabilities and preparing for potential gaps. In addition, there is still a looming question of how military and intelligence space activities should be organized and led. From an acquisition perspective, what is important is that the right decisions are made on individual programs, the right capability is in place to manage them, and there is someone to hold accountable when programs go off track. Madam Chairman, this concludes my prepared statement. I would be happy to answer any questions you or members of the subcommittee may have at this time. For further information about this statement, please contact Cristina Chaplain at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Pubic Affairs may be found on the last page of this statement. Individuals who made key contributions to this statement include Art Gallegos, Assistant Director; Greg Campbell; Maria Durant; Arturo Holguin; Laura Holliday; Rich Horiuchi; Sylvia Schatz; and Peter Zwanzig. In preparing this testimony, we relied on our body of work in space programs, including previously issued GAO reports on assessments of individual space programs, common problems affecting space system acquisitions, and the Department of Defense's (DOD) acquisition policies. We relied on our best practices studies, which comment on the persistent problems affecting space acquisitions, the actions DOD has been taking to address these problems, and what remains to be done. We also relied on work performed in support of our 2009 annual weapons system assessment. The individual reviews were conducted in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. This 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.

Despite a growing investment in space, the majority of large-scale acquisition programs in the Department of Defense's (DOD) space portfolio have experienced problems during the past two decades that have driven up cost and schedules and increased technical risks. The cost resulting from acquisition problems along with the ambitious nature of space programs have resulted in cancellations of programs that were expected to require investments of tens of billions of dollars. Along with the cost increases, many programs are experiencing significant schedule delays--as much as 7 years--resulting in potential capability gaps in areas such as positioning, navigation, and timing; missile warning; and weather monitoring. This testimony focuses on (3) the condition of space acquisitions, (1) causal factors, (2) observations on the space industrial base, and (4) recommendations for better positioning programs and industry for success. In preparing this testimony, GAO relied on its body of work in space and other programs, including previously issued GAO reports on assessments of individual space programs, common problems affecting space system acquisitions, and DOD's acquisition policies. Estimated costs for major space acquisition programs have increased by about $10.9 billion from initial estimates for fiscal years 2008 through 2013. As seen in the figure below, in several cases, DOD has had to cut back on quantity and capability in the face of escalating costs. Several causes behind the cost growth and related problems consistently stand out. First, DOD starts more weapon programs than it can afford, creating a competition for funding that encourages, among other things, low cost estimating and optimistic scheduling. Second, DOD has tended to start its space programs before it has the assurance that the capabilities it is pursuing can be achieved within available resources. GAO and others have identified a number of pressures associated with the contractors that develop space systems for the government that have hampered the acquisition process, including ambitious requirements, the impact of industry consolidation, and shortages of technical expertise in the workforce. Although DOD has taken a number of actions to address the problems on which GAO has reported, additional leadership and support are still needed to ensure that reforms that DOD has begun will take hold.

The State Department operates over 160 embassies and over 100 consulates at a cost of about $2 billion annually. The embassies perform diplomatic and consular functions and provide administrative support for other U.S. agencies. State employs over 7,300 U.S. Foreign Service officers, about 10,000 Foreign Service nationals, 650 U.S. contractors, and 30,000 Foreign Service national contractors. Worldwide, embassies manage about $600 million worth of personal property, procure about $500 million in goods and services annually, and share management responsibilities for about $12 billion in housing and other real properties. Embassies also have responsibility for over $2 million annually in accounts receivable, such as medical expenses. For decades, long-standing management deficiencies have weakened administrative operations at the embassies, and millions of dollars remained unnecessarily vulnerable to fraud, waste, and abuse. We have previously criticized State's deficient controls over embassies' personal and real property, cashiering operations, contract administration, and training. In July 1993, we testified that management deficiencies continued to plague embassies' operations. We suggested that each embassy establish a formal management improvement program to ensure sound management practices by documenting problems and monitoring corrective actions. For years, Congress has been concerned about State's reluctance to address management and internal control problems that have historically reduced the effectiveness of its operations. In its November 1993 report, the House Committee on Government Operations stated that State should implement our recommendation that each embassy adopt a formal management improvement plan. On the basis of prior reviews by us and State's Office of the Inspector General (OIG), the Committee also recommended that State (1) strengthen controls over personal property, (2) ensure that appropriate training is available for U.S. and foreign service national personnel, (3) implement contracting and procurement improvements, (4) eliminate control problems in cashiering functions, and (5) develop systems to track and collect medical insurance reimbursements. State has not implemented our suggestion that all posts establish formal management improvement programs to identify and correct deficiencies. State officials believe that their approach of targeting specific areas for improvement is more appropriate and achieves comparable results in the long term. We continue to believe that if State were to use existing mechanisms for managing embassy operations, such as the Mission Program Plan, it could more quickly and easily achieve the intent of our 1993 recommendation. (See app. I.) State has responded to recommendations contained in the House Committee on Government Operations' report by initiating some specific actions designed to improve its management over embassy operations. These actions, although steps in the right direction, do not go far enough to ensure that each embassy is improving its operations. We and the State's OIG continue to find deficiencies in (1) controlling personal property; (2) training for U.S. and foreign service national personnel; (3) contracting and procurement practices; (4) poor controls over cashiering functions; (5) medical insurance reimbursements; and (6) senior-level oversight of operations. In November 1993, the House Committee on Government Operations recommended that the State Department take the following actions to strengthen controls over personal property: establish more stringent procedures and guidance for receiving and issuing personal property overseas; improve the nonexpendable property application software to enhance reconciliation capability; provide increased and specialized training for Foreign Service officers and revise volume 6 of the Foreign Affairs Manual to require property officers to retain inventory records and other pertinent documentation in post files for 3 years; and adopt a zero-tolerance policy with respect to personal property losses. In July 1993, before the Committee's report, State updated volume 6 of the Foreign Affairs Manual to include revised personal property regulations for all diplomatic and consular posts. This updated guidance incorporated changes in assigned responsibilities and federal regulations. The revised regulations also clarified accountability criteria for ensuring internal controls. On the basis of the new regulations, State's Property Management Branch, which is responsible for central oversight for domestic and overseas personal property management, issued an instruction handbook that was intended to be an easy reference for posts to ensure compliance with management of personal property overseas. However, branch officials acknowledged that a number of posts were still not in compliance. During fiscal year 1994, branch staff visited 20 of the 260 posts to verify their annual inventory certification. Branch officials said that 14 posts failed to provide documentation that physical inventories were conducted. Although posts that do not provide inventory certifications can be subject to a withholding of funds for personal property acquisitions, and individuals that either refused to certify or falsely certified inventories can be subject to punitive actions, we found no instances in which money was withheld or individuals were sanctioned for not following property management procedures. According to State, it has a zero tolerance policy on personal property loses for fraudulent behavior, but it does not believe it to be in the taxpayers' interest to pursue small shortages; therefore, in November 1993, it adopted a 1-percent tolerance. State adopted this policy because the 1-percent level is commensurate with that of private industry and State officials believed that the cost to pursue shortages of less than 1-percent would outweigh any benefits. State officials said they required posts to submit to headquarters the amount of losses incurred in fiscal year 1994. Of the 160 posts that submitted such information, only 15 exceeded the 1-percent level. In 1989, to improve property management and accountability, State integrated an inventory reconciliation software package with its non-expendable property application (NEPA) software at about 210 of the overseas posts. State is testing a new application of NEPA, but it has not yet determined how NEPA and other subsidiary systems will function with the planned Integrated Financial Management System. In August 1994, we reported that this system was at a high risk of failure because of State's inadequate management and planning and therefore might not solve long-standing financial management and internal control problems. The Committee recommended that State train both U.S. Foreign Service officers and Foreign Service national employees in the areas of procurement and acquisition, real property management and maintenance, personal property, and budget and fiscal responsibilities. State's training arm--The Foreign Service Institute--offers training in most of these areas. State acknowledged that, in some cases, Foreign Service officers report to posts without such training. And, according to the Director of the Office of Foreign Service National Personnel, training Foreign Service nationals is not a priority because of the high costs involved in bringing Foreign Service nationals to Washington, D.C. Although State says it has focused on increasing its regional training of Foreign Service nationals, those we interviewed said that training was still limited, often not timely, and generally not offered in their native language. Of the seven posts we visited, only Paris had formal training programs that identified or provided opportunities for the training requirements of Foreign Service nationals or officers. State is exploring ways to increase the role of Foreign Service nationals in administrative operations overseas. However, the Foreign Service Institute does not have a formal plan in place to ensure that Foreign Service nationals receive adequate training. Transferring more responsibility to Foreign Service nationals without proper training is likely to weaken compliance with internal controls. In 1993, the Committee recommended a number of actions to improve contracting and procurement practices. These included (1) requiring training for all Foreign Service officers and Foreign Service nationals responsible for contracting and procurement, (2) developing and implementing a procurement management information system that includes overseas procurement operations, (3) requiring each post to fully implement the worldwide procurement data system and provide each with appropriate software, (4) requiring each post to appoint a competition advocate and establish a competition advocacy program, and (5) requiring posts to develop advance acquisition plans each fiscal year. To address the need for procurement training, State established new training requirements for contracting officers, including training seminars for about 100 employees at seven regional centers. However, only 150 of the 700 officers overseas have received required training for standard contracting authority up to $250,000. The rest of State's overseas contracting officers have provisional contracting authority up to $100,000.Procurement officials estimate that it will take many years before all of these officers complete their training. In addition, some Foreign Service nationals responsible for maintaining contracting files indicated that they were not adequately trained. For example, one Foreign Service national told us she had been involved in procurement actions for 6 years before receiving formal training. State developed a worldwide procurement database to meet the minimum legal and regulatory overseas procurement reporting requirements. This database is currently in use at 193 (or 73 percent) of the 265 overseas posts. This database, however, only reports the number and types of contract actions. It is not used to manage, monitor, or ensure control over embassy procurement operations. Most of the posts we visited had not established a competition advocacy program called for by the Committee. The lack of such a program contributed to the failure of some posts to fully compete or review their contract actions and prepare and maintain required documentation. None of the posts had a written policy to advertise solicitations or had evidence that solicitations were authorized. Also, most posts did not maintain a current vendor list, and therefore, could not be assured that all potential sources had been solicited. Several of the embassy officials we met with said they had not received or could not locate headquarters' guidance stipulating the need of advance acquisition planning. In addition, none of the officials had developed an advance acquisition plan ranking essential procurements. Embassy cashiers are responsible for the day-to-day payment, collection, deposit, and reconciliation of funds advanced by regional disbursement centers. Cashiering operations are supervised by U.S. disbursing officers located at those centers. To improve controls over cashiering, in 1993, the Committee recommended that State fully fund the implementation of a worldwide standardized and integrated financial management system, adopt standardized accounting systems, increase monitoring and oversight of overseas cashiering operations, improve oversight of U.S. disbursing officers operations to ensure that transactions and accounts are properly recorded and reconciled, and require all posts to train staff in safeguards and procedures to prevent theft or misuse of official funds. State has not fully implemented the computerized Integrated Financial Management System; therefore, controls over cashiering continue to be manual and dependent on noncompliant financial systems in the majority of overseas posts. Although reconciliations are required monthly at overseas post, only about one-third of embassies' cashiering operations are currently reviewed each year by external review teams from the State's Financial Service Centers. Headquarters officials said that losses have been minimal, but acknowledged that major problems could occur. To gain control over disbursing operations overseas, State has centralized 18 of 19 disbursing operations with its 3 regional administrative management centers and plans to relocate the 1 remaining operation (Brasilia). State's Deputy Chief Financial Officer and Deputy Assistant Secretary for Finance initiated this action to improve oversight and management controls over disbursing. State also created the Office of Overseas Financial Management and Oversight under the Chief Financial Officer. However, officials from this office said that fiscal irregularities were continuing due to (1) the lack of trained U.S. Foreign Service officers and nationals on cashiering practices, (2) negligence, and (3) malfeasance. To address the Committee's recommendation to train staff on financial controls, in June 1994, at the Regional Administrative Management Center in Mexico City, State trained about 40 budget and fiscal officers and 40 supervisory Foreign Service nationals from the posts in Mexico on safeguards and procedures to prevent theft or misuse of funds. However, State officials said more regional training was needed for the hundreds of Foreign Service nationals supporting State's budget and fiscal operations overseas. In 1993, the Committee recommended that State (1) develop and implement systems that identify and report on overseas medical expenses paid, claims filed, and amounts reimbursed to the government and (2) require all Foreign Service officers serving overseas to carry private medical insurance. State's Office of Medical Services now assigns an obligation number for each medical claim and authorizes payment by the overseas posts. The embassy notifies the office of each payment, and an accounts receivable and corresponding billing documents are then established in the Central Financial Management System. These actions resulted in collections of over $1 million in fiscal year 1994, including funds owed since 1991. According to a Medical Services official, the collection system applies to State employees only. It does not cover employees of other agencies that may receive medical services overseas. Although State still does not require Foreign Service officers to have private medical insurance before they are assigned overseas, it has stopped paying claims for hospitalization of those without insurance with the exception of the hospital admission charge, which must be promptly reimbursed. In 1993, the Committee called for increased oversight of operations by senior officials both in Washington and at the embassies. State officials acknowledged that a greater emphasis should be placed on management controls, and that commitment and support should come from the top. To enhance senior managers' commitment at posts, State has introduced a number of actions intended to address the managers' systemic disregard for sound management practices and establish accountability for carrying out headquarter's requirements. For example, State now emphasizes the importance of management controls and responsibility for those controls to newly appointed ambassadors during preassignment briefings and in the Secretary's Chief of Mission Authority Letter. The Chiefs of Mission are required to develop a Mission Program Plan that will form the basis for the missions' major activities and resource allocations and have the plan approved by the Assistant Secretary of State. They are also required to reduce mission costs whenever possible, implement sound management controls to ensure that government resources are maximized and protected, and certify annually that management controls are adequate. Another action to increase senior-level attention to embassy management included the addition of a management control segment to the training course for new Deputy Chiefs of Mission. This segment defines management controls, emphasizes using the Mission Program Plan, and encourages the use of the risk assessment questionnaire. In addition, the risk assessment questionnaire was revised to include questions covering the minimum controls necessary for facilities maintenance, contracting, and medical reimbursements. These initiatives were inconsistently applied at the posts we visited. However, as discussed below, posts that employed sound management practices had the active involvement of the Deputy Chief of Mission serving as a Chief Operating Officer. Some embassies have implemented practices on their own to improve administrative operations. Practices, such as those we observed in Ankara, Tunis, and Dhaka, could be used by other embassies to strengthen management controls, reduce costs, foster accountability, and increase compliance with applicable regulations. Embassies in Ankara, Tunis, and Dhaka introduced operational improvements to address and correct continuing deficiencies in the areas of property management, training, contract administration, and cashiering. For example, in Tunis and Ankara, setting performance targets for inventory control and accountability resulted in more efficient property utilization and reduced losses from theft. Cross-training programs for Foreign Service nationals within the budget and finance offices in Tunis and Ankara increased their supervisors' flexibility to fill staffing gaps and enhanced morale among their subordinates. In Tunis and Dhaka, the implementation of internal control checklists for contract administration ensured that their contracting and procurement operations were in compliance with regulations. All three posts have developed systems for tracking and collecting accounts receivables, which resulted in more accountability, cost savings, and reduced vulnerabilities to fraud, waste, and abuse. Table 1 summarizes the initiatives at these posts. We discussed these practices with State Department officials in Washington, D.C., and determined that the initiatives could be used to improve operations at other posts, as applicable. They said that many of these practices could be introduced by the post planning processes and would greatly assist in their efforts to achieve real management reform of embassy operations. As budget uncertainties continue, implementation of these practices could provide overseas managers with more flexibility in managing their operations. These posts had two other practices in common--the direct involvement of senior officials in post's operations and the use of existing management tools to address deficiencies. These practices could also be replicated at other embassies. At embassies in Ankara, Tunis, and Dhaka, the Deputy Chiefs of Mission and sometimes the Chiefs of Mission are directly involved in embassy administration. The commitment of these officials to management was demonstrated through regularly scheduled meetings to discuss management issues, an open-door policy for the resolution of problems, and daily reviews of management operations. The Deputy Chiefs of Mission served as the Chief Operating Officer at all three missions. These officials emphasize a zero-tolerance policy for inadequate management controls. They use management reviews and performance evaluations to hold section managers accountable for adequate internal controls and corrections of management deficiencies. In addition, the Deputy Chiefs of Mission regularly reinforce the importance of internal controls to administrative staff through counseling, according to embassy officials. Embassy managers stressed the importance of senior management involvement in the management of operations and said senior officials set the tone for how well their administrative staff will manage embassy operations. Reports by State's OIG have documented the critical link between the emphasis placed on internal controls by senior officials and the attention given to the management issues throughout the embassy. Senior managers at embassies in Ankara, Tunis, and Dhaka have successfully used existing, agencywide reporting requirements to address and correct management deficiencies. These include the Mission Program Plan, risk assessment questionnaire, and certification of internal controls. In 1990, the mission program planning process began. The Mission Program Plan is a long-range planning document that is updated annually to address the objectives of the mission and the resources needed to fulfill those objectives. It addresses all areas of embassy operations, including administrative operations. According to State guidance, the plan should include milestones for critical progress points and completion of action. The plan also has a performance and evaluation component. The Mission Program Plans for the embassies in Ankara, Dhaka, and Tunis all incorporated detailed statements of objectives and responsibilities within the administrative section, which helped management focus attention on identifying problems and developing corrective action plans. For example, in Ankara the Mission Program Plan establishes time frames for the correction of management deficiencies, and identifies offices that are accountable for the corrections. According to officials in the Office of Management and Planning, State is encouraging the posts to use this mechanism to address management weaknesses and increase accountability by tying resource allocations to objectives of the plan (see app.I). While there are few posts that currently do this, our review indicates that using the Mission Program Plan to address deficiencies would be consistent with our recommendation that each post establish a proactive management improvement plan. The risk assessment questionnaire identifies internal control weaknesses. State's policy requires posts to complete these questionnaires just before an inspection by the OIG, which usually occurs every 4 to 5 years. However, to help ensure adequate internal controls at the posts, State sent a February 1994 cable to all overseas posts that encouraged them to use the risk assessment questionnaire as frequently as local conditions warrant. The embassies at Ankara, Dhaka, and Tunis have used the risk assessment questionnaire at least once a year to assess administrative weaknesses. The questionnaires have provided input for the planning process and served as a foundation for the annual certification of internal controls. These posts also used the questionnaire to link management controls to goals and objectives in the Mission Program Plan. For example, in Ankara, administrative officers developed detailed corrective action plans, including milestones, based on the results of their questionnaires. Officials at these posts agreed that the questionnaire was an excellent management tool for identifying potential problems and that it can be completed with minimal effort. Officials in Washington asserted that all embassies should use the questionnaire on a more frequent basis. Officials in the Office of Finance and Management Policy said they encourage posts to use the questionnaire as a self-assessment management tool and find that posts that are concerned about management use the questionnaire annually, and posts less concerned about management only use the questionnaires prior to an inspection. The Chiefs of Mission are required by the Secretary of State to certify the adequacy of management controls each year. These certifications are to aid the Secretary of State in preparing the annual report required by the Federal Managers' Financial Integrity Act. The mission chiefs at the embassies in Ankara, Dhaka, and Tunis said they did not sign their certifications until they were sure that spot checks had been conducted to ensure the veracity of the certification. Officials in the other four posts we visited did not use the questionnaire to validate their certifications and their Chiefs of Mission relied solely on their administrative officer's opinion without conducting spot checks in certifying the posts' internal controls. We recommend that the Secretary of State expand the operational improvements discussed in this report to a minimum of 50 other embassies on a test basis to help improve operations. If the test demonstrates the applicability of these improvements in a variety of posts, the practices should be further expanded until the maximum benefits are achieved. In commenting on a draft of this report, State Department officials stated that improving the management of its overseas operations was a high priority and that it would like to see the overseas posts use the practices that we identified as a positive management tool in ways that make sense for their particular circumstances and environments. State believes it needs to provide overseas posts with information on the initiatives of other posts, but it does not want to make the implementation of such practices a requirement. We do not believe that relying on voluntary adoption of these practices will produce the maximum benefits. The management deficiencies have existed for decades. However, because our findings were focused on only a few overseas posts, and State points out that overseas posts operate in different environments, we have modified our position from one that would require all posts to immediately implement the recommended improvements. We believe that if State is serious about trying to improve management of its overseas operations, then out of its more than 260 posts, it should be willing to pilot test the recommended actions at a minimum of 50 posts. If the pilot demonstrates the applicability of these improvements in a variety of posts, then State should continue to expand the use of these practices until the maximum number of posts benefit. The Department of State's comments are presented in their entirety in appendix II along with our evaluation of them. We interviewed State Department officials in Washington, D.C., who are responsible for embassy management oversight, to assess actions taken by State to improve the management of its overseas operations. We analyzed documentation related to embassy management improvements provided by functional managers and documented continuing management deficiencies from State OIG reports. (See app. III for a listing of related GAO and OIG reports.) In addition, we observed good embassy practices that could be used at other embassies. We selected these embassies based on (1) State OIG reports that identified good management practices at these posts and (2) the recommendations of post management officers responsible for embassy oversight. Overall, we reviewed operations at U.S. embassies in Venezuela, Tunisia, France, Portugal, Turkey, Philippines, and Bangladesh. We performed our work from April 1994 to November 1995 in accordance with generally accepted government auditing standards. Please contact me at (202) 512-4128 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix VI. State's primary means for linking foreign policy objectives and resources is the program planning process. In a November 1994 cable to all diplomatic and consular posts, the Under Secretary for Management informed the Chiefs of Mission that the link between resources and the mission program planning process was missing; consequently, budget reductions were enacted without thought to the future. The Under Secretary instructed mission management to develop a mission program plan that reflects mission priorities in both policy and management areas, actively involves all mission elements in its preparation, and serves as an instrument for continuous management improvement. State guidance to embassies for preparing the Mission Program Plans (MPP) for fiscal years 1995 through 1999 attempts to build on previous planning efforts and encourages posts to embrace MPP as a management creed of continuous improvement to support the Department's goal of building an efficient organization. This guidance directs embassies to use MPP as a tool to measure progress in achieving mission objectives, including examining innovative and lower cost ways to deliver administrative support. More importantly, State guidance instructs embassy managers to document how they will address material weakness in administrative areas when reducing administrative staff. The structure of MPP supports a proactive management improvement effort. MPP has an administrative section that reviews financial management, cashiering, procurement, supplies, and warehousing. In addition, MPP has a status of progress section that tracks progress on administrative and other mission goals. The Under Secretary for Management's guidance encourages senior managers to personally assist in the preparation and implementation of the plan by (1) objectively measuring or validating results and adjusting performance through a regular, systematic process; (2) providing personal leadership and involvement; and (3) holding others accountable on a regular basis. Senior officials are also directed to establish incentives to help institutionalize the use of MPPs. To fully achieve these goals, recent headquarters actions have attempted to link embassy staff work requirements to mission program plans. One of these actions was to require that objectives of MPP be reflected in work requirements statements so that performance can be linked to the successful achievement of MPP goals. Assistant secretaries are also instructed to evaluate the performance of Chiefs of Missions based on the successful achievement of MPP objectives and their diligence in evaluating subordinates' performance against MPP objectives. To assist posts in using MPP to manage resources, the Under Secretary for Management issued 5-year staffing and funding levels for each geographic bureau. Bureaus use MPPs to review current resource deployments against policy priorities and determine the optimal match of resources and post needs. Both the Bureau of Diplomatic Security and the Bureau of International Organization Affairs have established exemplary bureau planning processes. The Bureau of Diplomatic Security initiated an operational planning system in fiscal year 1987 to establish specific goals and monitor progress in security programs receiving funds from the Supplementary Diplomatic Security budget. This effort has become known as the Milestone Program. The program, which is administrated by the Bureau's Office of Policy, Planning, and Budget, expanded in fiscal year 1988 to include all bureau programs. The Milestone Program applies management-by-objectives criteria to the security programs managed by the Bureau. Elements of the program include: meeting monthly to discuss program performance, problems, and modifications and revise milestones for the next cycle; tracking activities to specific program objectives; establishing performance measurements to keep programs in compliance; tying financial information to program milestones and continually analyzing ways to contain costs and streamline activities; and fully integrating the Bureau's planning process with its milestones. Likewise, the Bureau of International Organization Affairs' Internal Controls Plan uses a management-by-objective process that links foreign policy and management priorities to resource allocations. According to Bureau officials, this plan allows the Bureau to identify internal control weaknesses and better allocate resources. Program planning officials believe elements of these programs can significantly improve planning efforts at other bureaus. The following are GAO's comments on the Department of State's letter dated November 8, 1995. 1.We have modified our report by stating that branch officials said that 14 of the 20 posts visited failed to provide documentation that physical inventories were conducted. We also footnoted that 12 of the posts subsequently submitted the required certification at a later date. 2.We have modified the report in line with the comment. 3.We agree that a single automated system for processing travel vouchers is needed. However, replication of individual post systems that work could be beneficial to other posts until State is able to implement a uniform system for vouchers processed overseas. 4.Standardized procedures for tracking accounts receivable and other collections have long been needed in State. However, we believe that until standard procedures are implemented, application of automated systems used at individual posts would prove useful. 5.We did not recommend that State centrally develop manuals for all posts. However, State's endorsement of standard operating procedures manuals for each post could encourage individual posts to develop manuals consistent with their individual needs and conditions. 6.Although State described this practice as a standard procedure, our review indicated that only a few posts were actually performing this internal control procedure. 7.Completion of the risk assessment questionnaire annually by the posts would optimize the use of this document, which has been endorsed by the State Department as an excellent management tool. We do not believe that it is necessary for Washington to score and evaluate the questionnaires on an annual basis. Instead, the posts could use and score their own questionnaires for self-assessment purposes during the annual certification process. 8.The Secretary of State's endorsement of the use of best management practices throughout State's overseas system, where applicable, would help demonstrate a commitment from the top to improve management at the overseas posts. It would also encourage the use of best practices, such as automated travel voucher and accounts receivable tracking system, on a greater scale until agencywide systems are available. Internal Controls: State's Controls Over Personal Property Management Are Inadequate (GAO/NSIAD-87-156, June 10, 1987). Embassy Contracting: State Department Efforts to Terminate Employee Association Contracts (GAO/NSIAD-88-85, Feb. 16, 1988). Overseas Support: Current U.S. Administrative Support System Is Too Complicated (GAO/NSIAD-88-84, Mar. 25, 1988). State Department: Status of Actions to Improve Overseas Procurement (GAO/NSIAD-92-24, Oct. 25, 1991). State Department: Need to Ensure Recovery of Overseas Medical Expenses (GAO/NSIAD-92-277, Aug. 7, 1992). Financial Management: Serious Deficiencies in State's Financial Systems Require Sustained Attention (GAO/AFMD-93-9 Nov. 13, 1992). High-Risk Series: Management of Overseas Real Property (GAO/HR-93-15, Dec. 1992). State Department: Management Weaknesses at the U.S. Embassy in Mexico City, Mexico (GAO/NSIAD-93-88, Feb. 8, 1993). State Department: Management Weaknesses at the U.S. Embassies in Panama, Barbados, and Grenada (GAO/NSIAD-93-190, July 9, 1993). State Department: Survey of Administrative Issues Affecting Embassies (GAO/NSIAD-93-218, July 12, 1993). State Department: Widespread Management Weaknesses at Overseas Embassies (GAO/T-NSIAD-93-17, July 13, 1993). Financial Management: State's Systems Planning Needs to Focus on Correcting Long-Standing Problems (GAO/AIMD-94-141, Aug. 12, 1994). State Department: Additional Actions Needed to Improve Overseas Real Property Management (GAO/NSIAD-95-128, May 15, 1995). Financial Management Overseas, State Department Inspector General Report (O-FM-008, Jan. 15, 1990). Overseas Foreign Affairs Administrative Support Costs, State Department Inspector General Report (1-FM-005, Dec. 20, 1990). Overseas Procurement Programs, State Department Inspector General Report (1-PP-004, Jan. 29, 1991). Management Improvements in Embassy Cairo's Administrative Operations, State Department Inspector General Report (3-FM-003, Jan. 12, 1993). Report of Inspection, Embassy Paris, France (ISP/I-93-10, Mar. 1993). Buildings Overseas-Maintenance and Repair, State Department Inspector General Report (3-PP-014, Sept. 14, 1993). Report of Inspection, Embassy Ankara, Turkey and its Constituent Posts (ISP/I-94-02, Oct. 1993). Recovery of Overseas Medical Expenses, State Department Inspector General Report (4-SP-003, Feb. 9, 1994). Report of Inspection, Embassy Tunis, Tunisia (ISP/I-94-20, Mar. 1994). Management of Overseas Travel Services, State Department Inspector General Report (4-SP-009, Feb. 22, 1994). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 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. 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Pursuant to a congressional request, GAO reviewed the Department of State's efforts to improve the management of its embassies, focusing on whether State has responded to previous recommendations concerning embassy management. GAO found that: (1) State has not responded to the recommendation that it establish proactive management improvement programs at its overseas posts because it believes that its approach of targeting specific areas for improvement is more appropriate and achieves comparable longterm results; (2) State has initiated action on some congressional recommendations to improve its embassy management, but deficiencies continue in controls over personal property, training for U.S. and foreign service personnel, contracting and procurement practices, controls over cashiering functions and medical insurance reimbursements, and senior-level oversight; (3) the embassies in Turkey, Bangladesh, and Tunisia have initiated management practices, such as tracking accounts receivable, automating travel vouchers, strengthening internal controls, improving regulation compliance, reducing costs, and enhancing efficiency and effectiveness; and (4) embassy senior managers participate in the day to day operations of their posts and use existing reporting requirements to document administrative problems and decide on appropriate corrective actions.

In November 1994, the Office of the Director of Defense Procurement initiated the SPS program to acquire and deploy a single automated system to perform all contract-management-related functions for all DOD organizations. At that time, life-cycle costs were estimated to be about $3 billion over a 10-year period. From 1994 to 1996, the department defined SPS requirements and solicited commercially available vendor products for satisfying these requirements. Subsequently, in April 1997, the department awarded a contract to American Management Systems (AMS), Incorporated, to (1) use AMS's commercially available contract management system as the foundation for SPS, (2) modify this commercial product as necessary to meet DOD requirements, and (3) perform related services. The department also directed the contractor to deliver functionality for the system 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 (see table 1 for proposed SPS functionality by increment). Since our report of July 2001, DOD has revised its plans. According to the SPS program manager, current plans no longer include increments 6 and 7 or releases 5.0 and 5.1. Instead, release 4.2 (increment 5) will include at least three, but not more than seven, subreleases. At this time, only the first of the potentially seven 4.2 subreleases is under contract. This subrelease is scheduled for delivery in April 2002, with deployment to the Army and the Defense Logistics Agency scheduled for June 2002. Based on the original delivery date, release 4.2 is about one year overdue. The department reports that it has yet to define the requirements to be included within the remaining 4.2 subreleases, and has not executed any contract task orders for these subreleases. According to SPS officials, they will decide later this year whether to invest in these additional releases. As of December 2001, the department reported that it had deployed four SPS releases to over 777 locations. The Director of Defense Procurement (DDP) has responsibility for the SPS program, and the CIO is the milestone decision authority for SPS because the program is classified as a major Defense acquisition. Our July 2001 report detailed program problems and investment management weaknesses. To address these weaknesses, we recommended, among other things, that the department report on the lessons to be learned from its SPS experience for the benefit of future system acquisitions. Similarly, other reviews of the program commissioned by the department in the wake of our review raised similar concerns and identified other problems and management weaknesses. The findings from our report are summarized below in two major categories: lack of economic justification for the program and inability to meet program commitments. We also summarize the findings of the other studies. The Clinger-Cohen Act of 1996, OMB guidance, DOD policy, and practices of leading organizations provide an effective framework for managing information technology investments, not just when a program is initiated, but continuously throughout the life of the program. Together, they provide for (1) economically justifying proposed projects on the basis of reliable analyses of expected life-cycle costs, benefits, and risks; and (2) using these analyses throughout a project's life-cycle as the basis for investment selection, control, and evaluation decisionmaking, and doing so for large projects (to the maximum extent practical) by dividing them into a series of smaller, incremental subprojects or releases and individually justifying investment in each separate increment on the basis of costs, benefits, and risks. The department had not met these investment management tenets for SPS. First, the latest economic analysis for the program--dated January 2000-- was not based on reliable estimates because most of the cost estimates in the 2000 economic analysis were estimates carried forward from the April 1997 analysis (adjusted for inflation). Only the cost estimates being funded and managed by the SPS program office, which were 13 percent of the total estimated 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. Moreover, the military services, which share funding responsibility with the SPS program office for implementing the program, questioned the reliability of these cost estimates. However, this uncertainty was not reflected in the economic analysis using any type of sensitivity analysis. A sensitivity analysis would have disclosed for decisionmakers the investment risk being assumed by relying on the estimates presented in the economic analysis. Moreover, the latest economic analysis (January 2000) was outdated because it did not reflect the program's current status and known problems and risks. For instance, this analysis was based on a program scope and associated costs and benefits that anticipated four software releases. However, as mentioned previously, the program now consists of five releases, and subreleases within releases, in order to accommodate changes in SPS requirements. Estimates of the full costs, benefits, and risks relating to this additional release and its subreleases were not part of the 2000 economic analysis. Also, this analysis did not fully recognize actual and expected delays in meeting SPS's full operational capability milestone, which had been slipped by 3 1/2 years and DOD officials say that further delays are currently expected. Such delays not only increase the system acquisition costs but also postpone, and thus reduce, accrual of system benefits. Further, several DOD components are now questioning whether they will even deploy the software, which would further reduce SPS's cost effectiveness calculations in the 2000 economic analysis. Second, the department had not used these analyses as the basis for deciding whether to continue to invest in the program. The latest economic analysis showed that SPS was not a cost-beneficial investment because the estimated benefits to be realized did not exceed estimated program costs. In fact, the 2000 analysis showed estimated costs of $3.7 billion and estimated benefits of $1.4 billion, which was a recovery of only 37 percent of costs. According to the former SPS program manager, this analysis was not used to manage the program and there was no DOD requirement for updating an economic analysis when changes to the program occurred. Third, DOD had not made its investment decisions incrementally as required by the Clinger-Cohen Act and OMB guidance. That is, although the department is planning to acquire and implement SPS as a series of five increments, it has not made decisions about whether to invest in each release on the basis of the release's expected return on investment, as well as whether prior releases were actually achieving return-on-investment expectations. In fact, for the four increments that have been deployed, the department had not validated whether the increments were providing promised benefits and was not accounting for the costs associated with each increment so that it could even determine actual return on investment. Instead, the department had treated investment in this program as one, monolithic investment decision, justified by a single, "all-or-nothing" economic analysis. Our work has shown that it is difficult to estimate, with any degree of accuracy, cost and schedule estimates for many increments to be delivered over many years because later increments are not well understood or defined. Also, these estimates are subject to change based on actual program experiences and changing requirements. This "all-or- nothing" approach to investing in large system acquisitions, like SPS, has repeatedly proven to be ineffective across the federal government, resulting in huge sums being invested in systems that do not provide commensurate benefits. Measuring progress against program commitments is closely aligned with economically justifying information-technology investments, and is equally important to ensuring effective investment management. The Clinger- Cohen Act, OMB guidance, DOD policy, and practices of leading organizations provide for making and using such measurements as part of informed investment decisionmaking. DOD had not met key commitments and was uncertain whether it was meeting other commitments because it was not measuring them. (See table 2 for a summary of the department's progress against commitments.) two analyses, such as the number and dollar value of estimated benefits, and the information gathered did not map to the 22 benefit types listed in the 1997 economic analysis. Instead, the study collected subjective judgments (perceptions) that were not based on predefined performance metrics for SPS capabilities and impacts. Thus, the department was not measuring SPS against its promised benefits. The former program manager told us that knowing whether SPS was producing value and meeting commitments was not the program office's objective because there was no departmental requirement to do so. Rather, the objective was simply to acquire and deploy the system. Similarly, CIO officials told us that the department was not validating whether deployed releases of SPS were producing benefits because there was no DOD requirement to do so and no metrics had been defined for such validation. However, the Clinger-Cohen Act of 1996 and OMB guidance emphasize the need to have investment management processes and information to help ensure that information-technology 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 required this cost, schedule, and performance information to be reported quarterly to ensure that programs did not deviate significantly from expectations. In effect, these requirements and guidance recognize that one cannot manage what one cannot measure. Shortly after receiving our draft report for comment, the department initiated several studies to determine the program's current status, assess program risks, and identify actions to improve the program. These studies focused on such areas as program costs and benefits, planned commitments, requirements management, program office structure, and systems acceptance testing. Consistent with our findings and recommendations, these studies identified the need to establish performance metrics that will enable the department to measure the program's performance and tie these metrics to benefits and customer satisfaction; clearly define organizational accountability for the program; provide training for all new software releases; standardize the underlying business processes and rules that the system is to support; acquire the software source code; and address open customer concerns to ensure user satisfaction. In addition, the department found other program management concerns not directly within the scope of our review, such as the need to appropriately staff the program management office with sufficient resources and address the current lack of technical expertise in areas such as contracting, software engineering, testing, and configuration management; modify the existing contract to recognize that the system does not employ a commercial-off-the-shelf software product, but rather is based on customized software product; establish DOD-controlled requirements management and acceptance testing processes and practices that are rigorous and disciplined; and assess the continued viability of the existing contractor. To address the many weaknesses in the SPS program, we made several recommendations in our July 2001 report. Specifically, we recommended that (1) investment in future releases or major enhancements to the system be made conditional on the department first demonstrating that the system is producing benefits that exceed costs; (2) future investment decisions, including those regarding operations and maintenance, be based on complete and reliable economic justifications; (3) any analysis produced to justify further investment in the program be validated by the Director, Program Analysis and Evaluation; (4) the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence (C3I) clarify organizational accountability and responsibility for measuring SPS program against commitments and to ensure that these responsibilities are met; (5) program officials take the necessary actions to determine the current state of progress against program commitments; and (6) the Assistant Secretary of Defense for C3I report by October 31, 2001, to the Secretary of Defense 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. DOD's reaction to our report was mixed. In official comments on a draft of our report, the Deputy CIO generally disagreed with our recommendations, noting that they would delay development and deployment of SPS. Since that time, however, the department has acknowledged its SPS problems and begun taking steps to address some of them. In particular, it has done the following. The department has established and communicated to applicable DOD organizations the program's chain-of-command and defined each participating organization's responsibilities. For example, the Joint Requirements Board was delegated the responsibility for working with the program users to define and reach agreement on the needed functionality for each software release. The department has restructured the program office and assigned additional staff, including individuals with expertise in the areas of contracting, software engineering, configuration management, and testing. However, according to the current program manager, additional critical resources are needed, such as two computer information technology specialists and three contracting experts. It has renegotiated certain contract provisions to assume greater responsibility and accountability for the requirements management and testing activities. For example, DOD, rather than the contractor, is now responsible for writing the test plans. However, additional contract changes remain to be addressed, such as training, help-desk structure, facilities support, and system operations and maintenance. The department has designated a user-satisfaction manager for the program and defined forums and approaches intended to better engage users. It has established a new testing process, whereby program officials now develop the test plans and maintain control over all software testing performed. In addition, SPS officials have stated their intention to prepare analyses for future program activities beyond those already under contract, such as the acquisition of additional system releases, and use these analyses in deciding whether to continue to deploy SPS or pursue another alternative; define system performance metrics and use these metrics to assess the extent to which benefits have been realized from already deployed system releases; and report on lessons learned from its SPS experience to the Secretary of Defense and relevant congressional committees. The department's actions and intentions are positive steps and consistent with our recommendations. However, much remains to be accomplished. In particular, the department has yet to implement our recommendations aimed at ensuring that (1) future releases or major enhancements to the system be made conditional on first demonstrating that the system is producing benefits that exceed costs and (2) future investment decisions, including those regarding operations and maintenance, be based on a complete and reliable economic justification. We also remain concerned about the future of SPS for several additional reasons. First, definitive plans for how and when to justify future system releases or major enhancements to existing releases do not yet exist. Second, SPS officials told us that release 4.2, which is currently under contract, may be expanded to include functionality that was envisioned for releases 5.0 and 5.1. Including such additional functionality could compound existing problems and increase program costs. Third, not all defense components have agreed to adopt SPS. For example, the Air Force has not committed to deploying the software; the National Imagery and Mapping Agency, the Defense Advanced Research Projects Agency, and the Defense Intelligence Agency have not yet decided to use SPS; and the DOD Education Agency has already adopted another system because it deemed SPS too expensive.

The Department of Defense (DOD) lacks management control of the Standard Procurement System (SPS). 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. GAO found that 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. This testimony summarizes a July report (GAO-01-682).

The FFEL and DL programs have substantially different structures but both provide student loans to help students meet the costs of obtaining a postsecondary education. FFEL loans are provided by nonfederal lenders and repayment is guaranteed by the federal government. Under the DL program, the federal government provides loans to students and their families, using federal capital. Figure 1 shows the FFEL and DL program loan volume outstanding as of September 30, 2008 and 2009. In the FFEL program, student loans are made by nonfederal lenders, which can be for-profit or nonprofit entities. Lenders are protected against borrower defaults by federal government guarantees that are administered by guaranty agencies. Guaranty agencies are state or nonprofit entities that also perform other administrative and oversight functions under the FFEL program. For example, guaranty agencies provide counseling to borrowers regarding delinquent loan repayment and initiate collections on defaulted loans. Generally, lenders provide the FFEL loan proceeds to a student's school, which then credits the student's account and disburses the residual amount, if any, to the student. Schools, lenders, and guaranty agencies often employ third-party servicers to perform functions related to the administration of the FFEL program. For example, a lender may hire a servicer to process borrower payments. Table 1 details the number of FFEL participants. In the DL program, student loans are fully funded by the federal government, which provides the loan proceeds to the student's school. The school then credits the student's account and disburses any residual amount to the student. Schools sometimes contract with third-party servicers to assist in administering the operations of the DL program. In addition, Education contracts with a servicer (DL servicer) to administer certain aspects of the DL program, such as payment processing. The number of participants in the DL program is detailed in table 2. Under HCERA, no new FFEL loans may be made after June 30, 2010. Borrowers who may have been eligible to obtain new FFEL loans prior to the passage of HCERA could receive loans under the DL program. Accordingly, the number of DL borrowers is expected to increase with the expansion of the program. Education has awarded contracts to four additional DL servicers to begin servicing direct loans by August 31, 2010. Audits required under FFEL or DL are performed in accordance with guidance issued by the Office of Management and Budget (OMB) or the applicable Department of Education Office of Inspector General (OIG) audit guide. States, local government entities, and nonprofit entities are generally required to have their audits performed in accordance with OMB Circular No. A-133, Audits of States, Local Governments, and Nonprofit Institutions, although, if federal student assistance is the only federal program in which the entity participates, OMB Circular No. A-133 gives the entity the option of using the program-specific audit guide issued by the OIG in place of the guidance produced under the Circular. For-profit entities are required to have their audits performed in accordance with the applicable OIG audit guide. The FFEL and DL programs generally have different audit requirements stemming mainly from different program structures. The FFEL program relies on lenders, guaranty agencies, and other entities that are subject to statutory, regulatory, and contractual audit requirements. The DL program does not have as many of these audit requirements because DL loans are provided by the federal government, and fewer external entities are involved. The audit requirements set out under the FFEL and DL programs are similar with regard to schools and their servicers, which are participants in both programs. We noted that certain for-profit lender audit guidance was inconsistent with regulations. Finally, oversight procedures for the DL servicer were designed to assess the DL servicer's performance in servicing loans in the program. Different oversight procedures are planned for four additional DL servicers expected to begin servicing direct loans by August 31, 2010. The FFEL and DL programs have different statutory and regulatory requirements for audits and program reviews, with more audit requirements in place for the FFEL program, which involves more participants external to the government. For instance, because the FFEL program relies on thousands of nonprofit and for-profit lenders, there are regulatory requirements for compliance audits and program reviews of those lenders. Such requirements do not apply to the DL program, which provides student loans through a single lender--the federal government. Similarly, required agreed-upon procedures engagements for the Ensuring Continued Access to Student Loans Act (ECASLA) and audits of 9.5% Special Allowance Payments are only applicable to lenders in the FFEL program. Figure 2 summarizes the audit and review requirements for the FFEL and DL programs, and appendix I includes more details about these activities. While our analysis showed audit requirements generally differed, schools under both programs had similar requirements to have annual financial statement audits performed by independent public accountants (IPA). School financial statement audits focus on whether the financial statements are fairly presented in accordance with generally accepted accounting principles. These financial statement audits are to be performed in accordance with GAGAS. GAGAS also requires IPAs to report on the results of certain tests performed on internal controls over financial reporting and compliance with certain provisions of laws, regulations, and program requirements. Financial statement audit reports provide Education with information about the financial condition of participants, any significant internal control deficiencies, and instances of noncompliance. Third-party servicers employed by schools to aid in the administration of their federal loans are not generally required to have financial statement audits under either the FFEL or DL programs. Both programs also require schools and school servicers to have annual compliance audits performed by IPAs. The audits focus on whether these participants comply with applicable statutes, regulations, and program requirements. For example, school compliance audits for both programs are designed to test whether schools perform student eligibility validation. These audits are to determine whether a school has verified that certain student requirements, such as citizenship and financial need, have been met. In addition, schools participating in the student loan programs are required to follow specified criteria for applying loan proceeds to students' accounts and disbursing residual amounts to students within established time frames. To illustrate, for students borrowing from the FFEL or DL programs, schools should not credit a registered student's account more than 10 days before the first day of classes. For both programs, compliance with these requirements is monitored through the annual compliance audit. If performed properly, the required audits for FFEL and DL participants should address federal and borrower interests. Audits address federal fiscal interests if they are designed to help protect the government from financial loss and address borrower interests if they are designed to help ensure that qualified individuals (1) have access to federal student loans and (2) are protected from financial loss. For instance, auditors assess whether schools that participate in either program complied with refund requirements. Refund requirements for both programs include the proper return of program funds in the case of unearned tuition and other charges for a student who received federal student aid if the student did not register, dropped out, was expelled, or otherwise failed to complete the period of enrollment. Proper refunds to the lender or federal government reduce the outstanding loan amount, thus protecting federal and borrower interests. As noted previously, HCERA terminated the authority to make new FFEL loans after June 30, 2010. However, FFEL loans outstanding after that date will continue under the same structure with Federal Student Aid oversight for many years, depending on the repayment plan. Accordingly, we identified and reviewed audit objectives and related guidance and found one area where the guidance for compliance audits of for-profit and nonprofit FFEL lenders differed. FFEL lenders can be for-profit or nonprofit and, in some cases, can be the schools themselves. For-profit lenders are required to have their audits performed in accordance with the OIG Lender Audit Guide. Nonprofit lenders are generally required to have their audits performed in accordance with OMB Circular No. A-133, although the Single Audit Act and OMB Circular No. A-133 allow lenders to elect to have their audits performed using the OIG audit guide if federal student assistance is the only federal program in which the lender participates. "School lenders proceeds: Determine whether schools that made FFEL loans use borrower interest payments, Education special allowance payments, interest subsidies, and any proceeds from the sale of loans to supplement needs-based grants for its students, as required." This audit objective is designed to assess whether school lenders appropriately comply with regulations affecting significant amounts of proceeds from loans. The OIG Lender Audit Guide has been supplemented with several amendments for specific changes to audit requirements, but has not been comprehensively updated since December 1996 and, as amended, did not address this audit objective. OIG officials told us they plan to update the OIG Lender Audit Guide to appropriately address this omission. The functions performed by the DL servicer are similar to certain functions performed by lenders, guaranty agencies, and their servicers in the FFEL program. The DL servicer is not required to have an independent auditor perform financial and compliance audits similar to those required of guaranty agencies, guaranty agency servicers, and lender servicers in the FFEL program. Instead, Federal Student Aid directly oversees the DL servicer's performance as a federal contractor through monthly reviews of performance metrics as well as other procedures, including monthly reconciliations of loan balances recorded by the DL servicer to those in Federal Student Aid records. Federal Student Aid officials are to review reports generated by the Independent Quality Control Unit, a component of the DL servicer that performs analysis to help ensure that the DL servicer's performance metrics are correctly calculated and accurately reported and that corrective actions from prior audits are implemented. These oversight procedures are designed to assess and evaluate the DL servicer's performance in servicing loans in the DL program. Our analysis showed that the objectives of the oversight procedures to be performed by Federal Student Aid over the DL servicer share some similarities with the objectives being addressed by audits of FFEL lenders, guaranty agencies, and their servicers. For example, both FFEL lenders and the DL servicer are to update student records to reflect changes in a student's status--such as student enrollment, which affects the repayment of the loan. For FFEL lenders, the performance of this function is to be evaluated in the annual compliance audit of lenders performed by IPAs. For the DL servicer, this function is to be evaluated through the oversight procedures performed by Federal Student Aid staff, including monthly reviews of performance metrics that monitor the DL servicer's performance. For example, Federal Student Aid is to monitor whether the DL servicer meets the 2-day standard for completing student status updates and the 98 percent standard for status update accuracy. Other examples of similar functions monitored by compliance audits in the FFEL program and by oversight procedures in the DL program include timely and accurate application of loan payments to borrower accounts and timely review and processing of loan discharge claims. In 2009, Federal Student Aid awarded contracts to four additional servicers to address increased direct loan volume stemming from changed student loan market conditions and potential further volume increases. HCERA, passed in March of 2010, terminated the authority to make new FFEL loans after June 30, 2010, which, according to Federal Student Aid officials, will add substantially to Federal Student Aid's direct loan volume and DL servicing needs. The new servicers, expected to begin servicing direct loans by August 31, 2010, are subject to oversight procedures that differ from the current DL servicer. According to Federal Student Aid's contract monitoring plan, these activities will include transaction analysis and reconciliations as well as internal control and program compliance reviews. For example, according to the contract monitoring plan, Federal Student Aid staff are expected to perform periodic transaction analysis at the borrower account level to determine the servicing accuracy of transactions. Federal Student Aid officials and DL servicer are to discuss issues identified through transaction analysis and the status of corrective actions at weekly operational meetings. In addition, the monitoring plan states that program compliance reviews are to be conducted as needed, at least annually, to determine if servicing is in compliance with requirements. According to Federal Student Aid officials, guidance for some of these oversight procedures is under development. The contract monitoring plan also calls for the additional DL servicers to be subject to internal control examinations performed by IPAs in accordance with Statement on Auditing Standards No. 70. Each additional DL servicer is to provide Federal Student Aid with an IPA report on the examination of its operational controls semiannually and on the examination of its information technology controls annually. These examinations are in addition to Education's annual review of internal controls required by OMB Circular No. A-123. In addition, the contracts call for the additional DL servicers to be subject to performance measures focused on default prevention and surveys of borrower satisfaction, school satisfaction, and Federal Student Aid staff satisfaction with servicer performance. These performance measures are to be used to compare the additional DL servicers' relative performance as one factor in determining the allocation of direct loans to them for servicing. Education officials expect to have these oversight procedures in place by the time the additional DL servicers begin servicing direct loans. FFEL and DL participants submit required audits to Federal Student Aid. Components of Federal Student Aid's Program Compliance office, including the School Eligibility Channel and Financial Partner Eligibility and Oversight (Financial Partners) are responsible for providing oversight by ensuring that the audits performed comply with statutory and regulatory requirements. The School Eligibility Channel is responsible for providing oversight of audits of schools and school servicers that participate in the FFEL and DL programs. Financial Partners is responsible for the oversight of audits of lenders, guaranty agencies, and their servicers participating in the FFEL program. These activities are to be accomplished through audit resolution and program review processes. Figure 3 depicts the respective oversight responsibilities of the School Eligibility Channel and Financial Partners. The School Eligibility Channel and Financial Partners are responsible for logging receipt of the audit report, performing an acceptability review, and taking steps to resolve the audit. According to policies and procedures, Federal Student Aid staff track findings contained in audit reports and use them to oversee the programs by monitoring whether corrective actions are taken. Tracking systems used by the School Eligibility Channel and Financial Partners include the Postsecondary Education Participants System (PEPS), eZ-Audit, and various Excel-based tracking sheets. Figure 4 depicts the process used by Federal Student Aid components for reviewing audit reports. Some processes described in figure 4 are designed differently depending on the type of participant. Specifically, according to Federal Student Aid policies and procedures, schools are required to submit audit reports-- both financial statement and compliance audits--to Federal Student Aid electronically via the eZ-Audit system. Other participants, including lenders, guaranty agencies, and their servicers, are expected to submit reports in paper or electronic form. For audits performed in accordance with OMB Circular No. A-133, Federal Student Aid staff are to ob tain the audit reports from the Federal Audit Clearinghouse Web site, a governmentwide audit information repository. Federal Student Aid staff are to perform acceptability reviews on the audit reports using checklist that address issues such as whether all required reporting elements are included. The School Eligibility Channel uses contractors to assist with the acceptability review of school audit reports. After the acceptability review is completed, Federal Student Aid policies and procedures require staff to review the submitted audit report and notify the participant that th e audit has been accepted or explain steps required for satisfactory audit resolution. Statutes and regulations provide authority for Federal Studen Aid to perform a program review as a method of program oversight of participants. Regulations also authorize Federal Student Aid to in administrative hearings that can lead to sanctions, including the suspension of the participant from the program. Federal Student Aid staff are to enter resolution information into eZ-Audit or PEPS once an audit is resolved. Similar processes are to be used for biennial p rogram reviews of schools and lenders performed by guaranty agencies. Special allowance payment audits and ECASLA agreed-upon procedure reports, also required from participating lenders, are subject to similar report review procedures. Federal Student Aid procedures called for using acceptability review checklists and Excel-based tracking sheets designed specifically for these kinds of reports to ensure completeness of the reports and to track the status and ensure the resolution of reported findings. For these reports, findings resolution could include adjusting special allowance payments made to lenders or coordinating with the lender to remove ineligible loans from an ECASLA portfolio. Financial Partners has acknowledged that inefficiencies exist with the current tracking system. For example, Financial Partners staff must manually enter the receipt of the compliance audit reports in Excel-based tracking sheets, while the receipt of the school audit reports are automatically logged through eZ-Audit electronic submission. Further, PEPS does not allow Financial Partners to readily identify those lenders required to submit annual compliance audits. Accordingly, Financial Partners staff must analyze database information to identify these lenders. Further, because PEPS does not track all audit information that is important to Financial Partners, staff supplement their use of PEPS with Excel-based tracking sheets. To address these inefficiencies, Education is in the process of designing a new system--referred to as Integrated Partner Management (IPM)--that will replace the existing systems and, among other things, provide the capability to track audit findings. According to Education officials, IPM is currently in the requirements phase, which is expected to be completed in July 2010, with implementation in phases in 2012. We noted a gap in Education's policies and procedures regarding review of audited financial statements for lender servicers. Education regulations require lender servicers that participate in the FFEL program to submit audited financial statements to Education annually. However, our review found that lender servicers did not submit their audited financial statements to Education. Federal Student Aid did not have procedures in place to review these financial statement audit reports and therefore did not conduct any follow-up to ensure that the audit reports were received and reviewed. Federal Student Aid officials told us they consider the risk to the government of not receiving these servicers' audited financial statements to be low because lenders are ultimately responsible for the loans and have the responsibility to ensure that their servicers are financially capable. By not requiring the review of the audited financial statements of lender servicers, Federal Student Aid runs the risk of missing significant findings disclosed in these reports. Such findings could relate to control weaknesses over information security and financial reporting that may not be addressed in the annual compliance audits that Federal Student Aid staff review. Further, Federal Student Aid staff might not be informed if a lender servicer received other than an unqualified audit opinion. Concerns such as these might indicate potential problems regarding the servicer's ability to continue program operations effectively. In addition, because one servicer may service multiple lenders, the risk to the government and borrowers increases should one of these servicers be in violation of any provision of federal regulations. According to GAO's Internal Control Management and Evaluation Tool , agencies should obtain and report to managers any relevant external information that may affect the achievement of its missions, goals, and objectives. Unless Federal Student Aid receives and reviews these financial statement audit reports, it may not be fully aware of risks to the government and borrowers, and its ability to properly oversee the FFEL program could be impaired. Significant federal resources are committed to providing loans so that students' educational goals can be achieved. Effectively overseeing the FFEL and DL programs is critical to minimize the risks to taxpayers and borrowers. Although no new FFEL loans will be made after June 30, 2010, FFEL loans unpaid at that time will remain under Federal Student Aid's oversight for possibly 30 years. Improvements are needed in the audit guidance and review procedures for the FFEL program. The gaps we noted in the OIG Lender Audit Guide used to audit lenders and in Federal Student Aid's policies and procedures regarding its review of audited financial statements for lender servicers expose the program to unnecessary risk. As Education moves forward to administer the expanded DL program, maintaining and enhancing its oversight procedures will help ensure that federal and borrower interests continue to be protected. To help address any gaps in the guidance for audits FFEL lenders perform in accordance with the OIG Lender Audit Guide, we recommend that the Education Inspector General update the OIG Lender Audit Guide to include all appropriate regulatory audit requirements. To ensure that Education properly oversees the ongoing servicing of outstanding FFEL student loans and mitigates risks related to lender servicers, we recommend that the Secretary of Education direct the Chief Operating Officer of the Office of Federal Student Aid to develop and implement policies and procedures requiring Federal Student Aid review of audited financial statements for lender servicers. In written comments on a draft of this report, the Education Office of Inspector General and Federal Student Aid agreed with our recommendations. These comments are reprinted in their entirety in appendixes III and IV, respectively. Regarding our recommendation to update the OIG Lender Audit Guide, the Education Inspector General concurred that the guide needs to be made current with all compliance requirements and anticipates updating and issuing a revised guide by December 2010. Regarding our recommendation to develop and implement policies and procedures requiring the review of lender servicer audited financial statements, the Chief Operating Officer of Federal Student Aid acknowledged the need to update the OIG Lender Audit Guide and existing processes and procedures to require lender servicers to prepare and submit audited financial statements, and stated that Federal Student Aid will review the audited financial statements. Education also provided technical comments, which we incorporated in this report, as appropriate. We are sending copies of this report to the Secretary of Education, the Inspector General of Education, and other interested parties. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. Please contact me on (202) 512-9095 if you or your staff have any questions about this report. Contact points for our Office of Congressional Relations and Office of Public Affairs can be found on the last page of this report. Other major contributors to this report are listed in appendix V. The following information is from GAO, Federal Student Loans: Audits and Reviews of the Federal Family Education Loan and Federal Direct Loan Programs, GAO-09-992R (Washington D.C.: Sept. 30, 2009), enclosure, p. 16. To address the first objective, we reviewed our September 30, 2009, report to determine the extent to which the audit and review requirements were applicable to both the Federal Family Education Loan and the William D. Ford Federal Direct Loan (DL) program participants in order to identify similarities and differences. We obtained and reviewed relevant audit guides to determine if the audit objectives addressed statutory and regulatory requirements to be met by the programs' participants. For the DL program, we also interviewed knowledgeable officials regarding the Department of Education's (Education) procedures to oversee the performance of the DL servicer, and we reviewed the relevant oversight procedures. For nonprofit and for-profit schools and lenders, we analyzed Office of Management and Budget (OMB) Circular No. A-133 and the Education Office of Inspector General (OIG) audit guides to determine if they addressed similar objectives. To assess whether the audits as designed addressed federal and borrower interests, respectively, we determined if the audits are designed to help protect the government from financial loss, and help ensure that qualified individuals have access to federal student loans and are protected from financial loss. For example, we determined if the audit guides focused on determining whether the students and lenders met eligibility requirements to participate in these programs. We interviewed officials from Education's Office of Federal Student Aid (Federal Student Aid) and the OIG, including the Acting Director of Financial Partner Eligibility and Oversight (Financial Partners), the General Manager of the School Eligibility Channel, and the Deputy Assistant Inspector General for Audit, to obtain clarification and explanations for any discrepancies identified during our review of documentation. The scope of our audit did not include testing that the audit guides were used by the auditors as intended. In addition, our work did not include program reviews conducted by guaranty agencies and other Federal Student Aid reviews because (1) in some cases, these reviews had similar objectives to the audits that we did include in our study and (2) in other cases, the reviews were risk-based and addressed specific operating conditions, and therefore these objectives were unique to each review. To address the second objective, we focused on the design of the processes Education uses to oversee the programs and to ensure compliance with statutory and regulatory requirements for the timely submission of audit reports. We reviewed applicable statutes and regulations and Federal Student Aid policies and procedures, including process flow diagrams and audit acceptability checklists. To further our understanding of the design of Education's processes for overseeing these programs and ensuring compliance, we observed systems demonstrations that included automated and Excel-based systems used to track receipt of audits and related findings. During these demonstrations, we observed actual steps taken by staff in order to review, and if necessary resolve, the audit. We obtained and reviewed supporting documentation referenced during these demonstrations, such as audit acceptability checklists and copies of Excel-based tracking sheets, used by staff to determine the sufficiency of the audit report's content and to ensure the timeliness of audit submissions, respectively. We interviewed officials from Federal Student Aid and OIG, including the Acting Director of Financial Partners, the General Manager of the School Eligibility Channel, and the Deputy Assistant Inspector General for Audit, to obtain clarification and explanations for any discrepancies identified during our review of documentation and the demonstrations. We focused on describing the processes Education has designed to ensure that applicable requirements are being met. While the scope of our audit did not include testing the implementation of these processes including controls, as appropriate, we noted any design deficiencies. We requested comments on a draft of this report from Education. We received written comments from the Education Inspector General and the Chief Operating Officer of Federal Student Aid (reprinted in their entirety in appendixes III and IV, respectively). We conducted this performance audit at Federal Student Aid offices in Washington, D.C., from August 2009 to July 2010 in accordance with GAGAS. 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, significant contributions to this report were made by Jack Warner (Assistant Director), Jennifer Dent, Chau Dinh, P. Barry Grinnell, and Danietta Williams. Francine DelVecchio and Jason Kirwan also made key contributions.

The Higher Education Opportunity Act of 2008, Pub. L. No. 110-315, mandated GAO to study the financial and compliance audits and reviews required or conducted for the Federal Family Education Loan (FFEL) program and the Federal Direct Student Loan (DL) program. The Department of Education's (Education) Office of Federal Student Aid is responsible for administering these programs. This report focuses on (1) identifying differences and similarities in audit requirements and oversight procedures for the FFEL and DL programs, including anticipated changes to selected oversight activities and (2) describing how the Office of Federal Student Aid's policies and procedures are designed to monitor audits and reviews. To do so, GAO interviewed Education and inspector general officials and reviewed numerous audit guides, agency procedures, checklists, and audit tracking systems. GAO identified differences and similarities in audit requirements and oversight procedures for the two programs. Differences include the following: (1) The FFEL and DL programs generally had different audit requirements stemming primarily from divergent program structures. The FFEL program relied on lenders, guaranty agencies--which administer federal government loan guarantees to lenders--and other entities that were subject to statutory and regulatory audit requirements. The DL program did not have as many audit requirements because DL loans are provided by the federal government, and fewer external entities are involved. (2) GAO found differences in audit requirements for nonprofit and for-profit lenders. Certain applicable audit objectives included in Office of Management and Budget (OMB) requirements for compliance audits of nonprofit lenders were not included in the Department of Education Office of Inspector General (OIG) Lender Audit Guide for compliance audits of for-profit lenders. As a result, audits of lenders performed in accordance with the OIG Lender Audit Guide were at risk of omitting compliance testing for a key audit objective. Similarities in audit requirements and oversight procedures include these: (1) Schools were subject to annual financial statement and compliance audits under both programs. (2) The functions performed by the DL servicer, with which Education contracts to administer certain functions of the DL program, were similar to functions performed by lenders, guaranty agencies, and their servicers in the FFEL program. GAO's analysis found that objectives addressed by FFEL participant compliance audits were similar to the objectives addressed through oversight procedures for the DL servicer, such as Education's review of the servicer's monthly performance metrics. The passage of the Health Care and Education Reconciliation Act of 2010 terminated the authority to make new FFEL loans after June 30, 2010. Borrowers who would have been eligible to obtain new FFEL loans could receive loans under the DL program. Regarding Office of Federal Student Aid's monitoring activities, staff were to use financial statement audits to oversee the financial condition of the schools and guaranty agencies that participate in the student loan programs. Compliance audits of schools, lenders, guaranty agencies, and their third-party servicers help Education ensure that these participants comply with applicable statutes, regulations, and program requirements. The Office of Federal Student Aid was required to track findings in these audit reports. GAO found that third-party servicers for lenders in the FFEL program did not submit their audited financial statements to Education as required. Education lacked a policy and specific procedures to ensure receipt and review of these audited financial statements. Without such reviews, the Office of Federal Student Aid might not be informed of a third-party servicer's unfavorable audit opinion or significant reported findings that could affect program operations. GAO recommends that the Education Inspector General update the OIG Lender Audit Guide to include all appropriate regulatory requirements for audits of ongoing FFEL participants. GAO also recommends that the Secretary of Education develop and implement policies and procedures requiring Office of Federal Student Aid review of audited financial statements for lender servicers. The Education Office of Inspector General and Education agreed with GAO's recommendations.

Modern agricultural biotechnology refers to various scientific techniques, most notably genetic engineering, used to modify plants, animals, or microorganisms by introducing in their genetic makeup genes for specific desired traits, including genes from unrelated species (see slide 1). For centuries people have crossbred related plant or animal species to develop useful new varieties or hybrids with desirable traits, such as better taste or increased productivity. Traditional crossbreeding, however, can be very time-consuming because it may require breeding several generations to obtain a desired trait and breed out numerous unwanted characteristics. Genetic engineering techniques allow faster development of new crop or livestock varieties, since the genes for a given trait can be readily introduced into a plant or animal species to produce a new variety incorporating that specific trait. Additionally, genetic engineering increases the range of traits available for developing new varieties by allowing genes from totally unrelated species to be incorporated into a particular plant or animal variety. To date, the principal biotechnology products marketed have been certain genetically engineered field crops (see slide 2). No genetically engineered animals have yet been approved, and only a modest number of plant products obtained from biotechnology have been marketed. However, for three key crops grown in the United States---corn, soybeans, and cotton--a large number of farmers have chosen to plant varieties derived from biotechnology. In 2000, biotech varieties accounted for about 25 percent of the corn, 54 percent of the soybeans, and 61 percent of the cotton planted in the United States. These crops are the source of various ingredients used extensively in many processed foods, such as corn syrup and soybean oil, and they are also major U.S. commodity exports. The United States accounts for about three-quarters of biotech crops planted globally. Other major producers of biotech crops are Argentina, which produces primarily biotech soybeans, and Canada, whose principal biotech crop is canola. Several U.S. government agencies are involved in trying to address foreign regulatory measures that affect biotech exports (see slide 3). Some of these government entities, including several agencies within the Department of Agriculture (USDA), the Food and Drug Administration (FDA), and the Environmental Protection Agency (EPA), play a role because of their regulatory expertise in plant and animal health, food safety, or environmental protection. Other agencies, such as the Office of the U.S. Trade Representative (USTR), USDA's Foreign Agricultural Service, and the Department of State, are involved because of their responsibilities for trade, export facilitation, or diplomatic negotiations. Recent developments in countries that are major markets for U.S. agricultural exports and in various multilateral organizations raise concerns about the prospects for U.S. agricultural biotech exports. For example, no agricultural biotech products have been approved in the EU since 1998. In addition, several countries have already passed or are considering regulations mandating labels for foods obtained from biotechnology. Furthermore, in the EU there is an effort to establish regulations requiring documentation to trace the presence of biotech products through each step of the grain handling and food production processes. International organizations, such as Codex, are also developing guidelines or rules affecting agricultural biotech trade (see slide 4). Some countries have not approved for marketing certain biotech products that have been approved in the United States (see slide 5). Given the novelty of agricultural biotech products, harmonized regulatory oversight by major trading countries is still a work in progress. Indeed, many countries have no approval process for these products at all. Codex is currently developing international guidelines for analyzing the risks of foods derived from biotechnology that countries may use in establishing their own product approval regulations. The United States and the EU already have in place very different regulatory frameworks for approving new agricultural biotech products or genetically modified organisms. The United States applies existing food safety and environmental protection laws and regulations to biotech products, and makes decisions on approvals based on the characteristics of products rather than whether they are derived from biotechnology. In order to evaluate new products, U.S. regulators require sufficient evidence to determine their safety or risk. Some of this evidence is developed through testing. Under this approach, the United States has approved most new biotech varieties to date. The EU, on the other hand, has established a distinct regime for regulating biotech products and since 1998 has not approved for marketing any new genetically modified organisms. Based on a concept the EU calls the "precautionary principle," the European Commission maintains that approval of new biotechnology products should not proceed if there is "insufficient, inconclusive or uncertain" scientific data regarding potential risks. U.S. regulators stress that they also consider scientific evidence and exercise precaution in evaluating new products derived from biotechnology. U.S. officials note, however, that the EU's "precautionary principle" may allow product approval decisions to be influenced by political considerations. Failure of the EU to approve new products is affecting the viability of biotech trade in other parts of the world. For example, given the importance of the EU market, U.S. soybean producers have been reluctant to introduce new biotech varieties that have not been approved for marketing in the EU. Similarly, corn growers in Argentina, who export to the EU, are deferring planting a biotech variety known as "Round-up Ready" corn because the EU has not approved it. In advance of international guidelines, the EU, Japan, and Korea have already passed regulations requiring labels for food and food ingredients derived from biotechnology (see slide 6). These three countries are all significant markets for U.S. agricultural exports. Several other countries, including Australia, New Zealand, and Mexico, are also taking action to adopt such labeling requirements. U.S. officials have raised concerns that such regulations, depending on how they are crafted, could significantly increase production costs and disrupt trade. U.S. producers argue that a label identifying foods as derived from biotechnology is likely to be construed by consumers as a warning label, inhibiting demand for these products. Ultimately, if food producers seeking to avoid such labels reject biotech-derived ingredients, grain handlers may be compelled to separate conventional products from biotech varieties, which would raise handling and documentation costs considerably. Labeling requirements also raise questions about threshold levels for biotech ingredients in food. It would not be possible for many foods to avoid labeling requirements that set a zero tolerance for the presence of biotech ingredients, according to U.S. officials. This is primarily because of the comingling of conventional and biotech varieties in the U.S. grain handling system. In the case of Japan, at least, USDA believes that U.S. products will be able to comply with its new labeling rules because foods containing less than a 5-percent threshold of biotech ingredients do not require labeling. More highly processed products, such as seed oils, are exempt from Japan's labeling requirement because they have no detectable trace of genetic modification. The Codex Food Labeling Committee is currently in the process of developing international guidelines for countries that choose to establish mandatory labeling of food and food ingredients obtained through biotechnology. The U.S. delegation has supported a Codex guideline for mandatory labeling only when biotech-derived foods differ significantly from corresponding conventional foods in composition, nutritional value, or intended use. Draft language under consideration in the committee also includes an option for mandatory labeling based on the method of production, even if there is no detectable presence of DNA or protein in the end product resulting from the genetic modification. The U.S. delegation, led by FDA, has opposed this language. The committee remains deadlocked on this issue and has been for several years. "Traceability" is a concept that forms the basis for a proposed EU regulation of agricultural biotech products that could affect U.S. exports (see slide 7). This regulation would require documentation tracing biotech products through each step of the grain handling and food production processes. Currently, no countries have enacted traceability requirements. The European Commission is expected to adopt new regulations on both traceability and labeling requirements for foods and animal feed that contain biotech ingredients or are derived from biotechnology later in 2001. Under these proposed rules, margarine made from soybean oil, for example, would require documentation to identify whether it contains or was derived from a conventional or biotech soybean variety. If the oil was obtained from a biotech soybean variety, the margarine would have to be labeled, even though the oil may not contain detectable traces of modified DNA or protein. After the Commission adopts the regulations, it will forward them to EU legislative bodies for final approval, a process that may take up to a year or more. The EU has also pushed for traceability rules to be included in Codex guidelines and in the Biosafety Protocol's pending rules for documentation of bulk commodity grain shipments. The U.S. government has opposed the inclusion of traceability requirements for biotechnology products in these multilateral discussions. U.S. government officials maintain that traceability requirements could significantly disrupt trade while having no compelling public health benefit. Moreover, U.S. industry groups are concerned about the burden these new regulations would place on the U.S. grain handling and food production systems because of the associated documentation requirements and the need to segregate biotech from conventional crop varieties. Corn and soybeans are the principal U.S. commodity exports most threatened by foreign regulations governing biotech products (see slide 8). While exports of both crops are mainly destined for animal feed, these crops face notable differences in overseas markets. Corn exports have already experienced significant losses. From average annual sales of about $300 million in the mid-1990s, U.S. corn exports to the EU have dropped to less than $10 million in recent years. This decline is primarily because new biotech corn varieties have been introduced into production in the United States that have not been approved in the EU. Since it is possible that traces of biotech varieties not approved for marketing in the EU could be present in any shipment of U.S. corn, exporters have opted to discontinue most corn exports to Europe. While the EU has never accounted for more than 5 percent of the world market for U.S. corn, Asian and Latin American countries purchase more than three-quarters of U.S. corn exports. Recently some of the largest markets in these regions--Japan, Korea, and Mexico--have taken action to enact regulatory measures that would require labeling of biotech foods and food ingredients. U.S. industry representatives note that labeling requirements in these countries may adversely impact the marketability of products with a biotech component and present additional difficulties for U.S. corn exports. Unlike corn, U.S. soybean exports have not yet experienced disruptions. As noted above, U.S. soybean exports to the EU are primarily intended for animal feed. The European market is much more important for U.S. soybean exports than it is for corn. U.S. soybean producers have been more restrained about introducing biotech varieties that have not been approved in the EU. Currently, only one biotech variety of soybeans is in general production in the United States, and it has been approved in the EU and most other major markets. However, U.S. officials note that regulations on labeling and traceability now being considered in Europe may pose a threat to future soybean exports even if no new biotech varieties are introduced. This is because for the first time these regulations are expected to apply to animal feed as well as to food meant for human consumption. The United States faces a number of challenges to maintaining access to markets for biotech crops and foods containing or derived from agricultural biotechnology products (see slide 9). Among these challenges are the EU's moves to establish labeling and traceability requirements and gain recognition of the "precautionary principle" in various international organizations. U.S. and industry representatives are concerned that some developing countries may use the EU regulatory framework as the basis for their own regulations on agricultural biotechnology products. They also fear that some foreign governments' lack of experience regulating this new technology may lead them to impose rules that would restrict trade in a manner inconsistent with their WTO obligations. The United States is relatively isolated on biotech trade issues since currently only a few other countries produce or export these commodities. According to U.S. officials, other countries tend to view biotech as primarily a bilateral trade problem between the United States and the EU. Furthermore, since the United States is not a party to the U.N. Convention on Biological Diversity, U.S. participation will be limited in future Biosafety Protocol discussions, including those regarding bulk commodity shipments. Growing consumer concerns, particularly in Europe, about the safety of biotechnology underlie actions taken by foreign governments that may restrict biotech trade. EU and U.S. officials note that recent food safety scares involving "mad cow" disease and dioxin and the ineffective response to these incidents by certain EU member governments have undermined European consumers' confidence in their food safety regulatory system. Consequently, according to these officials, consumers in Europe question the capacity of regulatory authorities to ensure food safety, and even though these scares were not associated with biotechnology, European attitudes toward biotech foods have been adversely impacted. Some consumer groups contend that there are uncertainties about the risks and benefits of biotech foods, and they are not satisfied with existing U.S. health and environmental safety regulations. Moreover, the first generation of biotech products has primarily provided benefits for producers (such as lower pest management costs and enhanced yields)---not consumers. Recognizing this, the agricultural biotech industry is now promoting the potential benefits to consumers of the next generation of products, particularly improved nutritional content. However, such products have yet to be marketed and may not be for a number of years. Thus, the potential benefits to consumers are not yet well defined. The difficulty grain handlers encounter in trying to completely separate biotech from conventional varieties poses an additional challenge. This problem was highlighted by last year's discovery in U.S. supermarkets of foods containing a biotech corn variety known as StarLink. StarLink had been approved in the United States only for animal feed but found its way into processed foods, as well as into grain shipments to Korea and Japan where the product was not approved. According to industry representatives, the competitive advantage of the U.S. grain handling system results from the comingling of bulk commodity crops, including conventional and biotech varieties. Any regulatory measure that would ultimately lead to segregation or traceability would raise handling costs and potentially undermine the efficiency and competitiveness of this system, they maintain. While growers generally support biotechnology, some actors in the agricultural sector, notably exporters, have been critical of biotech companies for marketing varieties in the United States that have not yet been approved in major market countries. Another challenge is the ability of U.S. government agencies to address other countries' new biotech regulations as they arise and protect U.S. interests in multilateral organizations in matters affecting biotech trade. Given the numerous international discussions in Codex committees and elsewhere, the U.S. government must contend with an increasing demand for staff resources devoted to biotech trade issues. U.S. officials have also highlighted the need for greater outreach to countries participating in these talks or considering their own biotech regulations. Such outreach efforts place an additional burden on agency resources. Finally, the number of U.S. trade and regulatory agencies with biotech-related roles, both domestically and internationally, creates a challenge for effective coordination. For example, there are several different U.S. government agencies representing U.S. interests in international organizations on biotech issues and working with other countries bilaterally, including USTR, USDA, FDA, and State. Their efforts require extensive interagency coordination in order to develop and carry out consistent U.S. positions on these issues. We obtained oral comments on a draft of this report from the Office of the U.S. Trade Representative, including the Director for Sanitary and Phytosanitary Affairs. We also obtained oral comments from the Department of Agriculture's Foreign Agricultural Service. The agencies provided technical comments that we incorporated as appropriate. To meet our objectives of (1) summarizing developments in key international organizations and among major U.S. trading partners that are likely to affect agricultural biotech trade; (2) identifying principal U.S. commodities most affected by foreign regulations on biotechnology exports; and (3) describing challenges U.S. biotech exporters face in maintaining access to foreign markets, we studied official documents from various U.S. federal agencies and foreign governments. We did not, however, independently review all foreign government rules or regulations affecting biotech imports. We examined statements by industry groups and nongovernmental organizations, as well as academic studies that addressed agricultural biotechnology trade issues. We interviewed U.S. officials from relevant agencies, including USTR, USDA, FDA, EPA, and the Departments of State and Commerce. We also met with USTR, USDA, and State Department officials in Brussels and Geneva. We met with a cross- section of industry groups, including representatives of growers, processors, exporters, food manufacturers, and biotech companies. In addition, we attended three conferences on agricultural biotechnology issues, and met with agency officials assigned to U.S. delegations to Codex. Our focus was on challenges encountered by U.S. agricultural biotech exports. Pharmaceutical products derived from biotechnology were not part of our review. Moreover, we did not address the appropriateness of U.S. or foreign regulatory measures regarding biotech products. We conducted our work from October 2000 through May 2001 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Honorable Ann Veneman; Secretary of Agriculture; the Honorable Robert B. Zoellick, U.S. Trade Representative; the Honorable Colin L. Powell, Secretary of State; the Honorable Tommy Thompson, Secretary of Health and Human Services; and the Honorable Christine Todd Whitman, Administrator, Environmental Protection Agency. Copies will be made available to other interested parties upon request. If you or your staff have any questions concerning this report, please call me at (202) 512-4347. Additional GAO contacts and staff acknowledgments are listed in appendix V. What is Agricultural Biotechnology? Agricultural biotechnology is a collection of scientific techniques, such as genetic Agricultural biotechnology is a collection of scientific techniques, such as genetic engineering, used to modify plants, animals, or microorganisms by introducing in them engineering, used to modify plants, animals, or microorganisms by introducing in them desired traits, including characteristics from unrelated species. For example, traits may desired traits, including characteristics from unrelated species. For example, traits may be introduced to facilitate pest management and improve yield or nutritional value. be introduced to facilitate pest management and improve yield or nutritional value. To date the principal biotech products marketed have been certain genetically To date the principal biotech products marketed have been certain genetically engineered field crops. The United States is by far the world's largest producer of engineered field crops. The United States is by far the world's largest producer of biotech crops. biotech crops. Argentina: 17% (soybeans) Canada: 10% (canola) China: ~1% (cotton) U.S: 72% (soybeans, corn, cotton, & others) *Based on USDA National Agricultural Statistical Service's June 2000 Acreage Report. Photo source: USDA. biotechnology. agreements. agreements. products. products. *APHIS: Animal and Plant Health Inspection Service; FAS: Foreign Agricultural Service. Codex: Sets international food safety standards recognized under the WTO Sanitary and Phytosanitary (SPS) agreement. Active discussions related to biotech are taking place in several Codex committees. USDA manages overall U.S. participation in Codex. USDA and FDA lead U.S. delegations to Codex committees. Biosafety Protocol: Environmental agreement under the U.N. Convention on Biological Diversity, covering the transshipment and use of living modified organisms. Protocol takes effect upon ratification by 50 countries. The United States has not ratified the Convention nor signed the Protocol. State Department represented U.S. interests at Biosafety Protocol negotiations. consistent with WTO disciplines. WTO disciplines. WTO: Provides institutional framework for multilateral trade. Trade disciplines established under the SPS and Technical Barriers to Trade (TBT) agreements and the General Agreement on Tariffs and Trade (GATT) are related to biotech trade issues. USTR represents U.S. interests at WTO. Some foreign countries have not approved for marketing certain biotech products that have been approved in the United States. Resistance to new product approvals in the EU has affected U.S. exports and biotech trade in other parts of the world. Product approval regulations must be clear, transparent, timely, science-based, and predictable. U.S. regulators have concluded that approved biotech foods on the market now are as safe as their conventional counterparts. Photo source: USDA. Strict labeling requirements could impact U.S. exports because they could reduce consumer demand and increase costs. Mandatory labeling should only be implemented when the new biotech product represents a significant change from the conventional variety or poses a threat to consumer safety. FDA has recently proposed voluntary labeling guidelines. Various countries have taken action to enact mandatory labeling requirements (shaded areas on map) EU is pushing for traceability requirements to track biotech products throughout the production and distribution chains. However, the implementation cost to producers may be prohibitive. A costly and onerous traceability system is not justified because biotech products are not inherently less safe than other foods. U.S. officials have opposed traceability requirements in Codex. Photo source: USDA. Corn and soy exports are most threatened by foreign regulations on biotech products. Because the U.S. grain handling system comingles biotech and conventional products, restrictions on biotech varieties affect nearly all exports of these commodities. Corn and soy exports are most threatened by foreign regulations on biotech products. Because the U.S. grain handling system comingles biotech and conventional products, restrictions on biotech varieties affect nearly all exports of these commodities. U.S. U.S. Photo source: USDA. In addition to the persons named above, Howard Cott, Jody Woods, Richard Seldin, and Janey Cohen made key contributions to this report. The first copy of each GAO report is free. Additional copies of reports are $2 each. A check or money order should be made out to the Superintendent of Documents. VISA and MasterCard credit cards are also accepted. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Orders by visiting: Room 1100 700 4th St., NW (corner of 4th and G Sts. NW) Washington, DC 20013 Orders by phone: (202) 512-6000 fax: (202) 512-6061 TDD (202) 512-2537 Each day, GAO issues a list of newly available reports and testimony. 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This report reviews the challenges facing U.S. agricultural biotechnology products in international trade. GAO found that new regulations and guidelines that may restrict U.S. exports of crops with a large biotech component are being enacted or considered by some U.S. trading partners and are also under discussion in various international organizations. These actions address approval, labeling, and traceability of agricultural biotech products. U.S. corn and soybean exports are most threatened by new foreign regulatory measures because of their biotech content. Although U.S. soybean exports have not yet experienced disruptions, U.S. corn exports have been largely shut out of the European Union (EU) market because U.S. farmers are producing some biotech varieties that have not been approved for marketing in the EU. U.S. agricultural biotech exports face several significant challenges in international markets. First, as the single major producer of biotech products, the United States has been relatively isolated in its efforts to maintain access to markets for these products. Second, in many parts of the world, consumer concerns are growing about the safety of biotech foods, which have led key market countries to implement or consider regulations that may restrict U.S. biotech exports. Another challenge is that U.S. industry combines conventional and biotech grain in the distribution chain. Consequently, foreign regulations governing biotech varieties could affect all U.S. exports of these commodities. Finally, as international negotiations in Codex Alimentarius and elsewhere take on greater importance, the U.S. government faces increasing demands for staff resources and coordination among the multiple agencies involved in biotech trade issues.

FDA and FSIS must approve the release of the products they regulate before importers can distribute them in the domestic market. These agencies inspect products to ensure that they comply with U.S. food safety requirements. FDA electronically screened all 2.7 million entries of imported foods under its jurisdiction in fiscal year 1997 and physically inspected about 1.7 percent, or 46,000, of them. FSIS visually inspected all 118,000 entries of imported meat and poultry under its jurisdiction in calendar year 1997 and conducted physical examinations on about 20 percent of them. Importers must post bonds with Customs to allow them to move the shipment from the port. The bond amount is intended to cover any duties, taxes, and penalties. Importers generally obtain continuous bonds that provide coverage for multiple shipments over a specified time period. The amount of a continuous bond is based primarily on a percentage of duties paid in the previous year. Importers can also purchase bonds for single shipments (single-entry bonds) in an amount 3 times the declared value of the shipment. Once Customs reviews entry documents and verifies the bond, it conditionally releases the shipment to the importer. After the conditional release, FSIS and FDA exercise different controls over the shipment, according to their statutory and regulatory authorities. FSIS generally requires the importers of the products it regulates to deliver them to approved import inspection facilities for storage until the products are released or refused entry. If FSIS refuses entry, it notifies the importer, who must arrange for reexport, destruction, or conversion to animal food within 45 days. The shipment is not released from FSIS' custody until the importer presents documents to FSIS showing that arrangements have been made. In contrast, under the Federal Food, Drug, and Cosmetics Act, as amended (FFDCA), importers are allowed to retain custody of food imports subject to FDA regulation in their own warehouses throughout the entire import process, from pick-up at the port of entry to release, destruction, or reexport. FDA releases most shipments without inspection. If FDA decides to examine a shipment, it asks the importer to make the shipment available for inspection at a place of the importer's choosing. If FDA refuses to allow the shipment to enter the United States as a result of this inspection, it notifies Customs and the importer and gives the importer 90 days to reexport or destroy the refused shipment. FDA's decision to refuse entry may occur immediately after inspection or may occur several days or weeks after a sample is collected, when laboratory results become available. If a shipment is not presented for inspection as requested by FDA or FSIS or is refused entry by FDA or FSIS, Customs is to notify the importer through a redelivery notice to (1) make the shipment available for FDA or FSIS inspection or (2) redeliver the refused shipment for Customs' supervised reexport or destruction. Customs can penalize an importer that fails to (1) make a shipment available for inspection, (2) destroy or reexport a refused shipment within the time frame set out in the Customs redelivery notice, or (3) dispose of the shipment under Customs' supervision. Customs initially assesses penalties at the maximum amount allowed--3 times the value of the shipment declared on the Customs entry form, up to the amount of available bond coverage. According to Customs' guidelines, Customs must follow FDA's penalty recommendation when an importer fails to redeliver a refused shipment for export or destruction. Customs may reduce the penalty when the shipment is returned (1) late but disposed of under Customs' supervision or (2) on time but not disposed of under Customs' supervision. According to Customs officials, they cannot impose penalties if Customs does not issue a redelivery notice to the importer within 120 days of the FDA refusal date. Weak and inconsistently applied controls have allowed some FDA-regulated imported foods that violate U.S. food safety requirements to enter domestic commerce. This occurs when either (1) importers circumvent required inspections or fail to properly dispose of shipments refused entry or (2) federal agencies do not work together to ensure that these shipments are disposed of properly. Although importers are subject to penalties for circumventing inspection and disposal orders, we found such penalties may not effectively deter violations because the penalties are too low and at times are not imposed at all and therefore fail to serve as a deterrent. Unscrupulous importers bypass FDA inspections of imported food shipments or circumvent requirements for reexporting or destroying food shipments that were refused entry, according to Customs and FDA officials at the ports we visited. This occurs, in large part, because, under FFDCA, importers are allowed to maintain custody of their shipments throughout the import process. Additionally, (1) FDA does not require shipments to have unique identifying marks that would aid in ensuring that other products are not substituted for those targeted for inspection or disposal and (2) importers, under FFDCA, are allowed a long period of time to redeliver refused shipments to Customs for disposal, which facilitates substitution by unscrupulous importers. Recognizing this problem, Customs has conducted and is still conducting operations at a number of ports to detect importers that attempt to circumvent inspection and disposal requirements. For example, in a San Francisco operation that started in October 1996 and was known as "Shark Fin," Customs and FDA found that importers had diverted trucks en route to inspection stations so that suspect products could be substituted with acceptable products. According to Customs investigators, the operation revealed that six importers were sharing the same acceptable product when they had to present a shipment for inspection--a practice known as "banking." In a follow-up operation in San Francisco, known as "Operation Bad Apple" and started in July 1997, Customs and FDA found a number of substitution and other problems, such as invoices that falsely identified the product. Customs' concerns were further validated when this second operation found that 40 of the 131 importers investigated had import shipments with discrepancies, such as product substitution and false product identification. According to a Customs official, 10 of the importers were previously identified as suspicious, while the other 30 importers had been considered reliable until the investigation. Identifying the substitution of products prior to inspection is difficult and labor-intensive, according to FDA and Customs port officials. Because FDA-regulated imports do not have unique identification marks that associate a shipment with the import entry documents filed with Customs, extra efforts are required to identify substitution, such as marking or documenting the products at the port before they are released to the importer, then checking the products when they are presented for inspection. FDA and Customs officials believed that placing additional staff at the ports for such efforts, as in the San Francisco operations, could not be sustained as a normal practice, given the resources required and other priorities. Substitution problems have also occurred after inspections, when importers are ordered to redeliver refused shipments to the port for destruction or reexport. Three of the eight ports we reviewed routinely examined FDA-regulated shipments delivered for reexport or destruction to detect substitution, according to Customs and FDA officials. At two of these ports--New York and Blaine--Customs found that substitution had occurred on outbound shipments. For example, in New York, Customs instituted a procedure in 1997 to physically examine selected food shipments that were refused entry and were scheduled for reexport. Officials began this procedure after periodic examinations found that some importers had substituted garbage for the refused shipments that were being reexported. For the 9-month period of October 1, 1997, through June 30, 1998, Customs found discrepancies in 31 of the 105 FDA-refused shipments it examined. Nine of the discrepancies were for product substitution and 22 were for shortages--only part or none of the refused shipment was in the redelivered containers. For example, in one instance, the importer presented hoisin sauce for reexport that had a later production date than the date of the entry into the United States on the original refused shipment. Customs officials believed that the importer distributed the original refused shipment into domestic commerce and substituted the hoisin sauce to avoid detection and penalty. At the other five ports, Customs does not systematically examine the shipments delivered for disposal to detect substitution or only examines them for destruction. For example, at Laredo, Customs officials said they only review the documents provided by the importer and do not examine the shipment to verify that the products being reexported or destroyed are the same products that were refused entry. At Miami, Seattle, and Los Angeles, Customs or FDA officials may examine some products presented for destruction, but, as at the Laredo port, only review the documents provided by the importer to verify the export of refused shipments. At San Francisco, a Customs official told us that he reviews the paperwork on the refused shipment and the paperwork on the shipment presented for destruction or reexport. None of the five ports routinely physically examined the export shipments to ensure they contained the products that were refused entry and listed on the export documents. Customs officials told us they do not have enough time for inspectors to verify each shipment presented for destruction or reexport, given the number of refused shipments and other priorities. A number of factors contribute to FDA's and Customs' problems in ensuring that targeted shipments are actually inspected and that refused entries are properly disposed of. First, under FFDCA, importers are allowed to maintain custody of their shipments throughout the import process, thus providing importers with the opportunity to circumvent controls. Second, imported food shipments under FDA's jurisdiction are not required to contain unique identification marks. As a result, it is difficult to verify whether the FDA-regulated shipments presented for inspection were the actual shipments being imported or whether refused shipments were destroyed or reexported. Furthermore, when FDA determines that a shipment is unsafe, FDA does not mark the shipment to show it was refused entry. In contrast, FSIS requires that imported food shipments under its jurisdiction contain unique identifying marks and are retained under its custody until disposal, and when it refuses entry, it stamps each carton "U.S. Refused Entry." Without such markings, Customs and FDA have less assurance that an importer will not substitute products either before inspection or, in the case of refusal, before redelivery for export or destruction. Furthermore, there is no assurance that an importer will not reimport a refused shipment at a later date. Third, under FFDCA, importers of FDA-regulated products are given 90 days to redeliver refused shipments for proper disposal, which is twice the amount of time that FSIS regulations give importers of FSIS-refused shipments. According to Customs and FDA officials, allowing an importer up to 90 days to dispose of refused products while retaining custody of the shipment provides more time for the importer to arrange for substitution. That is, unscrupulous importers will distribute into domestic commerce shipments refused entry and substitute for reexport a shipment that arrives at a later date. At five of the eight ports we examined, Customs and FDA do not effectively coordinate their efforts to ensure that importers are ordered to redeliver refused shipments for disposal. At two of these ports--Los Angeles and New York--Customs was unaware of FDA's refusal notices for 61 to 68 percent of the shipments we reviewed. At the other three--Laredo, Pharr, and Seattle--the lack of coordination appears to be less problematic. Nonetheless, as a result of these coordination problems at the five ports, Customs had not issued notices of redelivery to the importers. In contrast, at Miami, San Francisco, and Blaine, Customs and FDA officials coordinate their efforts to issue refusal notices and redelivery notices through joint agency teams or regular reconciliation of records. (See app. I for information we collected on each port's FDA-refused shipments.) Refused shipments that are not properly disposed of are likely to have entered domestic commerce. For example, according to a New York Customs official, over three-quarters of the cases we reviewed in which Customs did not have an FDA refusal notice--48 out of 63--were presumably released into commerce because Customs did not issue a notice to the importer to redeliver the shipment. In Los Angeles, we found that Customs had not issued a redelivery notice and had no records of disposal for 21 out of 54 shipments we reviewed. Some of these refused shipments that may have been released into commerce posed serious health risks: 11 of the 48 New York cases and 8 of the 21 Los Angeles cases were refused by FDA because they contained salmonella, a bacteria that can cause serious illness. It is unclear why Customs was not aware of all the imported food shipments refused entry by FDA. While FDA officials told us they either mailed or hand-delivered notices of refusal to Customs, Customs officials said they did not receive them. Nonetheless, Customs should have been aware of a coordination problem because importers sometimes returned shipments for disposal after receiving a refusal notice from FDA but without having received a Customs redelivery notice. For example, at New York, we found indications that importers returned shipments for destruction or reexport in 15 of the 63 cases in which Customs did not issue a redelivery notice. At Miami, San Francisco, and Blaine, Customs and FDA officials work together to ensure that required redelivery notices are issued on FDA-refused entries. In Miami, a joint Customs-FDA team sends out a single notice to the importer stating that the shipment has been refused entry and that the importer must return it for proper disposal within 90 days. In San Francisco and Blaine, the agencies reconcile their refusal and redelivery notice records each week. As a result of their efforts, we found that Customs was aware of FDA's refusal notices at these three ports in about 95 percent of the cases we reviewed. Although we found that Customs was frequently not aware of FSIS-refused shipments, we did not find comparable problems of imported food products being distributed domestically after they had been refused entry. According to FSIS officials, when FSIS rejects a shipment, it only notifies the importer of the refusal. The importer, in turn, must notify Customs of the refusal and obtain Customs' authorization to destroy or export the shipment, but this information often does not reach Customs' files. In Seattle, for example, of the 15 FSIS cases we reviewed, Customs could not locate files for 7 cases, and only 3 of the remaining 8 case files at Customs contained records of FSIS refusals or Customs notices of redelivery. Despite this apparent lack of coordination, we found records at the FSIS import inspection facility that indicated the refused shipments were disposed of properly. We believe that FSIS' controls over import shipments--requiring unique markings on each carton, retaining custody of shipments until they are approved for release or properly disposed of, and stamping "U.S. Refused Entry" on rejected shipments--reduced opportunities to bypass import controls. Customs' penalties for failure to redeliver refused shipments do not effectively deter violations because they are either too low compared with the value of the product or not imposed at all, according to Customs and FDA officials at the ports we reviewed. According to these officials, importers often view these penalties as part of the cost of doing business. Some officials believe importers consider the amount of the penalty from one violation will be covered by the gains made from other shipments that manage to enter commerce. Although violations for failure to redeliver shipments for which Customs issued a redelivery notice are initially assessed at 3 times the declared value of the shipment, an importer could still profit from the sale of a refused shipment even after buying the product and paying a full penalty for failure to redeliver. For example, we found that the wholesale market price for a 10-pound carton of Guatemalan snow peas ranged from $13 to $15, while the declared value of a 10-pound carton in one refused shipment was $0.75 per carton and the assessed penalty was $2.25 per carton. Thus, in this case, the wholesale value was four to five times the maximum penalty. In some cases, Customs did not impose the maximum allowable penalty--3 times the shipment's declared value--because the penalty exceeded the value of the bond that the importer had posted. At least 16 of the 162 penalty cases identified by Customs in Miami and 7 of the 50 cases we reviewed in New York had lower penalties imposed because of insufficient bond coverage. In Miami, for example, the importer of a shipment of swordfish that was refused entry for excessive levels of mercury but not redelivered as required could have been assessed a penalty in excess of $110,000, but the importer was actually assessed a penalty of only $50,000--the value of the bond. Customs and FDA officials said the bond amount may not cover the maximum penalty because most importers obtain continuous bonds, whose value is set as a percentage of duties paid in the prior year and is not tied to the declared value of the entries in the current year. According to Customs officials in Miami and New York, if the importer has a history of violations, Customs may require the importer to post single-entry bonds for additional entries. At three ports--Los Angeles, San Francisco, and Seattle--Customs did not assess as severe a penalty as agency guidelines suggested because officials at these ports were unable to identify repeat offenders and penalize them accordingly. For example, port officials in Seattle said the computer system that records violation information is difficult to access for identifying repeat offenders, given other priorities. Prior to April 1998, Customs officials for the Laredo and Pharr ports said they could not identify repeat offenders for the same reasons. However, New York, Miami, and Blaine maintained their own records on violations and repeat offenders and usually followed Customs guidelines when assessing penalties on repeat offenders in the cases we reviewed. Finally, Customs officials said they cannot impose penalties in many cases we reviewed because the agency did not issue a redelivery notice to the importer within 120 days of the FDA refusal date. For example, in Los Angeles, we found that 11 cases had refusal notices over 120 days but did not have redelivery notices. Although some importers reexport or destroy their shipments after receiving only the FDA refusal notice, importers that do not redeliver the refused product will not incur a penalty. From their experience, Customs officials believe that in such cases importers distribute the product. Customs and FDA officials and importer association representatives suggested ways to strengthen controls over imported foods as they move through Customs' and FDA's import procedures. Some of the more promising suggestions are discussed below. Each of these suggested approaches has advantages and disadvantages, costs, or limitations that would have to be considered before any changes are made. For certain importers that FDA believes are more likely than others to violate import controls because they have a history of violations, Customs and FDA could work together to ensure that substitution does not occur before either inspection or disposal. For example, FDA could target importers, and Customs could order that these importers' shipments be delivered by bonded truckers to an independent, Customs-approved, bonded warehouse pending inspection. Although FDA can request Customs to require importers to present shipments for inspection at a bonded warehouse, it does not routinely use this authority and make such requests. In Los Angeles, for example, FDA officials said they have had Customs make an importer present a shipment to a bonded warehouse only once in the past 2 years. Given their concerns about importers circumventing federal controls over imported foods, Customs and FDA officials at San Francisco and Miami are considering implementing variations on this option. For example, in Miami, Customs and FDA officials are developing a program to require importers of FDA-refused shipments to deliver them into the custody of a centralized examination station, a type of bonded warehouse, for disposal, rather than allowing the importer to retain custody. This approach has the advantage of preventing the targeted importers from bypassing inspection controls and of ensuring the proper disposal of the targeted importers' shipments that were refused entry. Furthermore, this approach would serve as a deterrent to importers likely to violate requirements because they would have to pay the additional costs associated with unloading a shipment and storing it at a bonded warehouse. Moreover, this approach would not require any change in Customs' authority. Customs currently uses bonded warehouses for its own inspections and could, at FDA's request, require targeted importers to use bonded warehouses. This approach also has several limitations. First, it does not cover all importers. While ideally it would be preferable to monitor all importers, it may not be practicable because the costs to law-abiding importers would also increase. Second, even if Customs and FDA focused only on problem importers, the agencies would need to develop a coordinated system to identify them. Similarly, this approach would depend on effective coordination after such identification--FDA would need to request Customs to maintain control of a shipment, and Customs would have to act accordingly. As we have noted, effective coordination between FDA and Customs does not always occur. Customs and FDA could take steps to better ensure that importers with a history of violations are not substituting products before inspection and are not returning the actual refused cargo for destruction or reexport by adopting variations on controls used by FSIS for meat and poultry imports. To help prevent substitution before inspection, FDA could require the shipments of importers or products with a history of violations to have unique identification marks on each product container and on entry documents filed with Customs. To help ensure that shipments refused entry are destroyed or reexported, FDA could stamp "refused entry" on each carton/container in shipments that it finds do not meet U.S. food safety requirements. Requiring certain targeted shipments to have unique identification marks would have the advantage of enabling FDA inspectors to better verify that the products presented for inspection were the same products identified on Customs entry documents and help Customs inspectors verify that shipments refused entry were disposed of properly. Similarly, stamping refused entries would increase the likelihood that they were actually destroyed or reexported and reduce the likelihood that reexported products would reenter the country at a later time. However, these procedures might be difficult to implement. Requiring unique identification marks on imports (1) would require FDA to develop and implement a marking and labeling system for the wide variety of imported food products from many different countries that it regulates and (2) might negatively affect trade. Furthermore, a requirement to stamp refused entries would be labor-intensive for FDA because FDA, unlike FSIS, does not always have custody of the shipments at the time of refusal and would have to travel to the storage location to stamp the cartons. Customs and FDA could develop a method of ensuring that importers whose shipments are refused entry into the United States are issued notices to redeliver their cargo. Two approaches were suggested to us. First, Customs could retrieve information from its own database on FDA's refusals. Customs records all import shipments in its Automated Commercial System (ACS), and FDA communicates its refusal notice to the importer through ACS. Currently, however, Customs' system is not programmed to identify FDA refusals. Second, in lieu of the first approach, or until this approach is implemented, Customs and FDA could work out a manual system, such as reconciling FDA refusal and Customs redelivery notices. Either of these approaches has the obvious advantage of ensuring that Customs is promptly aware of all FDA refusals so that it can issue redelivery notices. The database approach, however, would require some reprogramming of ACS to enable Customs to access FDA's refusals as well as training of Customs officials to ensure that they know how to use the software. The second approach would also address the coordination problem but would require more staff time. The Congress could reduce the time allowed for redelivery of FDA-regulated shipments to require importers to dispose of refused shipments more quickly and more in line with the other agencies. By statute, importers of FDA-regulated foods are allowed 90 days to redeliver products after being issued the notice of refusal, in contrast to importers of FSIS-regulated foods, which are allowed a 45-day redelivery period. FDA officials at two ports said the longer time period is intended to give importers enough time to arrange export shipping of refused shipments. In New York, however, Customs officials said some importers use the longer time period to obtain products to substitute for the refused shipments. The advantage of this approach would be to reduce the opportunity for importers to distribute the products into domestic commerce or to prepare substitute products for disposal. However, importers would have less time to consolidate refused entries with other exports, which may increase their shipping costs. Reducing the redelivery period would also require changes in FDA's statutory authority. Under Customs' current practices, penalties can be lower than the wholesale market value of a shipment and therefore not effectively prevent refused imported foods from entering domestic commerce. To create a more effective deterrent, Customs could take one or more of the following suggested actions. First, Customs could increase the continuous bond requirement for importers with a history of violations so that the bond would cover potentially higher penalties. Rather than base the calculation for continuous bonds primarily on duties paid in the previous year, Customs could adjust the formula to include the history of violations and damages assessed during the earlier period. Second, Customs could require importers with a history of violations to post separate, single-entry bonds for each import shipment. The single-entry bond amount is 3 times the declared value of the shipment. Finally, Customs could impose higher penalties on repeat violators, as allowed by its own guidelines, by providing the means for Customs staff to identify importers with a history of violations. Currently, Customs cannot always identify repeat offenders. These approaches have the advantage of creating a more significant monetary disincentive to importers considering circumventing federal controls. The first two approaches would impose higher costs on repeat violators because they involve added expenses in increasing the level of a continuous bond or purchasing individual bonds for each shipment. The final approach would enable Customs to follow its own guidelines when assessing penalties on repeat violators. The first two approaches, however, would require additional work by Customs staff at each port to review and set bond requirements. The last approach would require Customs to correct deficiencies in its penalty database to allow Customs staff to identify repeat violators. This concludes my prepared testimony. I would be happy to respond to any questions that you and Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. 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GAO discussed: (1) the extent to which federal controls ensure that food importers present shipments for inspection when required and that shipments refused entry are destroyed or reexported; and (2) ways to strengthen these controls. GAO noted that: (1) the Food and Drug Administration's (FDA) controls provide little assurance that shipments targeted for inspection are actually inspected or that shipments found to violate U.S. safety standards are destroyed or reexported; (2) because importers, rather than FDA, retain custody over shipments throughout the import process, some importers have been able to provide substitutes for products targeted for inspection or products that have been refused entry and must be reexported or destroyed, according to Customs Service and FDA officials; (3) moreover, Customs and FDA do not effectively coordinate their efforts to ensure that importers are notified that their refused shipments must be reexported or destroyed; (4) Customs' penalties for violating inspection and disposal requirements may provide little incentive for compliance because they are too low in comparison with the value of the imported products or they are not imposed at all; (5) as a result of these weaknesses, shipments that failed to meet U.S. safety standards were distributed in domestic commerce; (6) because the Food Safety and Inspection Service (FSIS) requires unique identification marks on, and maintains custody of, each shipment of imported foods under its jurisdiction, GAO did not find similar weaknesses in FSIS' controls over the shipments reviewed, although GAO did identify some coordination problems between FSIS and Customs; (7) federal controls would be strengthened by consistently implementing current procedures and by adopting new procedures; (8) Customs and FDA officials and representatives of importer and broker associations identified a number of ways to improve agencies' controls over incoming shipments, strengthen interagency coordination, and provide stronger deterrents against repeat violators; and (9) each of these approaches has advantages and disadvantages that should be considered before making any changes.

According to the Institute of Medicine, the federal government has a central role in shaping nearly all aspects of the health care industry as a regulator, purchaser, health care provider, and sponsor of research, education, and training. According to HHS, federal agencies fund more than a third of the nation's total health care costs. Given the level of the federal government's participation in providing health care, it has been urged to take a leadership role in driving change to improve the quality and effectiveness of medical care in the United States, including expanded adoption of IT. In April 2004, President Bush called for the widespread adoption of interoperable electronic health records within 10 years and issued an executive order that established the position of the National Coordinator for Health Information Technology within HHS as the government official responsible for the development and execution of a strategic plan to guide the nationwide implementation of interoperable health IT in both the public and private sectors. In July 2004, HHS released The Decade of Health Information Technology: Delivering Consumer-centric and Information-rich Health Care--Framework for Strategic Action. This framework described goals for achieving nationwide interoperability of health IT and actions to be taken by both the public and private sectors in implementing a strategy. HHS's Office of the National Coordinator for Health IT updated the framework's goals in June 2006 and included an objective for protecting consumer privacy. It identified two specific strategies for meeting this objective--(1) support the development and implementation of appropriate privacy and security policies, practices, and standards for electronic health information exchange and (2) develop and support policies to protect against discrimination based on personal health information such as denial of medical insurance or employment. In July 2004, we testified on the benefits that effective implementation of IT can bring to the health care industry and the need for HHS to provide continued leadership, clear direction, and mechanisms to monitor progress in order to bring about measurable improvements. Since then, we have reported or testified on several occasions on HHS's efforts to define its national strategy for health IT. We have recommended that HHS develop the detailed plans and milestones needed to ensure that its goals are met and HHS agreed with our recommendation and has taken some steps to define more detailed plans. In our report and testimonies, we have described a number of actions that HHS, through the Office of the National Coordinator for Health IT, has taken toward accelerating the use of IT to transform the health care industry, including the development of its framework for strategic action. We have also described the Office of the National Coordinator's continuing efforts to work with other federal agencies to revise and refine the goals and strategies identified in its initial framework. The current draft framework-- The Office of the National Coordinator: Goals, Objectives, and Strategies--identifies objectives for accomplishing each of four goals, along with 32 high-level strategies for meeting the objectives, including the two strategies for protecting consumer privacy. Federal health care reform initiatives of the early- to mid-1990s were inspired in part by public concern about the privacy of personal medical information as the use of health IT increased. Congress, recognizing that benefits and efficiencies could be gained by the use of information technology in health care, also recognized the need for comprehensive federal medical privacy protections and consequently passed the Health Insurance Portability and Accountability Act of 1996 (HIPAA). This law provided for the Secretary of HHS to establish the first broadly applicable federal privacy and security protections designed to protect individual health care information. HIPAA required the Secretary of HHS to promulgate regulatory standards to protect certain personal health information held by covered entities, which are certain health plans, health care providers, and health care clearinghouses. It also required the Secretary of HHS to adopt security standards for covered entities that maintain or transmit health information to maintain reasonable and appropriate safeguards. The law requires that covered entities take certain measures to ensure the confidentiality and integrity of the information and to protect it against reasonably anticipated unauthorized use or disclosure and threats or hazards to its security. HIPAA provides authority to the Secretary to enforce these standards. The Secretary has delegated administration and enforcement of privacy standards to the department's Office for Civil Rights and enforcement of the security standards to the department's Centers for Medicare and Medicaid Services. Most states have statutes that in varying degrees protect the privacy of personal health information. HIPAA recognizes this and specifically provides that its implementing regulations do not preempt contrary provisions of state law if the state laws impose more stringent requirements, standards, or specifications than the federal privacy rule. In this way, the law and its implementing rules establish a baseline of mandatory minimum privacy protections and define basic principles for protecting personal health information. The Secretary of HHS first issued HIPAA's Privacy Rule in December 2000, following public notice and comment, but later modified the rule in August 2002. Subsequent to the issuance of the Privacy Rule, the Secretary issued the Security Rule in February 2003 to safeguard electronic protected health information and help ensure that covered entities have proper security controls in place to provide assurance that the information is protected from unwarranted or unintentional disclosure. The Privacy Rule reflects basic privacy principles for ensuring the protection of personal health information. Table 1 summarizes these principles. HHS and its Office of the National Coordinator for Health IT have initiated actions to identify solutions for protecting health information. Specifically, HHS awarded several health IT contracts that include requirements for developing solutions that comply with federal privacy and security requirements, consulted with the National Committee on Vital and Health Statistics (NCVHS) to develop recommendations regarding privacy and confidentiality in the Nationwide Health Information Network, and formed the American Health Information Community (AHIC) Confidentiality, Privacy, and Security Workgroup to frame privacy and security policy issues and identify viable options or processes to address these issues. The Office of the National Coordinator for Health IT intends to use the results of these activities to identify technology and policy solutions for protecting personal health information as part of its continuing efforts to complete a national strategy to guide the nationwide implementation of health IT. However, HHS is in the early stages of identifying solutions for protecting personal health information and has not yet defined an overall approach for integrating its various privacy-related initiatives and for addressing key privacy principles. HHS awarded four major health IT contracts in 2005 intended to advance the nationwide exchange of health information--Privacy and Security Solutions for Interoperable Health Information Exchange, Standards Harmonization Process for Health IT, Nationwide Health Information Network Prototypes, and Compliance Certification Process for Health IT. These contracts include requirements for developing solutions that comply with federal privacy requirements. The contract for privacy and security solutions is intended to specifically address privacy and security policies and practices that affect nationwide health information exchange. HHS's contract for privacy and security solutions is intended to provide a nationwide synthesis of information to inform privacy and security policymaking at federal, state, and local levels and the Nationwide Health Information Network prototype solutions for supporting health information exchange across the nation. In summer 2006, the privacy and security solutions contractor selected 34 states and territories as locations in which to perform assessments of organization-level privacy- and security-related policies and practices that affect interoperable electronic health information exchange and their bases, including laws and regulations. The contractor is supporting the states and territories as they (1) assess variations in organization-level business policies and state laws that affect health information exchange, (2) identify and propose solutions while preserving the privacy and security requirements of applicable federal and state laws, and (3) develop detailed plans to implement solutions. The privacy and security solutions contractor is to develop a nationwide report that synthesizes and summarizes the variations identified, the proposed solutions, and the steps that states and territories are taking to implement their solutions. It is also to deliver an interim report to address policies and practices followed in nine domains of interest: (1) user and entity authentication, (2) authorization and access controls, (3) patient and provider identification to match identities, (4) information transmission security or exchange protocols (encryption, etc.), (5) information protections to prevent improper modification of records, (6) information audits that record and monitor the activity of health information systems, (7) administrative or physical security safeguards required to implement a comprehensive security platform for health IT, (8) state law restrictions about information types and classes and the solutions by which electronic personal health information can be viewed and exchanged, and (9) information use and disclosure policies that arise as health care entities share clinical health information electronically. These domains of interest address the use and disclosure and security privacy principles. In June 2006, NCVHS, a key national health information advisory committee, presented to the Secretary of HHS a report recommending actions regarding privacy and confidentiality in the Nationwide Health Information Network. The recommendations cover topics that are, according to the committee, central to challenges for protecting health information privacy in a national health information exchange environment. The recommendations address aspects of key privacy principles including (1) the role of individuals in making decisions about the use of their personal health information, (2) policies for controlling disclosures across a nationwide health information network, (3) regulatory issues such as jurisdiction and enforcement, (4) use of information by non- health care entities, and (5) establishing and maintaining the public trust that is needed to ensure the success of a nationwide health information network. The recommendations are being evaluated by the AHIC work groups, the Certification Commission for Health IT, the Health Information Technology Standards Panel, and other HHS partners. In October 2006, the committee recommended that HIPAA privacy protections be extended beyond the current definition of covered entities to include other entities that handle personal health information. It also called on HHS to create policies and procedures to accurately match patients with their health records and to require functionality that allows patient or physician privacy preferences to follow records regardless of location. The committee intends to continue to update and refine its recommendations as the architecture and requirements of the network advance. AHIC, a commission that provides input and recommendations to HHS on nationwide health IT, formed the Confidentiality, Privacy, and Security Workgroup in July 2006 to frame privacy and security policy issues and to solicit broad public input to identify viable options or processes to address these issues. The recommendations to be developed by this work group are intended to establish an initial policy framework and address issues including methods of patient identification, methods of authentication, mechanisms to ensure data integrity, methods for controlling access to personal health information, policies for breaches of personal health information confidentiality, guidelines and processes to determine appropriate secondary uses of data, and a scope of work for a long-term independent advisory body on privacy and security policies. The work group has defined two initial work areas--identity proofing and user authentication--as initial steps necessary to protect confidentiality and security. These two work areas address the security principle. Last month, the work group presented recommendations on performing patient identity proofing to AHIC. The work group intends to address other key privacy principles, including, but not limited to maintaining data integrity and control of access. It plans to address policies for breaches of confidentiality and guidelines and processes for determining appropriate secondary uses of health information, an aspect of the use and disclosure privacy principle. HHS has taken steps intended to address aspects of key privacy principles through its contracts and with advice and recommendations from its two key health IT advisory committees. For example, the privacy and security solutions contract is intended to address all the key privacy principles in HIPAA. Additionally, the uses and disclosures principle is to be further addressed through the advisory committees' recommendations and guidance. The security principle is to be addressed through the definition of functional requirements for a nationwide health information network, the definition of security criteria for certifying electronic health record products, the identification of information exchange standards, and recommendations from the advisory committees regarding, among other things, methods to establish and confirm a person's identity. The committees have also made recommendations for addressing authorization for uses and disclosure of health information and intend to develop guidelines for determining appropriate secondary uses of data. HHS has made some progress toward protecting personal health information through its various privacy-related initiatives. For example, during the past 2 years, HHS has defined initial criteria and procedures for certifying electronic health records, resulting in the certification of 35 IT vendor products. In January 2007, HHS contractors presented 4 initial prototypes of a Nationwide Health Information Network (NHIN). However, the other contracts have not yet produced final results. For example, the privacy and security solutions contractor has not yet reported its assessment of state and organizational policy variations. This report is due on March 31, 2007. Additionally, HHS has not accepted or agreed to implement the recommendations made in June 2006 by the NCVHS, and the AHIC Privacy, Security, and Confidentiality Workgroup is in the very early stages of efforts that are intended to result in privacy policies for nationwide health information exchange. HHS is in the early phases of identifying solutions for safeguarding personal health information exchanged through a nationwide health information network and has not yet defined an approach for integrating its various efforts or for fully addressing key privacy principles. For example, milestones for integrating the results of its various privacy-related initiatives and resolving differences and inconsistencies have not been defined, and it has not been determined which entity participating in HHS's privacy-related activities is responsible for integrating these various initiatives and the extent to which their results will address key privacy principles. Until HHS defines an integration approach and milestones for completing these steps, its overall approach for ensuring the privacy and protection of personal health information exchanged throughout a nationwide network will remain unclear. The increased use of information technology to exchange electronic health information introduces challenges to protecting individuals' personal health information. In our report, we identify and summarize key challenges described by health information exchange organizations: understanding and resolving legal and policy issues, particularly those resulting from varying state laws and policies; ensuring appropriate disclosures of the minimum amount of health information needed; ensuring individuals' rights to request access to and amendments of health information to ensure it is correct; and implementing adequate security measures for protecting health information. Table 2 summarizes these challenges. Understanding and Resolving Legal and Policy Issues Health information exchange organizations bring together multiple and diverse health care providers, including physicians, pharmacies, hospitals, and clinics that may be subject to varying legal and policy requirements for protecting health information. As health information exchange expands across state lines, organizations are challenged with understanding and resolving data-sharing issues introduced by varying state privacy laws. HHS recognized that sharing health information among entities in states with varying laws introduces challenges and intends to identify variations in state laws that affect privacy and security practices through the privacy and security solutions contract that it awarded in 2005. Several organizations described issues associated with ensuring appropriate disclosure, such as determining the minimum data necessary that can be disclosed in order for requesters to accomplish the intended purposes for the use of the health information. For example, dieticians and health claims processors do not need access to complete health records, whereas treating physicians generally do. Organizations also described issues with obtaining individuals' authorization and consent for uses and disclosures of personal health information and difficulties with determining the best way to allow individuals to participate in and consent to electronic health information exchange. In June 2006, NCVHS recommended to the Secretary of HHS that the department monitor the development of different approaches and continue an open, transparent, and public process to evaluate whether a national policy on this issue would be appropriate. Ensuring Individuals' Rights to Request Access and Amendments to Health Information to Ensure It Is Correct As the exchange of personal health information expands to include multiple providers and as individuals' health records include increasing amounts of information from many sources, keeping track of the origin of specific data and ensuring that incorrect information is corrected and removed from future health information exchange could become increasingly difficult. Additionally, as health information is amended, HIPAA rules require that covered entities make reasonable efforts to notify certain providers and other persons that previously received the individuals' information. The challenges associated with meeting this requirement are expected to become more prevalent as the numbers of organizations exchanging health information increases. Implementing Adequate Security Measures for Protecting Health Information Adequate implementation of security measures is another challenge that health information exchange providers must overcome to ensure that health information is adequately protected as health information exchange expands. For example, user authentication will become more difficult when multiple organizations that employ different techniques exchange information. The AHIC Confidentiality, Privacy, and Security Workgroup recognized this difficulty and identified user authentication as one of its initial work areas for protecting confidentiality and security. To increase the likelihood that HHS will meet its strategic goal to protect personal health information, we recommend in our report that the Secretary of Health and Human Services define and implement an overall approach for protecting health information as part of the strategic plan called for by the President. This approach should: 1. Identify milestones and the entity responsible for integrating the outcomes of its privacy-related initiatives, including the results of its four health IT contracts and recommendations from the NCVHS and AHIC advisory committees. 2. Ensure that key privacy principles in HIPAA are fully addressed. 3. Address key challenges associated with legal and policy issues, disclosure of personal health information, individuals' rights to request access and amendments to health information, and security measures for protecting health information within a nationwide exchange of health information. In commenting on a draft of our report, HHS disagreed with our recommendation and referred to "the department's comprehensive and integrated approach for ensuring the privacy and security of health information within nationwide health information exchange." However, an overall approach for integrating the department's various privacy-related initiatives has not been fully defined and implemented. While progress has been made initiating these efforts, much work remains before they are completed and the outcomes of the various efforts are integrated. HHS specifically disagreed with the need to identify milestones and stated that tightly scripted milestones would impede HHS's processes and preclude stakeholder dialogue on the direction of important policy matters. We disagree and believe that milestones are important for setting targets for implementation and for informing stakeholders of HHS's plans and goals for protecting personal health information as part of its efforts to achieve nationwide implementation of health IT. HHS did not comment on the need to identify an entity responsible for the integration of the department's privacy-related initiatives, nor did it provide information regarding an effort to assign responsibility for this important activity. HHS neither agreed nor disagreed that its approach should address privacy principles and challenges, but stated that the department plans to continue to work toward addressing privacy principles in HIPAA and that our report appropriately highlights efforts to address challenges encountered during electronic health information exchange. HHS stated that the department is committed to ensuring that health information is protected as part of its efforts to achieve nationwide health information exchange. In written comments, the Secretary of Veterans Affairs concurred with our findings, conclusions, and recommendation to the Secretary of HHS and commended our efforts to highlight methods for ensuring the privacy of electronic health information. The Department of Defense chose not to comment on a draft of the report. In summary, concerns about the protection of personal health information exchanged electronically within a nationwide health information network have increased as the use of health IT and the exchange of electronic health information have also increased. HHS and its Office of the National Coordinator for Health IT have initiated activities that, collectively, are intended to protect health information and address aspects of key privacy principles. While progress continues to be made through the various initiatives, it becomes increasingly important that HHS define a comprehensive approach and milestones for integrating its efforts, resolve differences and inconsistencies among them, fully address key privacy principles, ensure that recommendations from its advisory committees are effectively implemented, and sequence the implementation of key activities appropriately. HHS's current initiatives are intended to address many of the challenges that organizations face as the exchange of electronic health information expands. However, without a clearly defined approach that establishes milestones for integrating efforts and fully addresses key privacy principles and the related challenges, it is likely that HHS's goal to safeguard personal health information as part of its national strategy for health IT will not be met. Mr. Chairman, Senator Voinovich, and members of the subcommittee, this concludes our statement. We will be happy to answer any questions that you or members of the subcommittee may have at this time. If you have any questions on matters discussed in this testimony, please contact Linda Koontz at (202) 512-6240 or David Powner at (202) 512-9286, or by e-mail at [email protected] or [email protected]. Other key contributors to this testimony include Mirko J. Dolak, Amanda C. Gill, Nancy E. Glover, M. Saad Khan, David F. Plocher, Charles F. Roney, Sylvia L. Shanks, Sushmita L. Srikanth, Teresa F. Tucker, and Morgan F. Walts.

In April 2004, President Bush called for the Department of Health and Human Services (HHS) to develop and implement a strategic plan to guide the nationwide implementation of health IT. The plan is to recommend methods to ensure the privacy of electronic health information. GAO was asked to summarize its report that is being released today. The report describes the steps HHS is taking to ensure privacy protection as part of its national health IT strategy and identifies challenges associated with protecting electronic health information exchanged within a nationwide health information network. HHS and its Office of the National Coordinator for Health IT have initiated actions to identify solutions for protecting personal health information through several contracts and with two health information advisory committees. For example, in late 2005, HHS awarded several health IT contracts that include requirements for addressing the privacy of personal health information exchanged within a nationwide health information exchange network. Its privacy and security solutions contractor is to assess the organization-level privacy- and security-related policies, practices, laws, and regulations that affect interoperable health information exchange. Additionally, in June 2006, the National Committee on Vital and Health Statistics made recommendations to the Secretary of HHS on protecting the privacy of personal health information within a nationwide health information network and in August 2006, the American Health Information Community convened a work group to address privacy and security policy issues for nationwide health information exchange. While these activities are intended to address aspects of key principles for protecting the privacy of health information, HHS is in the early stages of its efforts and has therefore not yet defined an overall approach for integrating its various privacy-related initiatives and addressing key privacy principles, nor has it defined milestones for integrating the results of these activities. GAO identified key challenges associated with protecting electronic personal health information in four areas.

DOD collects information on the extent of foreign participation in its contracts to assess matters related to defense trade balances and domestic industrial base capabilities. Toward this end, DOD uses different sources of information. For defense trade information, DOD has one database for prime contract awards (DD 350 Individual Contracting Action Report) and a second database for foreign subcontract awards (DD 2139 Report of Contract Performance Outside the United States). For industrial base information, DOD periodically conducts studies of specific industry sectors using industrial base questionnaires. These studies sometimes address the level of foreign participation in a particular industry sector. The United States currently conducts defense trade with 21 countries under the terms of reciprocal defense procurement memoranda of understanding (MOU). These agreements were designed in the late 1970s to promote rationalization, standardization, and interoperability of defense equipment within the North Atlantic Treaty Organization (NATO).Consistent with relevant laws and regulations, these MOUs seek to eliminate the application of nations' buy-national laws and tariffs relating to defense procurements. DOD's Office of Defense Procurement (Foreign Contracting) monitors the level of two-way defense procurement activity under MOUs by preparing summaries on the annual defense trade procurement balances between the United States and the 21 countries. The Office uses these summaries internally and exchanges the data with MOU countries that give the United States their defense procurement statistics. DOD has exchanged data with six MOU countries: Finland, Germany, Israel, Norway, Spain, and the United Kingdom. DOD does not compare the other countries' defense trade information with its own because it does not know how the other countries define and collect their defense trade information. As part of its efforts to monitor foreign procurements, DOD established in 1982 a reporting requirement to identify certain subcontracts performed outside the United States. In the fiscal year 1993 defense authorization legislation, Congress required any firm performing a DOD contract exceeding $10 million, or submitting a bid or proposal for such a contract, to notify DOD in advance if (1) the firm or any of its first-tier subcontractors intends to perform work exceeding $500,000 on that contract outside the United States and Canada and (2) such work could be performed inside the United States or Canada. This information must be made available for preparing required national defense technology and industrial base assessments. DOD regulations also require prime contractors to submit notification of contracts exceeding $500,000 when any part of the contract that exceeds $25,000 will be performed outside the United States, unless a foreign place of performance (1) is the principal place of performance and (2) is in the firm's offer. Contracts for commercial items or identified exceptions need not be reported. First-tier subcontractors awarded subcontracts in excess of $100,000 are also subject to the reporting requirement. Prime contractors and first-tier subcontractors are required on a quarterly basis to submit information such as the type of supply or service provided, the principal place of subcontract performance, and the dollar value of the transaction. The regulation states that reports should be submitted to the Office of Foreign Contracting on the standard form DD 2139 (Report of Contract Performance Outside the United States) or in computer-generated reports. The Office enters the information into its DD 2139 database on foreign subcontracting. Although DOD purchases the majority of its defense equipment and services from contractors performing in the United States, it does purchase some from firms performing outside the United States. While subject to annual fluctuations, the value of DOD's prime contract awards performed outside the United States remained about 5.5 percent of total DOD procurement awards from fiscal year 1987 to 1997 (see fig. 1). These awards, as a percentage of total DOD prime contract awards, ranged from a high of approximately 6.8 percent in 1991 to a low of 4.6 percent in 1995. Though the value of awards outside the United States increased during the last 2 fiscal years, it represented only 5.8 percent of total DOD prime contract award values by the end of 1997. From fiscal year 1987 through 1997, the value of DOD prime contracts performed outside the United States declined, which was consistent with the overall decline in the value of total DOD prime contract awards. As shown in figure 2, the value of DOD prime contracts performed outside the United States declined from about $12.5 billion to about $6.9 billion, while the total value of DOD prime contract awards also declined from about $197 billion to $119 billion. Data were adjusted and shown in constant fiscal year 1998 dollars. Prime contracts performed outside the United States tended to be concentrated in certain countries and products. Although DOD's prime contracts were performed in more than 100 different countries between fiscal year 1987 and 1997, 5 countries--Germany, Italy, Japan, South Korea, and the United Kingdom--accounted for about 61 percent of total prime contract values performed outside the United States when countries were identified. While DOD awarded prime contracts outside the United States for a wide variety of items, many of the awards were concentrated in three sectors: services, fuel, and construction. Services accounted for about 41 percent of all prime contracts performed outside the United States in fiscal year 1997, while petroleum and other fuel-related products accounted for about 19 percent and construction accounted for another 17 percent. DOD also tracks the award of subcontracts performed outside the United States, but the subcontract data are limited. According to DOD's DD 2139 data, the value of annual foreign subcontract awards ranged from a high of almost $2 billion in fiscal year 1990 to a low of almost $1.1 billion in fiscal year 1997, averaging about $1.4 billion over this period. As with prime contracts, DOD's foreign subcontracts tended to be concentrated in only a few countries. From 1990 to 1997, Canada, Israel, and the United Kingdom accounted for about 65 percent of the subcontracts that appeared in DOD's foreign subcontract database. The foreign subcontracts that appear in DOD's database cover a variety of equipment such as computers, circuitry, and components for engines; aircraft; lenses; and optics as well as services such as assembly, maintenance, and testing. DOD's Office of Foreign Contracting and DOD industrial base offices both collect and use foreign subcontract data, but they do not exchange their data with one another. In addition, the Office of Foreign Contracting has no safeguards for ensuring the accuracy and completeness of its foreign subcontract award (DD 2139) database. In our review of selected subcontracts, we found instances in which foreign subcontracts were not reported to DOD in accordance with the reporting requirement, resulting in the underreporting of foreign subcontract values. Also, the Office lacks standards and procedures for managing its database, which compromises the database's usefulness. An Office of Foreign Contracting official said the Office does not have sufficient resources to validate the collection and management of data but reviews the reported data for inconsistencies. DOD's Office of Foreign Contracting collects foreign subcontract information from prime contractors and first-tier subcontractors as required by law and regulation. The Office uses the data to prepare defense procurement trade balance reports on offshore activity with the 21 countries with which the United States has reciprocal procurement MOUs. While the Office's foreign subcontract data are used for a single, narrow purpose, similar data are sometimes collected by other DOD offices and are used to prepare industrial base assessments. DOD's periodic industrial base assessments sometimes entail evaluating reliance on foreign suppliers for specific products. DOD and military industrial base specialists rely on their own industrial base questionnaires to obtain relevant information to respond to specific requests from the military services. We spoke with numerous specialists who were not aware that data collected by the Office of Foreign Contracting existed. In addition, officials from the Office of Foreign Contracting said they have not been requested to furnish the foreign subcontract data for industrial base assessments. DOD has no process or procedures to systematically ensure that contractors are complying with the foreign subcontract reporting requirement. Furthermore, neither the law nor the regulation provides penalties for noncompliance. DOD officials said they performed a limited follow-up with contractors and are certain that contractors are reporting as required. However, responsibility for determining whether a foreign subcontract is to be reported lies with the contractor. We found that in several instances contractors had not reported their foreign subcontracts. Among the 42 foreign subcontracts we examined, 11 subcontracts totaling about $124 million did not have DD 2139 forms filed with the Office of Foreign Contracting. Contractors gave various reasons for not filing the DD 2139 forms. Some said they were unaware of the requirement to report foreign subcontract awards; others had apparently misinterpreted the law and regulation. A few of them said that the regulation was not clear and that a better understanding of the intent of the law and regulation would help them determine if they needed to report. Examples of their rationale for not filing included the following: Two contractors stated that Defense Acquisition Circular 91-5 rescinded the DD 2139 form. However, the circular deleted only the form and not the reporting requirement. Also, a subsequent circular reinstated the DD 2139 form. One contractor interpreted the dollar thresholds in the reporting requirement as applying only to the foreign subcontracts, not to the value of the prime contract. This contractor did not file a DD 2139 form, even though the value of the prime contract was above the $500,000 threshold, because the foreign subcontract was below this amount. The regulation required a contractor to report foreign subcontracts greater than $25,000 for prime contracts exceeding $500,000. One contractor awarded a foreign subcontract as part of a co-production program with Germany. The contractor cited the existence of an MOU between the United States and Germany for a specific program as the justification for not filing a DD 2139 form. We found no support for the contractor's position in the MOU, which aims "to use industrial capabilities in both countries by providing both industries a fair chance to compete on a dual-source basis and by initiating co-production of components." The MOU is also subject to the respective countries' national laws, regulations, and policies. One contractor said its foreign subcontract was for a component that had to be produced outside the United States because its design was solely owned by a foreign firm. According to the contractor, no U.S. or Canadian firm was licensed to produce it, although the U.S. company had the manufacturing capability to produce this item. Given this circumstance, a company official said that he believed that the company did not have to report this subcontract. The official, however, expressed uncertainty about the reporting requirement and later indicated that the company would report this subcontract to the Office of Foreign Contracting. We also identified 12 subcontracts, which were valued at almost $67 million, that were not reported to the Office because of possible weaknesses in the procedures used to collect foreign subcontract data. First, contracts should include the foreign subcontract reporting requirement to ensure that contractors report their foreign subcontracts to the Office. We found one contractor that did not file the DD 2139 forms for four subcontracts because the reporting requirement was erroneously omitted from the prime contract. Second, we found three companies that did not file DD 2139 forms for eight subcontracts because, consistent with the reporting requirement, this information was reported in their initial offers and was submitted either to the contracting officer or to the prime contractor. However, the information was not forwarded to the Office by the contracting officers as stipulated by the regulation. The contracting officers we spoke with were not aware they were required to send this information to the Office of Foreign Contracting for inclusion in the DD 2139 database. Although the law requires advance notification of contract performance outside the United States, we spoke with several contractors that regularly submitted DD 2139 information but used different criteria for identifying a foreign subcontractor. The various criteria included (1) no U.S. taxpayer identification number, (2) incorporation outside the United States, (3) foreign ownership, (4) place of contract performance, and (5) requirement of an export license. Sometimes this caused contractors to report transactions differently, which would create inconsistent data. For example, one contractor said it would report subcontracts awarded to a foreign subsidiary of a U.S. company because the subsidiary would be manufacturing overseas. However, another contractor said it would not report a subcontract awarded to a foreign subsidiary of a U.S. company because the subsidiary is domestically owned. Contractors also lack clear guidance about whether deobligations of foreign subcontracts should be reported. Currently, the Office of Foreign Contracting enters any subcontract deobligations voluntarily reported by contractors into its database, but there is no requirement that contractors report these deobligations. As such, deobligations are being reported inconsistently. The DD 2139 database lacks documentation defining the database's structure, critical data fields, and procedures for data entry, all of which makes the data highly questionable. For example, no written procedures exist for querying the database for the total dollar value of foreign subcontracts awarded. As a result, determining the dollar value of these subcontracts can lead to varying values, depending on the method used to query the database. We queried the database using two different methods and obtained a difference of $15.3 million in the total dollar value of foreign subcontracts in fiscal year 1997 and a difference of $2.8 billion for fiscal year 1990 to 1997. The current DD 2139 database structure of 30 data fields is based on a November 1985 version of the DD 2139 form (Subcontract Report of Foreign Purchases). However, some of the data no longer need to be reported. For example, the database contains six data fields of dollar values, but only two of the six fields are needed to calculate the value of foreign subcontracts awarded. According to an agency official, the remaining four data fields are irrelevant. The DD 2139 database also contains two fields related to offsets, but contractors are no longer required to submit this information. The Office of Foreign Contracting, however, continues to enter into its database offset information when it is voluntarily provided by contractors. The lack of standards and procedures for data entry has caused numerous data entry errors that compromise the database's usefulness. Data entry errors included blank critical fields; keypunch errors; duplicate entries; contract values for U.S. subcontractors; and inconsistent entries of prime contract numbers, prime contractor names, and weapon systems names. In fiscal year 1997, we found that 2 prime contractors' names had been entered with 10 or more different variations. Inconsistent data entry makes it difficult to query the DD 2139 database or use another database to validate its completeness. Programming errors in the DD 2139 database resulted in some underreporting of foreign source procurements. We examined the database structure for fiscal year 1997 and found some incorrectly coded database records. The miscoding of data for 1 year caused 13 out of 1,412 data records to be omitted from the total value of foreign subcontracts. As a result, the total value of foreign subcontracts for fiscal year 1997 was understated by $1.15 million, of which $802,249 was related to MOU countries. No error detection and correction procedures have been established to ensure the integrity of the DD 2139 database. As a result, the database contained information that was inconsistent with the reporting criteria specified in the statutory requirement. For example, the database should contain subcontracts awarded to foreign sources only for DOD prime contracts. For fiscal year 1997, the database included 25 out of 1,412 subcontracts totaling $2.8 million for the National Aeronautics and Space Administration, an independent civilian agency. We also found that one U.S. defense contractor reported its foreign subcontracts for sales to both DOD and foreign governments (the latter sales are known as direct commercial sales). Although the contractor's submittal clearly distinguished between DOD and direct commercial sale subcontracts, the Office included the data on subcontract awards for direct commercial sales in the database. Data on DOD subcontracts performed outside the United States could provide important information for making decisions on foreign sourcing and industrial base issues. The Office of Foreign Contracting collects information on contracts performed outside the United States to prepare defense trade reports. DOD industrial base specialists collect similar information for periodic industrial base assessments but are unaware of the data the Office has collected. In addition, weaknesses in the Office's data collection process significantly limit DOD's ability to use consistent data on foreign subcontract-level procurements. The Office has made no effort to improve contractor compliance with the foreign subcontract reporting requirement, resulting in underrepresentation of the level of foreign subcontracting activity. Poor database management also undermines the credibility and usefulness of the Office's foreign subcontract data. We recommend that the Secretary of Defense direct the Under Secretary of Defense for Acquisition and Technology to review the existing subcontract reporting requirement and amend it, as needed, to ensure that data collected satisfy the common information needs of the offices working on defense trade and industrial base issues, thus also avoiding duplicative data collection efforts within DOD. As part of this effort, DOD should provide additional guidance containing clear criteria and definitions for reporting foreign subcontracts. We also recommend that the Under Secretary of Defense for Acquisition and Technology direct the Director of the Office of Defense Procurement to develop and implement controls and procedures for periodically verifying compliance with the foreign subcontract reporting requirement and specify how to transmit the information to the Office of Foreign Contracting as a means of improving the completeness and consistency of its data and develop and implement procedures for entering data, verifying critical fields, documenting database programs, and querying the database to improve the Office's database management practices. In commenting on a draft of this report, DOD did not agree with the need for our first recommendation to ensure that data being collected satisfy common user needs. DOD stated that existing regulations and procedures governing the generation of data needed to address defense trade and industrial base issues are sufficient as it provides the data it collects to other groups within DOD. Our review, however, demonstrated that similar data are being collected by other offices. Further, our recommendation is in accordance with DOD's policy that states the Department will regularly review and evaluate opportunities for improvements to increase the usefulness of information and reduce the cost of information collection activities for both DOD and contractors. We have modified our recommendation to clarify that we are referring to the existing data collection requirement. DOD also stated that the reporting requirement is clear from the language in the relevant Defense Federal Acquisition Regulation Supplement clause. However, the reporting requirement has been interpreted differently by contractor and government officials. The varying interpretations indicate a lack of understanding about what subcontracts should be reported, which detracts from the consistency of information actually contained in the database. DOD did not fully concur with our second recommendation to improve the collection and management of foreign subcontract data. Our findings relating to poor database management arose from our attempts to use the database to determine the total value of DOD's foreign subcontract awards. We could not determine the total value from the database. First, some entries were coded so as not to be counted in the totals. Second, subcontracts for National Aeronautics and Space Administration procurements and for direct commercial sales, which should not be included in this database, were. Third, subcontracts performed in the United States, which should not be included in this database, were. Finally, in our attempt to match entries from the DD 2139 database with the subset of information on foreign subcontracts found in the Defense Contract Management District International database, we found subcontracts that should have been in the DD 2139 database but were not. Taken together, these findings represent a significant degradation of the value of the information. If DOD plans to use the data, and a recent directive by the Under Secretary suggests that it will become more important, the integrity of the data needs to be enhanced. Our analysis showed that these problems are directly attributable to the lack of controls and procedures for periodically verifying compliance with the reporting requirement and the lack of procedures for managing and using the database. DOD stated that it already maintains the most complete database on foreign subcontracting and that periodically verifying compliance would be too costly. Having the most complete database does not address the value of the data contained in it. In addition, periodically verifying compliance with the reporting requirement could be accomplished as part of contracting officers' routine oversight responsibilities. DOD agreed that there are no written procedures for managing and using the DD 2139 database, but stated that none are needed. DOD guidance, however, states that database managers must have written documentation to maintain their systems. Having written procedures for managing and using the database, such as controls for data entry and verification, are important to ensuring the reliability, accuracy, and usefulness of the information contained in the DD 2139 database. DOD's written comments and our evaluation of them are discussed in appendix II. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Committee on Armed Services and the House Committee on National Security; the Secretary of Defense; and the Director, Office of Management and Budget. We will also make copies available to others upon request. Please contact me at (202) 512-4841 if you have any questions concerning this report. Major contributors to this report are listed in appendix III. To determine trends in the Department of Defense's (DOD) foreign sourcing, we analyzed DOD's DD 350 data on prime contract awards, which were adjusted to reflect constant 1998 dollars, from fiscal year 1987 to 1997. We examined the amounts DOD purchased at the prime contractor level by country and by item. We performed a similar assessment of DOD's data on foreign subcontract awards. However, we did not include a trend analysis of DOD's foreign subcontract procurements because of the data weaknesses described in this report. In addition, we reviewed DOD's annual reports to Congress on purchases from foreign entities for fiscal year 1995 to 1997 and the laws and regulations requiring advance notification of contract performance outside the United States. We discussed the law and regulations with DOD and industry officials. We also examined DOD's policy and the chronology of changes to regulations regarding this reporting requirement. To determine the completeness of DOD data collection efforts, we tried to compare the DD 2139 database to other government and commercial databases. We were unable to use many of the sources we identified because they did not contain fields that could be readily compared to the DD 2139 database. We obtained foreign subcontract data from the Defense Contract Management District International (DCMDI) and the Defense Contract Management Command's (DCMC) customs team. Each of these data sources contained similar information to the DD 2139 database, including prime and subcontract numbers, transaction values, and subcontractor names. However, the DCMC import data were based on actual deliveries and not contract awards, unlike the DD 2139 and DCMDI data. Given the time difference between contract award and delivery data, we concentrated on matching the DD 2139 database with the DCMDI database. DCMDI's database is used internally to track foreign subcontracts administered by the district's field offices and is not representative of the universe of foreign subcontracts. We did not perform a reliability assessment of the DCMDI database because we only used it to identify possible unreported foreign subcontracts that we could trace back to original source documentation. To compare the two databases, we performed an automated and manual match of fiscal year 1997 DCMDI data with multiple years of the DD 2139 data to verify data entries. We sampled data records from the DCMDI database, which led us to examine 49 foreign subcontracts. We then eliminated all National Aeronautics and Space Administration and fuel and subsistence contracts because these types of subcontracts are excluded from the foreign subcontract reporting requirement. By comparing the two data sets, we found 7 subcontracts that matched and 42 subcontracts that did not appear in the DD 2139 database. For the 42 subcontracts, we obtained contractual documentation from the DCMC field offices and contractors to verify information about the prime contracts and subcontracts and to ensure that the contracts contained the foreign subcontract reporting requirement clause. We interviewed the contractors to determine whether they reported the foreign subcontracts to the Office of Foreign Contracting and discussed reasons for not reporting. We also interviewed officials from several defense companies, DCMC representative offices, and program offices. We discussed with company officials their processes for tracking foreign subcontracts and compliance with the DD 2139 reporting requirement. We obtained supplier lists for two defense programs and surveyed several subcontractors about the DD 2139 reporting requirements and corresponding regulations. With DOD officials, we discussed their procedures for monitoring subcontracts, including subcontractor performance, and for reviewing and approving requests for duty-free entry of foreign imports. To assess DOD's management of data on foreign subcontract procurements, we reviewed DOD's DD 2139 database for fiscal years 1990 through 1997, which was the only automated data available during our review. We performed various programming queries to examine the database structure and critical fields. We discussed with Office of Foreign Contracting officials the process for ensuring proper data entry, including error detection and correction procedures, reconciliation of output reports with input entries, and verification of contractor compliance with the reporting requirement. We requested documentation describing or evaluating the data system, but none was available. We did not compare the DD 2139 data with original source documents because no criteria, such as written standards for data entry and management, exist. We performed our review between January and September 1998 in accordance with generally accepted government auditing standards. Limitations of the DD 2139 database have been identified and discussed in earlier sections of the report. Where possible, corroborating evidence was obtained from other databases and original source documentation. The DD 350 database provides the most commonly used information on DOD procurements. However, we did not assure the reliability of the DD 350 data. The following are GAO's comments to DOD's letter dated October 29, 1998. 1. We are not proposing the establishment of a new data collection requirement. Instead, we are recommending that the current data collection efforts be enhanced to satisfy the information needs of the offices working on defense trade and industrial base issues. Such action would be in compliance with DOD policy to regularly review and evaluate opportunities for improvements to increase the usefulness of information and reduce the cost of information collection activities for both DOD and contractors. If the collection of foreign subcontracting award data (DD 2139) were improved, the data could meet multiple information needs. To avoid further misunderstanding, we have clarified the wording of our recommendation. 2. Prior to our review, the Office of Industrial Capabilities and Assessments was unaware of the data collection efforts of the Office of Foreign Contracting. The Office of Industrial Capabilities and Assessments has an industrial base questionnaire that, in part, collects information on subcontractors similar to the information collected by the Office of Foreign Contracting. The two offices would benefit from coordinating with each other to avoid some duplication of effort and alleviate burdening industry for similar information. According to DOD policy, information should be collected in a nonduplicative and cost-effective manner. Moreover, the Under Secretary of Defense for Acquisition and Technology recently initiated reviews of the globalization of the defense industrial base and its effects on national security. Information on suppliers located outside the United States, particularly those at lower tiers, such as that collected by the Office of Foreign Contracting, or owned by foreign entities, will be instrumental in evaluating the extent and effects of this globalization. 3. The Office of Foreign Contracting has no mechanism for systematically verifying contractor compliance with the foreign subcontract reporting requirement. Unless some verification is performed, DOD has no assurance of the accuracy of the total value of foreign subcontracts awards. We recognize that the Office of Foreign Contracting has limited resources for performing an extensive verification of contractor compliance. To assist in the verification process, some follow-up could be performed by contracting officers because defense companies are required to submit certain DD 2139 information to them. However, the contracting officers that we spoke with were often unaware of this reporting requirement and, therefore, would need to be educated about the requirement so that they could periodically check contractor compliance when performing routine oversight functions such as certifying duty-free entry of imported items. In 1989 we reported that the Office of Foreign Contracting sent a letter to the top 100 prime contractors informing them of the foreign subcontract reporting requirement and found that about one-third had reported. The Office of Foreign Contacting has not performed another survey of defense companies since then. Furthermore, officials from defense companies told us that the Office of Foreign Contracting had not contacted them to verify the data they had submitted. Periodic follow-up with the defense companies would help ensure that erroneous information, such as subcontract awards for nondefense contracts, would not be submitted. 4. For awarded contracts, the reporting requirement provides instructions on when and how contractors are to report subcontract performance outside the United States to the Office of Foreign Contracting. However, for offers exceeding $10 million, if the company is aware at the time its offer is submitted that it or its first-tier subcontractor intends to perform any part of the contract that exceeds $500,000 outside the United States and Canada, and if that part could be performed inside the United States or Canada, DD 2139 information must be submitted with the offer to the contracting officer. The regulation (Defense Federal Acquisition Regulation Supplement 225.7202) then stipulates that contracting officers are to forward a copy of reports submitted by successful offerors to the Office of Foreign Contracting. However, the contracting officers we spoke with were not aware that the regulation instructed them to forward any information to the Office of Foreign Contracting and had never provided the Office with such information. Consequently, information provided in firms' offers is not being fully captured by the Office's database. 5. Poor database management practices undermine the reliability of DOD's foreign subcontract data. The Office of Foreign Contracting lacks appropriate written standards for entering and verifying data. Such standards are necessary to ensure the reliability and integrity of the data. Our example of a programming error that resulted in 13 miscoded data entries merely illustrates the problems that can arise when no system controls are in place. DOD's calculation of an error rate based on these 13 entries is erroneous and misleading. It is erroneous because statistical inferences such as error rates must be based on a random statistical sample assessed against defined parameters such as written procedures for data entry, verification, or database queries. Without such documentation, we were unable to assess data reliability fully. It is also misleading because, as detailed in our report, we found numerous other examples of problems with the DD 2139 database that undermine its credibility. Besides the programming errors, we found data entry errors such as the inclusion of National Aeronautics and Space Administration subcontracts, direct commercial sales subcontracts, and U.S. subcontract awards. Other problems included evidence of noncompliance with the reporting requirement and inconsistent treatment of data. These problems support the need for written standards explaining the DD 2139 database's structure, data fields, and procedures for data entry and verification. Raymond J. Wyrsch The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) foreign procurement data, focusing on DOD's: (1) reported trends on contracts performed outside the United States; and (2) use of foreign subcontract information and the completeness and accuracy of how DOD collects and manages its data. GAO noted that: (1) for prime contracts, DOD purchases the majority of its defense equipment and services from contractors operating in the United States; (2) though subject to annual fluctuations, DOD's prime contract awards outside the United States remained about 5.5 percent of total DOD contract awards from fiscal year (FY) 1987 to 1997; (3) over this period, the value of DOD prime contracts performed both in and out of the United States declined; (4) prime contracts performed outside the United States tended to be concentrated in certain countries such as Germany, Italy, Japan, South Korea, and the United Kingdom and in certain sectors such as services, fuel, and construction; (5) at the subcontract level, the value of DOD's reported foreign subcontract awards ranged from almost $2 billion in FY 1990 to almost $1.1 billion in FY 1997, but this data has its limitations; (6) the Office of Foreign Contracting does not consider the data needs of industrial base specialists in its efforts to collect foreign subcontract data; (7) industrial base specialists are often unaware that data of this nature are available; (8) furthermore, weaknesses in the Office of Foreign Contracting's data collection and management processes undermine DOD's ability to use the foreign subcontract data for defense trade and industrial base decision-making; (9) the Office has no mechanism for ensuring that contractors provide required foreign subcontract information, which contributes to the underrepresentation of foreign subcontract activity; (10) GAO's review of selected subcontracts disclosed instances in which foreign subcontracts were not reported to the Office because contractors were unaware of the reporting requirement or misunderstood the criteria for reporting a foreign subcontract; and (11) the Office's poor database management also compromises the credibility and usefulness of its foreign subcontract data.

The annual number of fatalities from crashes involving large trucks increased 20 percent from 4,462 in 1992 to 5,355 in 1997 (see fig. 1). This result reversed a trend of decreasing truck fatalities in the previous 5-year period, 1988-92. Also during the 1992-97 period, the fatality rate--the number of fatalities per 100 million miles traveled by large trucks--has remained fairly constant at about 2.9 after decreasing by 27 percent between 1988 and 1992. The recent increases in annual fatalities reflect in part increases in truck travel: the number of miles traveled increased by 25 percent from 1992 to 1997. If truck travel continues to increase at this rate, and nothing is done to reduce the fatality rate, the annual number of fatalities could increase to 5,800 in 1999 and to more than 6,000 in 2000 (see fig. 2). While we are concerned that the number of fatalities from crashes involving large trucks could increase in the next few years, only about 1 percent of all truck crashes reported to police in 1997 resulted in a fatality. About 99 percent resulted in injuries or property damage only. From 1988 through 1997, the number of people injured each year increased overall from 130,000 to 133,000. During the same period, the number of injuries per 100 million miles traveled fell from 92 to 69. In addition, the annual number of crashes involving large trucks that resulted in property damage only increased from 291,000 to 329,000 while the number of these crashes per 100 million miles traveled decreased from 206 to 172. For each mile that they traveled between 1988-97, large trucks were involved in fewer total crashes than cars were. However, large trucks were involved in a greater number of fatal crashes per mile traveled (see fig. 3). The higher fatal crash rate for large trucks is not surprising, considering the difference in weight between large trucks and cars. When there is such a mismatch in weight between the vehicles involved in a crash, the lighter one and its occupants tend to suffer more damage. In fatal crashes between large trucks and cars in 1997, 98 percent of the fatalities were occupants of the car. While no definitive information on the causes of fatal crashes exists, there is information on factors that may contribute to these crashes. Data from the National Highway Traffic Safety Administration's Fatality Analysis Reporting System show that errors on the part of car drivers have been cited more frequently as contributing factors to crashes between large trucks and cars. In fatal crashes, police report driver errors or other factors related to a driver's behavior that contributed to the crash. In 98 percent of the fatal crashes between large trucks and cars in 1997, driver factors were recorded for one or both drivers. Errors by car drivers were reported in 80 percent of the crashes, while errors by truck drivers were reported in 28 percent of the crashes. The inference that car drivers were more often "at fault" than truck drivers has been disputed by safety groups. These groups maintain that because far more truck drivers than car drivers survive fatal crashes between large trucks and cars, more truck drivers have the opportunity to tell the officer at the crash scene their version of how the crash occurred. However, a recent study found that in fatal crashes in 1994 and 1995 in which both the truck driver and the car driver survived, car driver errors were cited in 74 percent of the crashes compared to 35 percent for truck driver errors. This finding lends some support to the hypothesis that, compared to truck drivers, car drivers contribute more to fatal crashes between large trucks and cars. One driver factor--truck driver fatigue--was identified as the number one issue affecting the safety of motor carriers during a 1995 safety meeting of representatives from government, trucking associations, and safety interest groups. When truck driver fatigue contributes to truck crashes, truck drivers are killed more often than someone outside the truck. From 1992 through 1997, fatigue was cited by police officers for 11 percent of truck drivers in crashes that were fatal to the truck occupant(s) only. In contrast, fatigue was cited for less than 1 percent of truck drivers in crashes that were fatal to people besides truck occupants, such as car occupants or pedestrians. However, these figures may significantly underestimate the actual proportion of fatal truck crashes attributable to fatigue because of the difficulty of determining the pre-crash condition of the driver after a crash occurs. OMCHS estimates that truck driver fatigue is the primary factor in 15 to 33 percent of the crashes that are fatal to the truck occupant(s) only, and 1 to 2 percent of crashes that are fatal to people besides the truck occupant(s). Furthermore, the National Transportation Safety Board estimates that truck driver fatigue is the probable cause of 31 percent of crashes involving trucks over 26,000 pounds that are fatal to the driver. Mechanical defects, such as worn brakes or a bald tire, have also been cited as a contributing factor to crashes involving large trucks. According to estimates in several studies, the percentage of such crashes that are attributed to mechanical failure ranges from 5 to 13 percent. In addition, in a 1996 study, OMCHS estimated that 29 percent of all large trucks had mechanical defects severe enough to warrant placing the vehicles out of service. While we do not know whether any of these large trucks had crashes as a result of their defects, they probably presented a higher crash risk than large trucks without defects. Other factors that may contribute to crashes or that may affect whether a fatality occurs in a crash include drivers' blood alcohol concentration and use of safety belts. These measures suggest that truck drivers who are involved in fatal crashes might be more safety conscious than car drivers involved in such crashes. For example, in fatal crashes between large trucks and cars in 1997, about 1 percent of truck drivers had blood alcohol concentrations of 0.10 or above, compared to 15 percent of car drivers. In addition, 75 percent of truck drivers were wearing their safety belt in fatal crashes between a large truck and a car in 1997, compared to 47 percent of car drivers. The Federal Highway Administration has established a goal for 1999 of reducing the number of fatalities from crashes involving large trucks to fewer than 5,126--the number of fatalities that occurred in 1996. This goal is substantially below the projected figure of 5,800 for 1999 if recent trends continue. OMCHS has undertaken a number of activities that it believes will accomplish this short-term goal. While these activities could have a positive effect on truck safety issues over the long term if effectively implemented, OMCHS is not likely to reach its goal for 1999. This is because (1) its initiative to target high-risk carriers for safety improvements depends on data that are not complete, accurate, or timely, (2) major components of several activities will not be completed before the end of 1999, and (3) the effectiveness of OMCHS' educational campaign to improve car driver behavior is unknown. OMCHS' activities are just one of many factors that affect the level of truck safety. OMCHS' activities--either directly or through grants provided to states--are intended to improve truck safety largely by influencing the safety practices of trucking companies and the behavior of truck drivers. There are other factors that affect truck safety that OMCHS does not directly influence, such as the use of safety belts by car occupants, highway design standards, trucks' and cars' handling and crashworthiness characteristics, traffic congestion, local traffic laws and enforcement, and state initiatives. Each year, OMCHS and state inspectors conduct thousands of on-site reviews of motor carriers' compliance with federal safety regulations, known as compliance reviews. To identify high-risk carriers for these reviews, OMCHS uses a safety status measurement system known as SafeStat. SafeStat relies heavily on data from OMCHS' motor carrier management information system (MCMIS) to rank motor carriers on the basis of four factors: (1) crashes, (2) driver factors, (3) vehicle factors, and (4) safety management. The crash factor is given twice the weight of the other factors because carriers that have been in crashes are considered more likely to be involved in crashes in the future. Carriers that are ranked in the worst 25 percent of all carriers for three or more factors or for the accident factor plus one other factor are targeted for a compliance review. However, SafeStat's ability to accurately target high-risk carriers is limited because state officials do not report a large percentage of crashes involving large trucks to MCMIS. For 1997, OMCHS estimated that about 38 percent of all reportable crashes and 30 percent of the fatal crashes involving large trucks were not reported to MCMIS. Furthermore, 10 states reported fewer than 50 percent of the fatal crashes occurring within their borders, including four states that reported fewer than 10 percent. Because MCMIS does not contain a record of all crashes, a carrier that has been involved in a substantial number of crashes might go undetected by SafeStat. According to OMCHS officials, states do not report all crashes for several reasons. In particular, (1) states do not understand that complete reporting would enable OMCHS to more accurately target high-risk carriers, (2) state employees who submit crash data to MCMIS may not have sufficient training or incentives, or (3) there may be errors in some states' databases that are preventing the transmittal of the data. According to OMCHS officials, an initiative to encourage states to report data for all crashes in a consistent manner is being developed; no implementation date has been set. SafeStat's ability to target high-risk carriers is also limited by out-of-date census data in MCMIS. SafeStat uses the census data--such as the number of trucks operated by each carrier--to normalize safety data. For example, SafeStat checks the number of crashes reported for a carrier against the number of trucks operated by the carrier to determine if the number of crashes is disproportionate. However, interstate carriers are required to file census data with OMCHS only once--when they initially go into business. After that, the census data are updated generally only when OMCHS or states conduct compliance reviews at the carriers' facilities. Each year from 1993 through 1997, these reviews were conducted for fewer than 4 percent of these carriers listed in MCMIS, whose number increased from 275,000 to more than 415,000 over the period. According to OMCHS officials, a system to update census data annually will not be implemented for at least 2 years. As we reported in 1997, states have improved the timeliness of reporting the results of the roadside inspections, compliance reviews, and crashes that are used by SafeStat. However, they are still not meeting OMCHS' reporting deadlines. OMCHS' December 1996 guidance to states includes deadlines to report the results of roadside inspections and compliance reviews within 21 days, and crashes within 90 days. As shown in table 1, states improved the timeliness of reporting data to MCMIS from fiscal year 1997 to 1998 but were missing OMCHS' deadlines by an average of 8 to 16 days. Data problems also exist at the state level. In fiscal year 1998, all states submitted performance-based safety plans to OMCHS for the first time. Under these plans, states must identify areas that need improvement, such as sections of highways where a disproportionate number of crashes involving large trucks have occurred, and develop a plan for improving those areas. In a pilot program to implement performance-based plans, 5 of the 13 pilot states reported that they lacked sufficient or timely data to accurately identify areas that need improvement. OMCHS officials said that insufficient data--such as carrier size information that is used to help states focus their safety education programs for carriers--have also been a problem for some states once they have identified problem areas and are developing improvement plans. Several of OMCHS' activities that could improve large truck safety--including revising the rule governing the number of hours that truck drivers can drive and targeting high-risk carriers through the number of citations drivers receive--will not be completed before the end of 1999. The ICC Termination Act of 1995 directed the Federal Highway Administration to modify the existing hours of service rule for commercial motor vehicles to incorporate countermeasures for reducing fatigue-related incidents, such as crashes. The act required the Administration to issue an advance notice of proposed rulemaking by March 1, 1996; this notice was issued on November 5, 1996. The act also required a proposed rule within one year after the advance notice, and a final rule within two years after that one year deadline. The Administration has not issued a proposed rule. OMCHS officials explained that revising the rule is a difficult and very contentious issue and the final rule will not be issued until 2000 or later. In addition, OMCHS has concluded that high-risk carriers can be more accurately targeted by tracking the number of citations issued to each carrier's drivers. A 1997 report prepared for the Federal Highway Administration found that trucking companies with higher rates of citations--for such things as overweight vehicles or moving violations--are also more likely to have higher accident rates. OMCHS officials have stated that they plan to develop software that will track the number of citations drivers for each carrier receive. However, states must first agree on a standard format for collecting and reporting citations, and OMCHS does not yet have an estimated date for implementing its plan to use driver citations as a targeting mechanism. Because of the large contribution of car driver errors to fatal crashes between large trucks and cars, OMCHS launched the "No-Zone" campaign in 1994. ("No-Zone" is a term used to describe the areas around a truck where the truck driver's visibility is limited.) This campaign is intended to reduce crashes between large trucks and cars by educating car drivers about how to safely share the road with large trucks and about trucks' limitations, such as reduced maneuverability, longer stopping distances, and blind spots. The campaign's public education efforts include public service announcements via radio, television, and print; brochures; posters; and decals on large trucks. Because car drivers between 15 and 20 years old were found to be involved in a relatively high percentage of fatal crashes, the "No-Zone" campaign focused a large part of its public outreach on this age group. The campaign has a goal of reducing fatal crashes involving large trucks and cars by 10 percent over a 5-year period. However, as evidenced by the overall increase in the number of fatalities since 1994, the campaign apparently did not make any progress toward achieving its goal through 1997, the last year for which data are available. OMCHS has not determined to what extent, if any, the "No-Zone" campaign has contributed to changing car drivers' behavior and reducing crashes between large trucks and cars. While OMCHS plans to conduct a national telephone survey within the next year to determine the level of public recognition of the "No-Zone" campaign, the survey will not measure whether car drivers' behavior has changed. These findings summarize our work to date. We are continuing our review of the effectiveness of OMCHS for this Subcommittee. Mr. Chairman, this concludes my statement. I will be pleased to answer any questions that you or Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO discussed the safety of large commercial trucks on the nation's highways, focusing on: (1) trends in crashes involving large trucks; (2) factors that contribute to such crashes; and (3) the Federal Highway Administration's Office of Motor Carrier and Highway Safety's (OMCHS) activities to improve the safety of large trucks. GAO noted that: (1) of the nearly 42,000 people who died on the nation's highways in 1997, about 5,400 died from crashes involving large trucks; (2) this represents a 20 percent increase from 1992; (3) at the same time, the annual number of miles traveled by large trucks increased by a similar proportion; (4) if this trend of increasing truck travel continues, the number of fatalities could increase to 5,800 in 1999 and to more than 6,000 in 2000; (5) while trucks are involved in fewer crashes per mile traveled than are cars, crashes involving trucks are more likely to result in a fatality; (6) in 1997, 98 percent of the fatalities from crashes between trucks and cars were the occupants of the car; (7) although no definitive information on the causes of crashes involving large trucks exists, several factors contribute to these crashes; (8) these contributing factors include errors on the part of car and truck drivers, truck driver fatigue, and vehicle defects; (9) of these factors, errors on the part of car drivers are cited most frequently as contributing to crashes involving large trucks; (10) specifically, errors by car drivers were reported in 80 percent of the crashes, while truck drivers errors were reported in 28 percent of the crashes; (11) while many factors outside OMCHS' authority--such as the use of safety belts by car occupants and states' actions--influence the number of fatalities that result from crashes involving large trucks, the Federal Highway Administration has established a goal for 1999 of reducing these fatalities; (12) its goal is to reduce the number of fatalities to below the 1996 level of 5,126--substantially less than the projected figure of 5,800; (13) OMCHS has undertaken a number of activities intended to achieve this goal, such as identifying high-risk carriers for safety improvements and educating car drivers about how to share the road with large trucks; and (14) however, OMCHS is unlikely to reach the goal because: (a) its initiative to target high-risk carriers for safety improvements depends on data that are not complete, accurate, or timely; (b) several activities will not be completed before the end of 1999; and (c) the effectiveness of OMCHS' educational campaign to improve car drivers' behavior is unknown.

FPA includes several provisions designed to protect fish, wildlife, and the environment from the potentially damaging effects of a hydropower project's operations. Specifically: Section 4(e) states that licenses for projects on federal lands reserved by Congress for other purposes--such as national forests--are subject to the mandatory conditions set by federal resource agencies, including the Forest Service and the Bureau of Indian Affairs, Bureau of Land Management, Bureau of Reclamation, and FWS. Section 10(a) requires FERC to solicit recommendations from federal and state resource agencies and Indian tribes affected by a hydropower project's operation on the terms and conditions to be proposed for inclusion in a license. Section 10(j) authorizes federal and state fish and wildlife agencies to recommend license conditions to benefit fish and wildlife. FERC must include section 10(j) recommendations in the hydropower licenses unless it (1) finds them to be inconsistent with law and (2) has already established license conditions that adequately protect fish and wildlife. Section 18 requires FERC to include license prescriptions for fish passage prescribed by resource agencies, such as FWS and NMFS. Under section 241 and the interim rules, licensees and other nonfederal stakeholders may request a trial-type hearing with duration of up to 90 days on any disputed issue of material fact with respect to a preliminary condition or prescription. An administrative law judge (ALJ), referred by the relevant resource agency, must resolve all disputed issues of material fact related to an agency's preliminary conditions or prescriptions in a single hearing. The interim rules contain procedures for consolidating multiple hearing requests involving the same project. Under section 241 and the interim rules, licensees and other nonfederal stakeholders may also propose alternatives to the preliminary conditions or prescriptions proposed by the resource agencies. Under section 241, resource agencies are required to adopt the alternatives if the agency determines that they adequately protect the federal land and either cost significantly less to implement or result in improved electricity production. If the alternatives do not meet these criteria, the agencies may reject them. In either case, under section 241, resource agencies must formally submit a statement to FERC explaining the basis for any condition or prescription the agency adopts and reason for not accepting any alternative under this section. The statement must demonstrate that the Secretary of the department gave equal consideration to the effects of the alternatives on energy supply, distribution, cost, and use; flood control; navigation; water supply; and air quality (in addition to the preservation of other aspects of environmental quality). In addition, the resource agencies often negotiate with the stakeholders who submitted the alternatives and settle on modifications of the agencies' preliminary conditions and prescriptions. FPA requires licensees to pay reasonable annual charges in amounts fixed by FERC to reimburse the United States for, among other things, the costs of FERC's and other federal agencies' administration of the act's hydropower provisions. To identify these costs--virtually all of which are related to the relicensing process--FERC annually requests federal agencies to report their costs related to the hydropower program for the prior fiscal year. FERC then bills individual licensees for their share of FERC's and the other federal agencies' administrative costs, basing these shares largely on the generating capacity and amount of electricity generated by the licensees' projects. FERC deposits the licensees' reimbursements--together with other annual charges and filing fees that it collects--into the U.S. Treasury as a direct offset to its annual appropriation. Receipts that exceed FERC's annual appropriation are deposited in the General Fund of the U.S. Treasury. Nonfederal stakeholders--licensees, states, environmental groups, and an Indian tribe--used the section 241 provisions for 25 of the 103 (24 percent) eligible hydropower projects being relicensed, although the use of these provisions has decreased since its first year. In response to the use of these provisions, resource agencies modified most of the conditions and prescriptions that they had originally proposed. In addition, trial-type hearings were completed for three projects, with the resource agencies prevailing in most of the issues in these hearings. From November 17, 2005, through May 17, 2010, 103 hydropower projects being relicensed, including 49 transition projects, were eligible for nonfederal stakeholders to use the section 241 provisions to submit alternative conditions or prescriptions or request a trial-type hearing. Nonfederal stakeholders have used the provisions for 25 of these 103 projects, including 15 of the 49 transition projects. Table 1 shows the 25 projects, the nonfederal stakeholder proposing alternatives, the affected federal resource agency, and whether the stakeholder requested a trial- type hearing. In each of these projects, the licensee submitted one or more alternatives. In addition, in the DeSabla-Centerville, Klamath, and McCloud-Pit projects, stakeholders other than the licensee also submitted alternatives. The use of section 241 provisions has decreased since the first year. In fiscal year 2006, nonfederal stakeholders used section 241 provisions for 19 projects undergoing relicensing. By comparison, after fiscal year 2006, nonfederal stakeholders used the provisions for only 6 projects. Fifteen of the 19 projects in which stakeholders used the provisions in fiscal year 2006 were transition projects. These transition projects included 11 projects that had expired original licenses and were operating on annual licenses at the time that the interim rules were implemented, which helped create the initial surge of projects eligible to use section 241. As table 2 shows, the number of eligible nontransition projects--projects that had received preliminary conditions and prescriptions from federal resource agencies after section 241 was enacted--for which nonfederal stakeholders have sought to use section 241 provisions has declined since the first year. However, the number of nontransition projects becoming subject to these provisions has not widely varied. Licensees and other nonfederal stakeholders had proposed a total of 211 alternatives--194 alternative conditions and 17 alternative prescriptions--for the 25 projects where section 241 provisions were used. However, these numbers do not necessarily reflect the number of issues considered because section 4(e) conditions and section 18 fishway prescriptions are counted differently. For example, a resource agency may issue a section 4(e) condition for each part of a particular topic. However, NMFS or FWS will typically issue single section 18 fishway prescriptions with multiple sections. Of the 25 projects, stakeholders proposed alternative conditions for 19 and alternative prescriptions for 9. Table 3 provides the number of alternative conditions proposed, accepted, rejected, and pending, and the number of preliminary conditions modified or removed for 19 of the 25 projects. Table 4 provides the number of alternative prescriptions proposed, accepted, rejected, and pending and the number of preliminary prescriptions modified or removed in settlement for 9 of the 25 projects. As the tables show, instead of accepting or rejecting alternative conditions and prescriptions, resource agencies most frequently modified the original conditions and prescriptions in settlement negotiations with the nonfederal stakeholders. In all, resource agencies did not formally accept any alternatives as originally proposed and instead modified a total of 140 preliminary conditions and prescriptions for 22 of rejected a total of 42 alternative conditions and prescriptions in 5 projects, and removed a total of 9 preliminary conditions and prescriptions in 4 projects. Licensees submitted 204 of the 211 alternative conditions and prescriptions. State agencies or nongovernmental organizations submitted the remaining 7 alternative conditions, 4 of which were rejected by the resource agencies, and 3 were being considered as of May 17, 2010. Section 241 directs the Secretary of the relevant resource agency to explain the basis for any condition or prescription the agency adopts, provide a reason for not accepting any alternative condition under this section, and demonstrate that it gave equal consideration to the effects of the alternatives on energy supply, distribution, cost, and use; flood control; navigation; water supply; and air quality (in addition to the preservation of other aspects of environmental quality). Similarly, the agencies' interim rules provide, "The written statement must explain the basis for the modified conditions or prescriptions and, if the Department did not accept an alternative condition or prescription, its reasons for not doing so." While the agencies provided an explanation for rejecting all 42 alternative conditions and prescriptions, they did not explain the reasons for not accepting a proposed alternative for 127 of the 140 modified conditions and prescriptions. Without an explanation, it is difficult to determine the extent, type, or basis of changes that were made and difficult to determine if and how the proposed alternatives affected the final conditions and prescriptions issued by the agencies. As of May 17, 2010, nonfederal stakeholders requested trial-type hearings for 18 of the 25 projects in which the section 241 provisions were used, and 3 trial-type hearings were completed. Most of these requests were made by licensees. The requests for hearings in 14 of the 18 projects were withdrawn when nonfederal stakeholders and resource agencies reached a settlement agreement before the ALJ made a ruling, and 1 request is pending as of May 17, 2010, because the licensee is in negotiations to decommission the project. Prior to a trial-type hearing, an ALJ holds a prehearing conference to identify, narrow, and clarify the disputed issues of material fact. The ALJ must issue an order that recites any agreements reached at the conference and any rulings made by the ALJ during or as a result of the prehearing conference, which can include dismissing issues the ALJ determines are not disputed issues of material fact. For the three projects that have completed trial-type hearings, the number of issues in these projects was reduced from 96 to 37 after prehearing conferences. In addition, in a fourth project in which the federal resource agencies and the licensee eventually reached a settlement before going to a hearing, the number of issues was reduced from 13 to 1 after the prehearing conference. As table 5 shows, the three trial-type hearings were held for the Klamath project, in California and Oregon; the Spokane River project, in Idaho and Washington; and the Tacoma project, in Colorado, all of which are nontransition projects. In addition to the licensees requesting hearings, one nongovernmental organization and one tribe requested a hearing for the Klamath project. The Spokane River and Tacoma hearings were completed in 90 days, the time allotted by the interim rule, while Klamath required 97 days. As table 5 shows, of the 37 issues presented, the ALJ ruled in favor of the federal resource agency on 25 issues, ruled in favor of the licensee on 6 issues, and offered a split decision on 6 issues. According to the relicensing stakeholders we spoke with, section 241 provisions have had a variety of effects on relicensing in three areas: (1) settlement agreements between licensees and resource agencies, (2) conditions and prescriptions that the resource agencies set, and (3) agencies' workload and cost. Most licensees and a few resource agency officials that we spoke with said that section 241 encourages settlement agreements between the licensee and resource agency. In contrast, other agency officials we spoke with said that section 241 made the relicensing process more difficult to reach a settlement agreement with the licensee. Regarding conditions and prescriptions, some stakeholders commented that under section 241, resource agencies generally researched their conditions and prescriptions more thoroughly, while all seven of the environmental groups' representatives and some resource agency officials we spoke with said that resource agencies issued fewer or less environmentally protective conditions and prescriptions. Resource agency officials also raised concerns about increases in workload and costs as a result of section 241. Finally, many of the stakeholders offered suggestions for improving the use of section 241. Most of the licensees and a few resource agency officials we spoke with said that section 241 encourages settlement agreements between the licensee and resource agency. Several licensees commented that before section 241 was enacted, they had little influence on the mandatory conditions and prescriptions and that the resource agencies had made decisions on which conditions and prescriptions to issue without the potential oversight of a third-party review. One licensee commented that resource agencies had little incentive to work collaboratively with the licensee during relicensing prior to section 241. Several licensees and a few resource agency officials said that under section 241, some resource agencies have been more willing to negotiate their conditions and prescriptions to avoid receiving alternatives and requests for trial-type hearings. Some resource agency officials, however, said that in some cases, reaching a settlement with the licensee has been more difficult under section 241 than in previous negotiations. Specifically, they noted the following: If licensees request a trial-type hearing, resource agencies and licensees have to devote time and resources to preparing for the potential upcoming trial-type hearing instead of negotiating a settlement. Section 241 made the relicensing process less cooperative and more antagonistic when, for example, a licensee did not conduct the agencies' requested studies, the agencies had less information to support their conditions and prescriptions. As a case in point, one NMFS regional supervisor told us that a licensee declined to conduct a study about the effects of its dams' turbines on fish mortality. However, the licensee subsequently requested a trial-type hearing because, it argued, the agency had no factual evidence to support the agency's assertion that the turbines injured or killed fish. Some licensees used their ability to request a trial-type hearing as a threat against the agencies' issuance of certain conditions, prescriptions, or recommendations. For example, two NMFS biologists and their division chief told us that a licensee had threatened to issue a trial-type hearing request on fish passage prescriptions if NMFS made flow rate recommendations that it did not agree with. The Hydropower Reform Coalition, a coalition of conservation and recreational organizations, commented that from its experience, participation in settlement negotiations under section 241 is "almost exclusively limited to licensees." It also commented that agreements reached by the license applicant and resource agency are not comprehensive settlement agreements in which licensees, state and federal resource agencies, tribes, nongovernmental organizations, and other interested parties are involved in the agreement. Some licensees said agencies now put more effort into reviewing and providing support for their conditions and prescriptions because licensees or other nonfederal stakeholders could challenge the terms in a trial-type hearing. Several agency officials commented that they generally conduct more thorough research and provide a more extensive explanation about mandatory conditions and prescriptions than they had for projects prior to section 241. A few agency officials also commented they are requesting licensees to conduct more extensive studies about the effects of their hydropower projects to ensure that the agencies have sufficient information for writing conditions and prescriptions. Views differed on whether conditions and prescriptions were as protective or less protective since section 241 was enacted. All seven environmental group representatives that we spoke with expressed concerns that resource agencies were excluding and writing less protective conditions, prescriptions, and recommendations to avoid trial-type hearings. For example, one group commented that in one hydropower project, under section 241, agency officials settled for stream flow rates that were lower than necessary for protecting and restoring the spawning habitat for fish that swam in the project area. Some agency officials said the conditions and prescriptions they have issued are as protective as those issued prior to the enactment of section 241. Others said that they now issue fewer or less environmentally protective conditions or prescriptions to avoid a costly trial-type hearing. In addition, some other officials commented that instead of issuing conditions and prescriptions that could result in a trial- type hearing, agencies have either issued recommendations or reserved authority to issue conditions and prescriptions at a later time. While a reservation of authority allows the resource agency to issue conditions and prescriptions after the issuance of the license, one regional agency official told us that in his experience, this rarely occurs. At one regional office, two staff biologists and their division chief told us that while they still issue prescriptions that meet the requirements of resource protection, these prescriptions are less protective than they would have been without the possibility of a trial-type hearing. Many agency officials said that the added efforts they put into each license application since the passage of section 241 has greatly increased their workloads for relicensing. Several agency officials also told us that even greater efforts are needed when a trial-type hearing is requested. To complete the work needed for a trial-type hearing, agencies often need to pull staff from other projects. According to these officials, at the local level, pulling staff from other projects can result in the agency's neglect of its other responsibilities. Officials commented that whether they win or lose a trial-type hearing, agencies must provide the funding for an ALJ, expert witnesses, and their attorneys at a trial-type hearing. Although they did not track all costs, the Bureau of Indian Affairs, Bureau of Land Management, Interior's Office of the Solicitor, FWS, Forest Service, and NMFS provided individual estimates that totaled to approximately $3.1 million in trial-type hearings for the following three projects: Approximately $300,000 for the Tacoma project. Approximately $800,000 for the Spokane River project. Approximately $2 million for the Klamath project. Among all the resource agencies, only NMFS has dedicated funding for section 241 activities. However, this funding only covers administrative costs related to a trial-type hearing and does not fund NMFS's program staff or General Counsel staff for a hearing. Many of the agency officials, licensees, and other stakeholders we spoke with had suggestions on how to improve section 241 and the relicensing process. For example, several licensees and agency officials raised concerns that the 90-day period for a trial-type hearing, including a decision, was too short and resulted in the need to complete an enormous amount of work in a compressed time frame. Some said that an ALJ who did not have a background in hydropower issues needed more time to review the information presented following the hearing. Some stakeholders suggested allowing the ALJ to make his or her decision outside of the 90-day period. Other stakeholders, however, commented that an extension of the 90-day period could result in greater costs for all parties. One regional hydrologist suggested using a scientific peer review panel rather than an ALJ to hear arguments. Some stakeholders also suggested providing an opportunity to delay the start date of a trial-type hearing if all parties were close to reaching a settlement. The stakeholders we spoke with also had several suggestions that were specific to their interests, which included the following: A couple of licensees noted that while the provisions of section 241 may be used after preliminary conditions and prescriptions are issued, they would like to be able to use these provisions after the issuance of final conditions and prescriptions because of concerns that the final conditions and prescriptions could differ from the agreed-upon terms that were arrived at through negotiations. These licensees assert that if they do not have this option, their only recourse is to sue in an appeals court, after the license has been issued. These licensees were not aware of any instance in which the terms had drastically changed between negotiations and the issuance of the final license. Several environmental group representatives commented that while section 241 allows stakeholders to propose alternative conditions and prescriptions, they would like to be allowed to propose additional conditions and prescriptions to address issues that the resource agencies have not addressed in their preliminary conditions and prescriptions. Three of these representatives also commented that the section 241 criteria for the acceptance of an alternative--adequately or no less protective and costs less to implement--favored licensees, not conservation groups. Instead, one representative suggested that the criterion for an alternative should be that it is more appropriately protective and not that it costs less to implement. In addition, another representative suggested that all interested parties should be allowed to participate in negotiations to modify the preliminary conditions and prescriptions after the submission of an alternative. In his experience, these negotiations have been limited to the stakeholder who uses the provisions of section 241 and the resource agency. A few resource agency officials suggested that licensees who lose the trial- type hearing should pay court costs, such as the costs of the ALJ. They also suggested that licensee reimbursements for the relicensing costs go directly to the resource agencies rather than the General Fund of the U.S. Treasury. Almost 5 years have passed since the interim rules were issued, and several stakeholders that we spoke with expressed interest in having an opportunity to comment on a draft of the revised rules when they become available and before these rules become final. In addition, on June 2, 2009, the National Hydropower Association--an industry trade group--and the Hydropower Reform Coalition submitted a joint letter addressed to Interior, NMFS, and USDA expressing interest in an opportunity to comment on the revised rules before they become final. Section 241 of the Energy Policy Act of 2005 changed the hydropower relicensing process, including permitting licensees and other nonfederal stakeholders to propose alternative conditions and prescriptions. All parties involved in relicensing a hydropower project have an interest in understanding how the conditions and prescriptions for a license were modified, if at all, in response to proposed alternatives. Indeed, the interim rules require agencies to provide, for any condition or prescription, a written statement explaining the basis for the adopted condition and the reasons for not accepting any alternative condition or prescription. While we found that the agencies have provided a written explanation for all 42 rejected conditions and prescriptions, they provided a written explanation of the reasons for not accepting a proposed alternative for only 13 of the 140 modified conditions and prescriptions. The absence of an explanation makes it difficult to determine the extent or type of changes that were made. Furthermore, when the interim rules that implemented section 241 were issued on November 17, 2005, the federal resource agencies stated that they would consider issuing final rules 18 months later. Instead, nearly 5 years later, final rules have not yet been issued. Given this delay and the amount of experience with section 241's interim rules, many stakeholders we spoke with had ideas on how to improve section 241 and several expressed interest in providing comments when a draft of the final rules becomes available. To encourage transparency in the process for relicensing hydropower projects, we are recommending that the Secretaries of Agriculture, Commerce, and the Interior take the following two actions: Direct cognizant officials, where the agency has not adopted a proposed alternative condition or prescription, to include in the written statement filed with FERC (1) its reasons for not doing so, in accordance with the interim rules and (2) whether a proposed alternative was withdrawn as a result of negotiations and an explanation of what occurred subsequent to the withdrawal; and Issue final rules governing the use of the section 241 provisions after providing an additional period for notice and an opportunity for public comment and after considering their own lessons learned from their experience with the interim rules. We provided the departments of Agriculture, Commerce, and the Interior; FERC; the Hydropower Reform Coalition; and the National Hydropower Association with a draft of this report for their review and comment. FERC had no comments on the report. Commerce's National Oceanic and Atmospheric Administration (NOAA), Interior, USDA's Forest Service, the Hydropower Reform Coalition, and the National Hydropower Association provided comments on the report and generally agreed with the report's recommendations. While Forest Service, Interior, and NOAA generally agreed with our recommendation that they file a written statement with FERC on their reasons for not accepting a proposed alternative, they all cited a circumstance in which they believed that they were not required to do so. Specifically, the three agencies commented that under the interim rules, they do believe that they are required to explain their reasons for not accepting a proposed alternative when the alternatives were withdrawn as a result of negotiations. Two of the agencies, Interior and NOAA, agreed to indicate when a proposed alternative was voluntarily withdrawn, and NOAA acknowledged that providing an explanation on what occurred after the withdrawal of an alternative may be appropriate in some circumstances. We continue to believe that providing an explanation for not accepting a proposed alternative is warranted, even when the proposed alternative is voluntarily withdrawn as a result of negotiations, and we have modified our recommendation to address this situation. The agencies could add transparency to the settlement process by laying out the basis for the modifications made to the preliminary conditions and prescriptions; the reasons the agencies had for not accepting the proposed alternative, including those alternatives withdrawn as a result of negotiations; and an explanation of what occurred subsequent to the withdrawal. Further, no provision of the interim rules discusses withdrawal of proposed alternatives or provides an exemption from the requirement to explain why a proposed alternative was not accepted. The agencies have an opportunity to clarify their approach to withdrawn conditions and prescriptions as they consider revisions to the interim rules. Interior and NOAA commented that they agreed with our recommendation regarding the issuance of final rules and are considering providing an additional public comment opportunity. According to Interior and NOAA, the resource agencies are currently working on possible revisions to the interim rules. NOAA also commented that resource agencies use the term "modified prescription" as a "term of art" to refer to the agencies' final prescription, regardless of whether the final prescription actually differs from the preliminary one. As we noted in table 4 of this report, we counted a preliminary prescription as modified if the resource agency does not explicitly accept or reject the proposed alternative. In response to this comment, we added an additional clarifying footnote in the report. Interior suggested that we clarify in our report that agencies have no reason to write less protective recommendations because recommendations cannot be the basis for trial-type hearing requests. We did not change the language in our report because we believe that Interior's assertion that agencies have no reason to write less protective recommendations may not always be the case. For example, as stated in our report, NMFS officials told us that a licensee had threatened to issue a trial-type hearing request on fish passage prescriptions if NMFS made flow rate recommendations that it did not agree with. The Hydropower Reform Coalition suggested that we collect additional information and conduct further analysis on the use of the section 241 provisions. We did not gather the suggested additional information or conduct additional analysis because in our view, they fell outside of the scope and methodology of our report. Appendixes I, II, III, IV, and V present the agencies', the Hydropower Reform Coalition's, and the National Hydropower Association's comments respectively. Interior, NOAA, and the Hydropower Reform Coalition also provided technical comments, which we incorporated into the report as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees; the Secretaries of Agriculture, Commerce, and the Interior; the Chairman of the Federal Energy Regulatory Commission; and other interested parties. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed are listed in appendix VI. In addition to the contact named above, Ned Woodward, Assistant Director; Allen Chan; Jeremy Conley; Richard Johnson; Carol Herrnstadt Shulman; Jay Smale; and Kiki Theodoropoulos made key contributions to this report.

Under the Federal Power Act, the Federal Energy Regulatory Commission (FERC) issues licenses for up to 50 years to construct and operate nonfederal hydropower projects. These projects must be relicensed when their licenses expire to continue operating. Relevant federal resource agencies issue license conditions to protect federal lands and prescriptions to assist fish passage on these projects. Under section 241 of the Energy Policy Act of 2005, parties to the licensing process may (1) request a "trial-type hearing" on any disputed issue of material fact related to a condition or prescription and (2) propose alternative conditions or prescriptions. In this context, GAO was asked to (1) determine the extent to which stakeholders have used section 241 provisions in relicensing and their outcomes and (2) describe stakeholders' views on section 241's impact on relicensing and conditions and prescriptions. GAO analyzed relicensing documents filed with FERC and conducted a total of 61 interviews with representatives from relevant federal resource agencies, FERC, licensees, tribal groups, industry groups, and environmental groups. Since the passage of the Energy Policy Act in 2005, nonfederal stakeholders--licensees, states, environmental groups, and an Indian tribe--used section 241 provisions for 25 of the 103 eligible hydropower projects being relicensed, most of which occurred within the first year. Of these 25 projects, stakeholders proposed a total of 211 alternative conditions and prescriptions. In response, the federal resource agencies (U.S. Department of Agriculture's Forest Service, Department of Commerce's National Marine Fisheries Service, and several bureaus in the Department of the Interior) accepted no alternatives as originally proposed but instead modified a total of 140 and removed a total of 9 of the agencies' preliminary conditions and prescriptions and rejected 42 of the 211 alternatives; the remaining alternatives are pending as of May 17, 2010. Under section 241, resource agencies must submit a statement to FERC explaining the basis for accepting or rejecting a proposed alternative. While agencies generally provided explanations for rejecting alternative conditions and prescriptions, with few exceptions, they did not explain the reasons for not accepting alternatives when they modified conditions and prescriptions. As a result, it is difficult to determine the extent, type, or basis of changes that were made and difficult to determine if and how the proposed alternatives affected the final conditions and prescriptions issued by the agencies. As of May 17, 2010, nonfederal stakeholders requested trial-type hearings for 18 of the 25 projects in which section 241 provisions were used, and three trial-type hearings were completed. Of the remaining 15 projects, requests for hearings were withdrawn for 14 of them when licensees and agencies negotiated a settlement agreement before the administrative law judge made a ruling, and one is pending because the licensee is in negotiations to decommission the project. In the three hearings held to date, the administrative law judge ruled in favor of the agencies on most issues. According to the federal and nonfederal relicensing stakeholders GAO spoke with, the section 241 provisions have had a variety of effects on the relicensing process and on the license conditions and prescriptions. While most licensees and a few agency officials said that section 241 encourages settlement agreements between the licensee and resource agency, some agency officials said that section 241 made agreements more difficult because efforts to negotiate have moved to preparing for potential hearings. Regarding conditions and prescriptions, some stakeholders commented that under section 241, agencies put more effort into reviewing and providing support for their conditions and prescriptions, but environmental groups and some agency officials said that in their opinion, agencies issued fewer or less environmentally protective conditions and prescriptions. Many agency officials also raised concerns about increases in workload and costs as a result of section 241. For example, their estimated costs for the three hearings to date totaled approximately $3.1 million. Furthermore, many of the stakeholders offered suggestions for improving the use of section 241, including adjusting the time frame for a trial-type hearing. GAO recommends that cognizant officials who do not adopt a proposed alternative include reasons why in their statement to FERC. The resource agencies generally agreed, but commented that no explanation is required when an alternative is withdrawn as a result of negotiations.

VA operates the largest integrated health care system in the United States, providing care to nearly 5 million veterans per year. The VA health care system consists of hospitals, ambulatory clinics, nursing homes, residential rehabilitation treatment programs, and readjustment counseling centers. VA delegates decision making regarding financing, health care service delivery, and medical facility operations to its 21 networks. Physicians who work at VA medical facilities are required to hold at least one current and unrestricted state medical license. Current and unrestricted licenses are those in good standing in the states that issued them, and licensed physicians may hold licenses from more than one state. State medical licenses are issued by state licensing boards, which generally establish state licensing requirements governing their licensed practitioners. To keep licenses current, physicians must renew their licenses before they expire and meet renewal requirements established by state licensing boards, such as continuing education. Renewal procedures and requirements vary by state. When state licensing boards discover violations of licensing practices, such as the abuse of prescription drugs or the provision of substandard care that results in adverse health effects, they may place restrictions on licenses or revoke them. Restrictions issued by a state licensing board can limit or prohibit a physician from practicing in that particular state. Generally, state licensing boards maintain a database that contains information on any restrictions or revocations of physicians' licenses. When physicians apply for initial appointment, they initiate the credentialing process by completing VA's application, which includes entering into VetPro--a Web-based credentialing system VA implemented in March 2001--information used by VA medical facility officials in the credentialing process. Among the credentialing information that VA requires physicians enter into VetPro is information on all the state medical licenses they have ever held, including any licenses they have held that have expired. For their reappointments, physicians must update this credentialing information in VetPro. Once physicians enter their credentialing information into VetPro, a facility's medical staff specialist--an employee who is responsible for obtaining and verifying the information used in the credentialing and privileging processes--performs a data check on the information to be sure that all required information has been entered. In general, the medical staff specialist at each VA medical facility manages the accuracy of VetPro's credentialing data. The medical staff specialist verifies, with the original source of the information, the accuracy of the credentialing information entered by the physicians. This type of check is known as primary source verification. For example, the medical staff specialist contacts state licensing boards in order to verify that physicians' state medical licenses are valid and unrestricted. At initial appointment only, VA requires medical staff specialists to query FSMB, which contains information from state licensing boards. This query enables officials to determine all the state medical licenses a physician has ever held, including those not disclosed by a physician to VA, and whether a physician has had any disciplinary actions taken against these licenses. VA does not require this query at reappointment because VA headquarters regularly receives reports from FSMB on any VA physician whose name appears on FSMB's list, indicating that disciplinary action has been taken against the physician's state medical license. When VA headquarters receives a report from FSMB, it notifies the appropriate VA medical facility. VA's credentialing process requires VA medical staff specialists to verify medical malpractice claims at initial appointment and at reappointment. These claims may be verified by contacting a court of jurisdiction or the insurance company involved in the medical malpractice claims, or by obtaining a statement of claims status from the attorney representing the physician in the medical malpractice claim. In addition, VA requires medical staff specialists to query NPDB, which contains reports by state licensing boards, hospitals, and other health care entities on unprofessional behavior on the part of physicians or adverse actions taken against them. This query enables officials to determine whether physicians fully disclosed to VA any involvement they might have had in paid medical malpractice claims. Once a physician's credentialing information has been verified, the medical staff specialist sends the information to the physician's supervisor, who is known as a clinical service chief. The clinical service chief reviews this information along with the physician's privileging information. Figure 1 illustrates VA's credentialing process. Physicians, in addition to entering credentialing information into VetPro, must complete a written request for clinical privileges. The facility medical staff specialist provides a physician's clinical service chief with the physician's requested clinical privileges and information needed to complete the privileging process, including information that indicates that the credentialing information entered by the physician into VetPro has been verified with the appropriate sources. For reappointment, documentation is required by another physician stating that the physician is able to perform both physically and mentally the clinical privileges requested. In addition, the medical staff specialist provides the clinical service chief with information on medical malpractice allegations or paid claims, loss of medical staff membership, loss or reduction of clinical privileges, or any challenges to the physician's state medical licenses. The requested clinical privileges are reviewed by a clinical service chief, who recommends whether a physician should be appointed or reappointed to the facility's medical staff and which clinical privileges should be granted. When deciding to recommend clinical privileges, a clinical service chief considers whether the physician has the appropriate professional credentials, training, and work experience to perform the privileges requested. For reappointment only, a clinical service chief is to consider observations of the physician's delivery of health care to veterans, and VA's policy requires that information on a physician's performance, such as a physician's surgical complication rate, be used when deciding whether to renew a physician's clinical privileges. Based on the clinical service chief's observations and the physician's performance information, the clinical service chief recommends that clinical privileges previously granted by the facility remain the same, be reduced, or be revoked, and whether newly requested privileges should be added. Clinical service chiefs forward their recommendations and the reasons for the recommendations to the next level of a medical facility's privileging review process, which may be a professional standards board or a medical executive committee. A medical facility professional standards board or the medical executive committee reviews the recommendations of the clinical service chief and recommends to the facility director whether the physician should be appointed to the facility's medical staff and which clinical privileges should be granted to the physician. The 2-year time period for renewal of clinical privileges and reappointment to the medical staff begins on the date that the privileges are approved by the medical facility's director. The list of approved clinical privileges with the date of approval is maintained at VA medical facilities and the initial appointment or reappointment date is entered into VetPro. Figure 2 illustrates VA's privileging process. According to VA's policy and a VA memorandum, information concerning individual physician performance that is used as part of the privileging process to either reduce, revoke, or support granting clinical privileges must be collected separately from a medical facility's quality assurance program. VA's policy is based on a federal law that restricts the disclosure of documents produced in the course of VA's quality assurance program. In general, documents created in connection with such a program are confidential and may not be disclosed except in limited circumstances. Individuals who willfully disclose documents that they know are protected quality assurance documents are subject to fines up to $20,000. Although the law states that it is not intended to limit the use of documents within VA, VA's policy expressly prohibits the use of such documents in connection with the privileging process. VA's use of separate information sources for quality assurance and privileging decisions is intended to maintain the confidential status of documents produced in connection with quality assurance programs. According to VA, the confidentiality of individual performance information helps ensure provider participation, including physicians, in a medical facility's quality assurance program by encouraging providers to openly discuss opportunities for improvement in provider practice without fear of punitive action. VA has another requirement that is related to the renewal of physicians' clinical privileges. Medical facility officials are required to submit to VA's Office of Medical-Legal Affairs information on paid VA malpractice claims. This information must be submitted within 60 days after the medical facility is notified about a paid malpractice claim. The Office of Medical- Legal Affairs is responsible for convening a panel of clinicians to determine whether a VA facility physician involved in the claim delivered substandard care. The Office of Medical-Legal Affairs notifies the medical facility director of the results of its review. If it is determined that the physician delivered substandard care to veterans, the medical facility must report the physician to NPDB within 30 days of being notified of the decision. VA medical facility officials also would use this determination to decide whether to grant clinical privileges to the physician involved in the VA medical malpractice claim. In our 2006 report, we found that the physician files at the seven facilities we visited demonstrated compliance with four VA credentialing and four privileging requirements we reviewed. However, we found that there were problems complying with a fifth privileging requirement--to use information on a physician's performance in making privileging decisions. We also found during our review that three of the seven medical facilities we visited did not submit to VA's Office of Medical-Legal Affairs information on paid VA medical malpractice claims within 60 days after being notified that a claim was paid, as required by VA policy. Further, VA had not required its medical facilities to establish internal controls to help ensure that privileging information managed by medical staff specialists is accurate. Internal controls are important because at one facility we visited we found 106 physicians whose privileging process had not been completed by facility officials for at least 2 years because of inaccurate information. As a result, these physicians were practicing at the facility with expired clinical privileges. None of the VA medical facilities we visited for our 2006 report had internal controls in place that would prevent a similar situation from occurring. To better ensure that VA physicians are qualified to deliver care safely to veterans, we recommended that VA provide guidance to medical facilities on how to collect individual physician performance information in accordance with VA's credentialing and privileging policy to use in medical facilities' privileging process, enforce the requirement that medical facilities submit information on paid VA medical malpractice claims to VA's Office of Medical-Legal Affairs within 60 days after being notified that the claim is paid, and instruct medical facilities to establish internal controls to ensure the accuracy of their privileging information. VA states that it has implemented all three recommendations we made in our May 2006 report to address compliance with VA's physician privileging requirements by establishing policy and guidance for its medical facilities. However, we do not know the extent of compliance with these requirements at VA medical facilities. VA implemented our recommendation that VA provide guidance to VA medical facilities on how to appropriately collect information on individual physician performance and use that information in VA's privileging process. Physician performance information is to be used to assist VA medical facility clinical service chiefs in determining the appropriate clinical privileges that should be granted based on a physician's clinical competence. VA implemented our recommendation by issuing a policy on October 2, 2007, that elaborated on the sources of physician performance information and the types of information that could be collected outside of VA medical facilities' quality assurance programs. In addition, in July 2007, VA officials told us that they were in the process of implementing online training programs on physician performance information to help implement our recommendation. The training will be mandatory for all VA medical facility clinical service chiefs and medical staff leaders responsible for the assessment and oversight of the privileging process and must be completed by January 31, 2008. VA also implemented our recommendation that it enforce its requirement that VA medical facilities report information on any paid VA malpractice claims involving their physicians to VA's Office of Medical-Legal Affairs within 60 days after being notified of a paid claim. In June 2006, VA's Office of Medical-Legal Affairs began notifying network and VA medical facility directors of delinquencies in reporting this information by the medical facilities. If a medical facility's delinquency in reporting extends longer than 90 days, VA requires the Office of Medical-Legal Affairs to inform not only network and VA medical facility directors but also VA's central office of the delinquency. Because VA's Office of Medical-Legal Affairs reviews information on paid malpractice claims involving VA physicians to determine whether the physicians delivered substandard care, when VA medical facilities do not submit relevant malpractice claim information to this office, medical facility clinical service chiefs may make privileging decisions without complete information about substandard care provided by physicians. Further, VA implemented our recommendation that it instruct VA medical facilities to establish internal controls to ensure the accuracy of their privileging information. Internal controls help ensure that VA medical facility officials have accurate clinical privileging information and that physicians are not practicing at the facility with expired clinical privileges. To address our recommendation, VA first asked network directors to report on how they tracked the privileging status of VA physicians. In response to a VA memorandum sent on May 16, 2006, network directors provided a report indicating that their medical facilities had one or more mechanisms in place to identify physicians who were currently privileged at their facilities and to track whether their privileges have expired. In addition, VA instructed its network directors to monitor the internal controls at their facilities that ensure that VA medical facilities have accurate clinical privileging information and that physicians are not practicing with expired clinical privileges. Mr. Chairman, this concludes my prepared remarks. I will be pleased to answer any questions you or other members of the committee may have. For further information regarding this testimony, please contact Randall B. Williamson 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 testimony. Marcia Mann, Assistant Director; Mary Ann Curran; Christina Enders; Krister Friday; Lori Fritz; Rebecca Hendrickson; and Jason Vassilicos also contributed to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

In a report issued in May 2006, GAO examined compliance with the Department of Veterans Affairs' (VA) physician credentialing and privileging requirements at seven VA medical facilities GAO visited. VA's credentialing process is used to determine whether a physician's professional credentials, such as licensure, are valid and meet VA's requirements for employment. VA's privileging process is used to determine which health care services or clinical privileges, such as surgical procedures, a VA physician is qualified to provide to veterans without supervision. Although GAO cannot generalize from its findings, GAO found that the seven facilities were complying with credentialing requirements. However, the facilities were not complying with aspects of certain privileging requirements. To better ensure that VA physicians are qualified to deliver care safely to veterans, GAO made three recommendations to improve VA's privileging of physicians. GAO was asked to testify on (1) how VA credentials and privileges physicians working in its medical facilities and (2) the extent to which VA has implemented the three recommendations made in GAO's May 2006 report that address VA's privileging requirements. To update its issued work, GAO reviewed VA's policies, procedures, and correspondence related to physician privileging and interviewed VA central office officials to determine if the recommendations made in GAO's May 2006 report were implemented. The Department of Veterans' Affairs (VA) has specific requirements that medical facility officials must follow to credential and privilege physicians. VA requires its medical facility officials to credential and privilege facility physicians periodically so that they can continue to work at VA. Facility officials verify the information used in the credentialing process and query certain databases that contain information on disciplinary actions that have been taken against a physician's state medical license and have information about a physician's professional competence. Each physician also must complete a written request for clinical privileges that is reviewed by the physician's supervisor who considers whether the physician has the appropriate professional credentials, training, and work experience. In addition, every 2 years, the supervisor is to consider information on a physician's performance, such as a physician's surgical complication rate, when deciding whether to renew a physician's clinical privileges. In a May 2006, GAO examined compliance with VA's physician credentialing and privileging requirements at seven VA medical facilities it visited and made three recommendations designed to improve aspects of privileging and oversight of the process. The three recommendations were (1) to provide guidance to medical facilities on how to collect individual physician performance information in accordance with VA's credentialing and privileging policy to use in medical facilities' privileging process, (2) to enforce the requirement that medical facilities submit information on paid VA medical malpractice claims to VA within 60 days after being notified that the claim is paid, and (3) to instruct medical facilities to establish internal controls to ensure the accuracy of their privileging information. VA reports that it has implemented all three recommendations by establishing policy and guidance for its medical facilities. However, GAO does not know the extent of compliance with these requirements at VA medical facilities.

The Foreign Buildings Act of 1926, as amended, authorizes the secretary of state to sell, exchange, or lease any property acquired abroad that is used for diplomatic and consular establishments in foreign countries. The law authorizes the secretary to use the sales proceeds to acquire and maintain other property overseas. It also requires the secretary to report such transactions to the Congress with the department's annual budget estimates. The secretary of state delegated the secretary's authority under the law to the Bureau of Overseas Buildings Operations (OBO). Thus, OBO is responsible for establishing and overseeing policies and procedures for the department's real estate properties. In 1996, we reported that the State Department did not have a systematic process for identifying unneeded properties and disposing of them. At that time, the department identified potentially unneeded properties through a variety of ad hoc and uncoordinated actions that we believed did not constitute an organized and effective system for identifying such properties. We also reported that decisions about the sale of unneeded overseas real estate properties had been delayed for years because of disputes between OBO and the regional bureaus and embassies. To speed these decisions by providing a final, authoritative forum for the disputing parties to argue their positions, we recommended that the State Department establish an independent panel to review disputed properties and decide which ones should be sold. In September 1996, the Congress directed the secretary of state to establish an advisory board on real property management to (1) review information about properties proposed for sale and (2) compile a list of properties recommended for sale to be approved by the under secretary of state for management. The Congress also directed the State Department to transmit this list to the appropriate congressional committees and to "proceed with the immediate sale of on the approved list" as soon as market conditions were appropriate. In response to the congressional direction, in April 1997, the assistant secretary of state for administration created the Real Property Advisory Board to review and make recommendations about the sale of disputed properties. The advisory board's charter authorizes a seven-member panel appointed by the under secretary of state for management consisting of three real estate professionals from outside the State Department and four high-ranking department officials. The board is authorized to (1) review information on properties proposed for sale by the State Department, the State IG, our office, or any other federal agency and (2) compile a list of properties recommended for sale to be approved by the under secretary of state for management. The charter directs the advisory board to meet at least once each fiscal year and to proceed "as far as possible" by consensus in deciding which properties to recommend for sale. A 1999 State IG's report found that the State Department had substantially complied with the Congress's intent (and our 1996 recommendation) in drafting the advisory board's charter and reporting the board's actions to the Congress. The report also found that the advisory board had functioned in a manner consistent with its charter, and that its recommendations were based on sufficient and balanced information. Since 1996, OBO has taken steps to implement a more systematic process for identifying unneeded properties, which has resulted in post and OBO officials' placing greater emphasis on identifying properties that could be sold. Steps reflecting this emphasis include an annual request to posts asking them to identify government-owned properties that should be considered for disposal and increased efforts by OBO and IG officials to identify such properties when they visit posts. However, the department's ability to monitor property use and identify potentially unneeded properties is hampered by weaknesses in its property inventory system. In response to our 1996 report, OBO began asking posts during an annual property inventory to identify properties that should be considered for disposal. OBO has included this request as part of State's annual chiefs of mission certification that posts are in compliance with the Foreign Affairs Manual in regards to the management of real property. This process has helped the State Department to more systematically identify unneeded property. For example, in 2001, OBO cabled all posts for this purpose in July and sent follow-up cables to unresponsive posts in August. OBO's initial cable requested that posts report all government-owned real property that should be considered for disposal, including properties for which posts had disposal processes under way. Posts were instructed to include excess office space, excess and oversized/overstandard housing, vacant or underutilized lots, properties used infrequently or for purposes such as unofficial business, and any other properties that could be considered appropriate for disposal. OBO officials explained that the effectiveness of this identification effort depended on posts' responding fully and promptly. In 2001, almost all posts complied. As a result of this process, the department identified 130 potentially unneeded properties. In addition to the annual post certification process, the director of OBO has instructed bureau officials to emphasize identification of unneeded property. For example, OBO officers have been instructed to pay more attention to identifying potentially disposable property during post visits to oversee and resolve real estate issues. OBO officials said this increased emphasis has helped posts and OBO to continually focus on the need to dispose of unneeded property. The State Department's IG reviews property use issues as part of its regular inspections. In addition, in February 1998, the under secretary for management asked the IG to specifically include identification of excess, underutilized, and obsolete properties as part of the IG's inspections and audits at overseas posts and to provide periodic summaries on these data collection efforts. This work was aimed at identifying potentially excess, underutilized, and obsolete properties on the basis of existing criteria and was not a substantive review of the reasons why posts should or should not retain these properties. It ended in June 2001 by mutual consent between the IG and the under secretary for management, but the IG still reviews property status and use as part of its post inspections. The IG's final report stated that the office found 21 excess, 160 underutilized, and 51 obsolete properties during this 3-year review. The State Department agreed to sell 72 of these properties. The IG stated that these reviews were useful and productive. It added that chiefs of mission and other senior officials were interested in this work, and, as a result, the IG noted increased emphasis on real property management. An IG official said they would only start a similar effort again if it is requested by the under secretary. According to this official, OBO's new director has taken a more aggressive approach to identifying and selling unneeded property, which reduces the need for any additional IG effort at this time. The State Department's worldwide real property inventory contains many errors and omissions. To better monitor property use and identify potentially unneeded properties, accurate inventory data are needed. Accurate real property data are also needed for the worldwide inventory that the General Services Administration keeps at the Congress's request. OBO, however, has had difficulty getting posts to ensure that data in its inventory database are accurate, which is a long-standing problem. We observed problems involving properties sold but not removed from the inventory, properties acquired but not added to the inventory, and errors in cost and other descriptive information. For example, In June 2001, the inventory still listed an office building and the consul general's residence in Alexandria, Egypt, which were sold in 1997 and 1998 (for more than $5 million). Acquisition cost was overstated by about $300 million for three properties in Bamako, Mali, and by nearly $132 million for one property in Yaounde, Cameroon, due to data input errors, according to OBO. Inaccurate inventory information can result in unneeded properties not being identified for potential sale. For example, a parking lot in Paris purchased in 1948 was not included in the inventory until an IG visit in 1998 highlighted the lot's absence from the inventory. The property is currently being marketed and is valued at up to $10 million. We also found that the number of properties listed in the inventory does not accurately reflect the number of properties the State Department manages because, according to OBO, posts have inconsistently assigned property identification numbers. Posts sometimes assigned separate numbers to land and associated buildings. For example, the embassy in Paris is listed as three separate properties--the land and two buildings. The buildings were acquired separately but are now connected. The three properties comprise one compound. At other times, posts assigned one number to multiple properties--for example, in Brasilia, four separate lots were given one property identification number. Along with its other efforts, OBO is attempting to improve the accuracy, and therefore the reliability, of the State Department's worldwide overseas property inventory data. According to OBO officials, since individual posts are responsible for entering their own data, correcting inaccuracies requires that they routinely check and update data in their property inventories. To help posts keep accurate inventory data, OBO has provided 238 posts with computer software for recording their property inventories, along with a user manual that gives step-by-step instructions. However, according to OBO, 185 posts have installed or are in the process of installing the software, leaving 53 posts that are not using it--thereby negatively affecting the consistency and accuracy of inventory data. In November 2001, OBO reported that about 20 posts had not corrected known errors or omissions in their property inventories. Because of such errors and omissions, some OBO staff said they do not rely on the property inventory for their work and instead keep their own property inventory information. The State Department's performance in selling unneeded property has significantly improved in the last 5 years. Property sales proceeds were more than 3 times greater than for the previous 5-year period. However, despite this progress, the department still has a large number of potentially unneeded properties that remain unsold. In 2001, the State Department began several initiatives intended to expedite the sale of unneeded properties, including (1) using "business case" analyses to ensure that financial and economic factors were included in the property sales decision process, (2) emphasizing the use of commercial real estate marketing services, and (3) more aggressively focusing on resolving property disputes. The State Department sold 104 properties for more than $404 million from fiscal years 1997 through 2001. This is a threefold increase in proceeds compared with the 65 properties the department sold for more than $133 million from fiscal years 1992 through 1996 (see fig. 1). Large-value sales from fiscal years 1997 through 2001 included a compound in Seoul, South Korea (almost $99 million in installment payments), and the former chancery in Singapore for nearly $60 million. As of September 30, 2001, the State Department reported that 92 properties were potentially available for sale. These properties have an estimated value of more than $180 million. Many of these properties have been identified for potential sale for years, including 35 that date back to 1997. In 2001, the new OBO director introduced "business case" sales analysis to the process of determining whether a property should be sold. This new framework considers economic and financial factors, along with diplomatic and security issues and post concerns. According to OBO officials, the State Department's former property sales decision-making process generally did not fully consider economic and financial factors. OBO officials said the new framework has helped OBO in its effort to gain agency consensus regarding property sales and is already producing results. OBO officials also stated that the director has made business case- based decisions to sell properties in at least six posts, including Paris where he has directed the post to sell a parking lot and an office building. Another initiative designed to expedite property sales is OBO's award of indefinite quantity contracts to several international real estate brokerage firms for real estate marketing services. OBO officials believe these contracts will speed overseas property sales, give OBO greater control over the sales process, and relieve the administrative burden that property sales place on posts. Under these contracts, the brokerage firms will do tasks formerly performed by the posts, including advertising properties, identifying prospective buyers, receiving bids, and conducting negotiations. However, the brokers cannot conclude sales without the State Department's approval. As of March 2002, OBO was using these contracts to market 20 properties at 10 posts, including 5 properties OBO has been trying to sell for several years. OBO stated that it has not been able to fully evaluate the effectiveness of these contracts since the program has just started. Furthermore, to reduce the department's inventory of unneeded properties, the new OBO director has focused on resolving disputes with host countries and posts that have delayed the sale of valuable properties. For example, OBO intends to sell a high-value Bangkok residential compound that has been under consideration since the early 1990s but delayed due to post objections. The Asian financial crisis in 1997 temporarily halted this debate, according to OBO officials, but OBO is now pushing to sell the property. OBO officials added that the director has also addressed disputed properties at five more posts. The State Department has not yet sold 19 of 26 properties recommended for sale by the Real Property Advisory Board and approved by department management. Since its inception in 1997, the advisory board has reviewed 41 disputed properties and recommended that 27 be sold (department management approved the sale of 26 of these properties). As of April 2002, the State Department had disposed of 7 (including 2 for which it terminated the long-term lease) of the 26 properties for about $21 million. Sales of the remaining 19 properties, valued at about $70 million, have been delayed by host country restrictions (12 properties), the need to find replacement properties (4 properties), and post objections (3 properties). OBO officials acknowledged that the department has moved slowly to resolve some of these impediments. As a result, the advisory board has reviewed the status of most properties multiple times over several years. Our analysis of department records shows that of the 41 disputed properties reviewed since 1997, the advisory board recommended selling 27 (26 were approved for sale by State Department management) and retaining 9. The board planned to revisit the cases of 4 properties at a later date and ended its review of 1 property in Manila after concluding that the issue at hand was largely political and diplomatic. The advisory board reached these decisions and compiled its list of recommended sales by consensus. Our analysis of department records and discussion with a board member showed that in reaching these decisions, the advisory board's consideration of economic analyses was balanced by consideration of political and diplomatic factors, such as representational concerns and the historic value of the properties. Figure 2 summarizes the board's recommendations for all 41 properties through its mid- November 2001 meeting. The assistant secretary of state for administration or under secretary of state for management reviewed and approved 26 of the board's 27 sales recommendations. Our analysis of department records shows that the State Department has disposed of 7 of these 26 properties for $20.6 million. According to OBO, the estimated value of the 19 unsold properties is about $70 million. In addition, the State Department has decided to sell the property in Manila that the board had considered but on which it had declined to make a recommendation. Table 1 summarizes the factors that have delayed the sale of these properties. Appendix I provides additional information about the disposition and status of all 41 properties reviewed by the advisory board. Because property sales were delayed, the advisory board reviewed the status of most properties submitted in 1997 through 2000 multiple times over several years. Our analysis of department records shows that, on average, the board reviewed 34 properties 4 times over 3.1 years. In addition, as of the board's last meeting in November 2001, 17 of the properties had been sold, retained for use, or otherwise discharged by the board. The board had reviewed each of the remaining 17 properties (awaiting sale) an average of almost 6 times over 4.4 years. Table 2 shows the results of our analysis. OBO officials predict that the State Department will implement advisory board recommendations more quickly in the future. According to these officials, recent actions to expedite property sales, such as contracting for real estate appraisal and marketing services, will reduce delays in implementing the advisory board's recommendations by making approved property sales less susceptible to post appeals and inaction. Moreover, OBO believes that its enhanced standing within the department will reduce delays by giving OBO a greater voice in intradepartmental discussions to counterbalance post appeals. In 2001, OBO was upgraded from an office reporting to the assistant secretary of state for administration to a bureau reporting to the under secretary of state for management. OBO officials also said the advisory board's support for OBO's position on most properties was a positive factor in helping to reduce post resistance to proposed sales. OBO has implemented a number of initiatives to improve the identification of unneeded properties. Accurate property inventory data would help OBO and the posts to further identify such properties. However, inventory data are currently inaccurate and therefore unreliable, and post cooperation in correcting these errors and omissions has been inconsistent. While OBO has taken action to expedite property sales, difficulties reaching consensus within the State Department on sales of individual properties continue to cause delays. Furthermore, the State Department has not fully implemented most of the Real Property Advisory Board's recommendations, and properties valued at about $70 million have not been sold. Additional property sales could be delayed unless the department takes action to ensure that approved sales recommendations are implemented as the Congress intended--as soon as market conditions are appropriate and any issues with the host country are resolved. To improve the State Department's ability to identify properties that may be available for sale, we recommend that the secretary of state take action to improve the accuracy of the real property inventory. Ensuring that all posts install and use the new automated property inventory software would be a key step. In written comments on a draft of this report, the State Department stated that it is in total agreement with our recommendation and is taking steps to implement it. The department added that it believes this report is a fair and accurate representation of its ongoing efforts to dispose of unneeded real property overseas, and that the report recognizes the progress and the many improvements that have been made and continue to be made. The department also stated that the cooperative effort between the legislative and executive branches on this review can serve as a model for future work. In a draft of this report, we had recommended that the secretary of state direct the department to proceed with property sales as soon as market conditions are appropriate to ensure that disputed overseas real estate properties are sold as expeditiously as possible. The department responded that it believed the recommendation is unnecessary due to the enhanced position of the OBO Bureau and the proactive approach and involvement of its director in property disposal issues. It added that it appreciated the intent of the recommendation, that the secretary use his office as necessary and appropriate to expedite disposal of unneeded property, and that this option is always available should it become necessary. On the basis of these comments, we deleted this recommendation from the report. However, as the department noted in its comments, instances may arise when involvement by the secretary does become necessary, specifically to emphasize resolution of issues caused by host country restrictions on property sales that require diplomatic negotiations, such as the case with the 12 properties in Brasilia. It is therefore important that the director of OBO keep the under secretary for management informed on the status of all properties being considered for sale to avoid the type of lengthy delays experienced in the past. To determine if the State Department has taken steps to improve its process for identifying unneeded properties that are potentially available for disposal, we interviewed OBO's director and other OBO officials concerning OBO policies and processes for identifying unneeded property and determining when properties should be sold. We reviewed documents relating to OBO's identification of unneeded property potentially available for disposal, including the State Department's quarterly reports to the Congress describing properties potentially available for disposal during that quarter. We also examined OBO's policies and processes for entering information into its real property worldwide database and issues affecting quality control over this information, and we reviewed the department's worldwide property inventory as part of our effort to assess the accuracy of the property database. In addition, we reviewed sections of the Foreign Affairs Manual applicable to property management overseas and documents prepared by State Department officials in response to our questions about their processes for identifying unneeded property. To assess the Department of State's performance in selling unneeded properties, we analyzed quarterly reports to the Congress identifying property sales since 1997 and properties that are still available for disposal. We also reviewed OBO policies and processes, focusing on actions OBO has taken to overcome constraints that have delayed sales, such as disputes with posts and host government restrictions. We also interviewed officials at OBO's Real Estate and Property Management and Area Management offices to identify the status of properties being considered for sale and to understand how they deal with the posts concerning individual property sales. In addition, we reviewed the department's long-range overseas buildings plan to identify property the department plans to sell through fiscal year 2007. To determine whether the State Department has implemented the Real Property Advisory Board's recommendations, we analyzed the House conference report that directed the department to establish the board, our prior and State IG reports, and applicable department policies and guidance in the Foreign Affairs Manual and Foreign Affairs Handbook. We analyzed records prepared by State Department officials in response to our questions about the advisory board, minutes of the board's eight meetings, and the board's original and modified charters. We also interviewed a member of the advisory board and State Department officials involved in reviewing the properties included in our evaluation. In addition, we analyzed the minutes of the advisory board's meetings and other records to determine the number of properties submitted to the board for review from 1997 through 2001, the board's recommendations for these properties (sell, retain, revisit, or other), and the current status of these properties (sold, retained, or awaiting sale). For properties submitted to the advisory board from 1997 through 2000, we analyzed these records to determine the number of times and the length of time the board reviewed each of these properties. This analysis excluded seven properties submitted to the advisory board at its mid-November 2001 meeting because we do not know yet whether State will implement the board's sales recommendations before its next meeting. We conducted our review from June 2001 through April 2002 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its date. At that time, we will send copies of this report to interested congressional committees and the secretary of state. We also will make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4128 or at [email protected]. Contacts and staff acknowledgments are listed in appendix III. Property status as of March 2002 Sold in 1998 for $2.1 million. Sold in 2000 for $1.05 million. Post has not acted to sell property. Retain until post finds a secure residence for defense attache. Sold in 2000 for $4.7 million. Sales delayed by tax dispute with host government. Negotiations started recently to resolve the dispute. IG reports property no longer underutilized. Retained to provide security buffer. Retained for recreational use. The State Department plans to sell the property when the school relocates. In the interim, the department will charge the school rent. Board recommended selling properties after post occupied new embassy (which occurred in October 2001). The State Department has terminated these long-term leases effective April 23, 2002. Sold in 1999 for $12.5 million. Retained to provide security buffer. Sold in 1998 for $239,082. Retained as site for new office building after security concerns made embassy site unsuitable. State plans to sell when it can buy or lease suitable replacements. State is negotiating the disposition of these properties with tenant agencies. Board concluded the decision was political/diplomatic. State has decided to sell the property. Property status as of March 2002 Relocation not cost-effective. Retained for parking. Property was retained on the basis of guidance from the president. Property retained for recreational use. Board recommended selling the property unless State's 2002 long- range facilities plan authorized constructing a new office building in Rabat. State now plans to sell the property contingent on resolving potential host government restrictions. Property retained for recreational use. The following are GAO's comments on the Department of State's letter dated May 15, 2002. 1. We deleted this example from the final report. 2. The State Department's property inventory records from March 1998,did not include the parking lot and listed the ambassador's residence as 3.01 acres, not 3.4 acres. Subsequent inventory records from 1999 and 2001 listed the parking lot at 0.4 acres and also continued to list the ambassador's residence as 3.01 acres. In addition to the contact named above, Janey Cohen, Ed Kennedy, Jesus Martinez, Michael Rohrback, and Richard Seldin made key contributions to this report.

The U.S. government owns about 3,500 properties overseas at more than 220 locations, including embassy and consular office buildings, housing, and land. The Department of State is responsible for acquiring, managing, and disposing of these properties. In 1996, GAO reported that the State Department did not have an effective process for identifying and selling unneeded overseas real estate, and that decisions concerning the sale of some properties had been delayed for years because of parochial conflicts among the parties involved. The State Department has taken steps to implement a more systematic process for identifying unneeded properties by (1) requesting posts to annually identify excess, underutilized, and obsolete property and (2) requesting its own staff and Inspector General officials to place greater emphasis on identifying such property when they visit posts. The State Department has significantly increased its sales of unneeded properties in the last 5 years. From 1997 through 2001, it sold 104 overseas properties for over $404 million, almost triple the proceeds compared with the previous 5 year period. However, the department still has a large number of unneeded properties that have not yet been sold. The State Department has not effectively implemented recommendations made by the Real Property Advisory Board to sell unneeded property. State has disposed of only 7 properties of the 26 recommended for sale by the board.

In 1986, IRCA established the employment verification process based on employers' review of documents presented by employees to prove identity and work eligibility. On the Form I-9, employees must attest that they are U.S. citizens, lawfully admitted permanent residents, or aliens authorized to work in the United States. Employers must then certify that they have reviewed the documents presented by their employees to establish identity and work eligibility and that the documents appear genuine and relate to the individual presenting them. In making their certifications, employers are expected to judge whether the documents presented are obviously counterfeit or fraudulent. Employers generally are deemed in compliance with IRCA if they have followed the Form I-9 process in good faith, including when an unauthorized alien presents fraudulent documents that appear genuine. Following the passage of IRCA in 1986, employees could present 29 different documents to establish their identity and/or work eligibility. In a 1997 interim rule, the former U.S. Immigration and Naturalization Service (INS) reduced the number of acceptable work eligibility documents from 29 to 27. The Illegal Immigration Reform and Immigrant Responsibility Act (IIRIRA) of 1996 required the former INS and SSA to operate three voluntary pilot programs to test electronic means for employers to verify an employee's eligibility to work, one of which was the Basic Pilot Program. The Basic Pilot Program was designed to test whether pilot verification procedures could improve the existing employment verification process by reducing (1) false claims of U.S. citizenship and document fraud, (2) discrimination against employees, (3) violations of civil liberties and privacy, and (4) the burden on employers to verify employees' work eligibility. In 2007, USCIS renamed the Basic Pilot Program the Employment Eligibility Verification (EEV) program. EEV provides participating employers with an electronic method to verify their employees' work eligibility. Employers may participate voluntarily in EEV, but are still required to complete Forms I-9 for all newly hired employees in accordance with IRCA. After completing the forms, these employers query EEV's automated system by entering employee information provided on the forms, such as name and Social Security number, into the EEV Web site within 3 working days of the employees' hire date. The program then electronically matches that information against information in SSA's NUMIDENT database and, for noncitizens, DHS databases to determine whether the employee is eligible to work. EEV electronically notifies employers whether their employees' work authorization was confirmed. Those queries that the DHS automated check cannot confirm are referred to DHS immigration status verifiers, who check employee information against information in other DHS databases. The EEV process is shown in figure 1. In cases when EEV cannot confirm an employee's work authorization status either through the automatic check or the check by an immigration status verifier, the system issues the employer a tentative nonconfirmation of the employee's work authorization status. In this case, the employers must notify the affected employees of the finding, and the employees have the right to contest their tentative nonconfirmations by contacting SSA or USCIS to resolve any inaccuracies in their records within 8 days. During this time, employers may not take any adverse actions against those employees, such as limiting their work assignments or pay. After 10 days, employers are required to either immediately terminate the employment or notify DHS of the continued employment of workers who do not successfully contest the tentative nonconfirmation and those who the pilot program finds are not work-authorized. The EEV program is a part of USCIS's Systematic Alien Verification for Entitlements Program, which provides a variety of verification services for federal, state, and local government agencies. USCIS estimates that there are more than 150,000 federal, state, and local agency users that verify immigration status through the Systematic Alien Verification for Entitlements Program. SSA also operates various verification services. Among these are the Employee Verification Service (EVS) and the Web- based SSN Verification Service (SSNVS), which can be used to provide verification that employees' names and Social Security numbers match SSA's records. These services, designed to ensure accurate employer wage reporting, are offered free of charge. Employer use is voluntary, and the services are not widely used. Mandatory electronic employment verification would substantially increase the number of employers using the EEV system, which would place greater demands on USCIS and SSA resources. As of May 2007, about 17,000 employers have registered to use the program, 8,863 of which were active users, and USCIS has estimated that employer registration is expected to greatly increase by the end of fiscal year 2007. If participation in the EEV program were made mandatory, the program may have to accommodate all of the estimated 5.9 million employers in the United States. USCIS officials estimate that to meet a December 2008 implementation date, this could require about of 30,000 employers to register with the system per day. The mandatory use EEV can affect the capacity of the system because of the increased number of employer queries. USCIS has estimated that a mandatory EEV could cost USCIS $70 million annually for program management and $300 million to $400 million annually for compliance activities and staff. The costs associated with other programmatic and system enhancements are currently unknown. According to USCIS, cost estimates will rise if the number of queries rises, although officials noted that the estimates may depend on the method for implementing a mandatory program. SSA officials told us they have estimated that expansion of the EEV program to levels predicted by the end of fiscal year 2007 would cost $5 to $6 million, but SSA was not yet able to provide us estimates for the cost of a mandatory EEV. According to SSA officials, the cost of a mandatory EEV would be driven by the increased workload of its field office staff due to resolving SSA tentative nonconfirmations. A mandatory EEV would require an increase in the number of USCIS and SSA staff to operate the program. For example, USCIS had 13 headquarters staff members in 2005 to run the program and 38 immigration status verifiers available for secondary verification. USCIS plans to increase staff levels to 255 to manage a mandatory program, which includes increasing the number of immigration status verifiers who conduct secondary verifications. USCIS officials expressed concern about the difficulty in hiring these staff due to lengthy hiring processes, which may include government background checks. In addition, according to SSA officials, a mandatory EEV program would require additional staff at SSA field offices to accommodate an increase in the number of individuals visiting SSA field offices to resolve tentative nonconfirmations. According to SSA officials, the number of new staff required would depend on both the legislative requirements for implementing mandatory EEV and the effectiveness of efforts USCIS has under way to decrease the need for individuals to visit SSA field offices. For this reason, SSA officials told us they have not yet estimated how many additional staff they would need for a mandatory EEV. In prior work, we reported that secondary verifications lengthen the time needed to complete the employment verification process. The majority of EEV queries entered by employers--about 92 percent--confirm within seconds that the employee is authorized to work. About 7 percent of the queries are not confirmed by the initial automated check and result in SSA-issued tentative nonconfirmations, while about 1 percent result in DHS-issued tentative nonconfirmations. With regard to the SSA-issued tentative nonconfirmations, USCIS and SSA officials told us that the majority occur because employees' citizenship status or other information, such as name changes, is not up to date in the SSA database. SSA does not update records unless an individual requests the update in person and submits the required evidence to support the change in its records. USCIS officials stated that, for example, when aliens become naturalized citizens, their citizenship status is often not updated in the SSA database. In addition, individuals who have changed their names for various reasons, such as marriage, without notifying SSA in person may also be issued an SSA tentative nonconfirmation. According to SSA officials, although SSA instructs individuals to report any changes in name, citizenship, or immigration status, many do not do so. When these individuals' information is queried through EEV, a tentative nonconfirmation would be issued, requiring them to go to an SSA field office to show proof of the change and to correct their records in SSA's database. USCIS and SSA are exploring some options to improve the efficiency of the verification process. For example, USCIS is exploring ways to automatically check for naturalized citizens' work authorization using DHS databases before the EEV system issues a tentative nonconfirmation. Furthermore, USCIS is planning to provide naturalized citizens with the option, on a voluntary basis, to provide their Alien Number or Naturalization Certification Number so that employers can query that information through the EEV system before referring the employees to SSA to resolve tentative nonconfirmations. SSA is also coordinating with USCIS to develop an automated secondary verification capability, which may reduce the need for employers to take additional steps after the employee resolves the SSA tentative nonconfirmation. USCIS and SSA officials told us that the agencies are planning to provide SSA field office staff with access to the EEV system so that field office staff can resolve the SSA tentative nonconfirmation directly in the system at the time the employee's record is updated at the field office. According to SSA officials, the automated secondary verification capability is tentatively scheduled to be implemented by October 2007. While these steps may help improve the efficiency of the verification process, including eliminating some SSA tentative nonconfirmations, they will not entirely eliminate the need for some individuals to visit SSA field offices to update records when individuals' status or other information changes. USCIS and SSA officials noted that because the current EEV program is voluntary, the percentage of individuals who are referred to SSA field offices to resolve tentative nonconfirmations may not accurately indicate the number of individuals who would be required to do so under a mandatory program. SSA and USCIS officials expressed concern about the effect on SSA field offices' workload of the number of individuals who would be required to physically visit a field office if EEV were made mandatory. In our prior work, we reported that EEV enhances the ability of participating employers to reliably verify their employees' work eligibility and assists participating employers with identification of false documents used to obtain employment. If newly hired employees present false information, EEV would not confirm the employees' work eligibility because their information, such as a false name or social security number, would not match SSA and DHS database information. However, the current EEV program is limited in its ability to help employers detect identity fraud, such as cases in which an individual presents borrowed or stolen genuine documents. USCIS has taken steps to reduce fraud associated with the use of documents containing valid information on which another photograph has been substituted for the document's original photograph. In March 2007, USCIS began piloting a photograph screening tool as an addition to the current EEV system. According to USCIS officials, the photograph screening tool is intended to allow an employer to verify the authenticity of a Lawful Permanent Resident card (green card) or Employment Authorization Document that contain photographs of the document holder by comparing individuals' photographs on the documents presented during the I-9 process to those maintained in DHS databases. As of May 2007, about 70 employers have been participating during the pilot phase of the photograph screening tool, and EEV has processed about 400 queries through the tool. USCIS expects to expand the program to all employers participating in EEV by the end of summer 2007. The use of the photograph screening tool is currently limited because newly hired citizens and noncitizens presenting forms of documentation other than green cards or Employment Authorization Documents to verify work eligibility are not subject to the tool. Expansion of the pilot photograph screening tool would require incorporating other forms of documentation with related databases. In addition, efforts to expand the tool are still in the initial planning stages. For example, according to USCIS officials, USCIS and the Department of State have begun exploring ways to include visa and U.S. passport documents in the tool, but these agencies have not yet reached agreement regarding the use of these documents. USCIS is also exploring a possible pilot program with state Departments of Motor Vehicles. In prior work we reported that although not specifically or comprehensively quantifiable, the prevalence of identify fraud seemed to be increasing, a development that may affect employers' ability to reliably verify employment eligibility in a mandatory EEV program. The large number and variety of acceptable work authorization documents--27 under the current employment verification process--along with inherent vulnerabilities to counterfeiting of some of these documents, may complicate efforts to address identity fraud. Although mandatory EEV and the associated use of the photograph screening tool offers some remedy, further actions, such as reducing the number of acceptable work eligibility documents and making them more secure, may be required to more fully address identity fraud. EEV is vulnerable to acts of employer fraud, such as entering the same identity information to authorize multiple workers. Although ICE has no direct role in monitoring employer use of EEV and does not have direct access to program information, which is maintained by USCIS, ICE officials told us that program data could indicate cases in which employers may be fraudulently using the system and therefore would help the agency better target its limited worksite enforcement resources toward those employers. ICE officials noted that, in a few cases, they have requested and received EEV data from USCIS on specific employers who participate in the program and are under ICE investigation. USCIS is planning to use its newly created Compliance and Monitoring program to refer information on employers who may be fraudulently using the EEV system, although USCIS and ICE are still determining what information is appropriate to share. Employees queried through EEV may be adversely affected if employers violate program obligations designed to protect the employees, by taking actions such as limiting work assignments or pay while employees are undergoing the verification process. The 2004 Temple University Institute for Survey Research and Westat evaluation of EEV concluded that the majority of employers surveyed appeared to be in compliance with EEV procedures. However, the evaluation and our prior review found evidence of some noncompliance with these procedures. In 2005, we reported that EEV provided a variety of reports that could help USCIS determine whether employers followed program requirements, but that USCIS lacked sufficient staff to do so. Since then, USCIS has added staff to its verification office and created a Compliance and Monitoring program to review employers' use of the EEV system. However, while USCIS has hired directors for these functions, the program is not yet fully staffed. According to USCIS officials, USCIS is still in the process of determining how this program will carry out compliance and monitoring functions, but its activities may include sampling employer usage data for evidence of noncompliant practices, such as identifying employers who do not appear to refer employees contesting tentative nonconfirmations to SSA or USCIS. USCIS estimates that the Compliance and Monitoring program will be sufficiently staffed to begin identifying employer noncompliance by late summer 2007. USCIS's newly created Compliance and Monitoring program could help ICE better target its worksite enforcement efforts by indicating cases of employers' egregious misuse of the system. Currently, there is no formal mechanism for sharing compliance data between USCIS and ICE. ICE officials noted that proactive reduction of illegal employment through the use of functional, mandatory EEV may help reduce the need for and better focus worksite enforcement efforts. Moreover, these officials told us that mandatory use of an automated system like EEV could limit the ability of employers who knowingly hired unauthorized workers to claim that the workers presented false documents to obtain employment, which could assist ICE agents in proving employer violations of IRCA. Although efforts to reduce the employment of unauthorized workers in the United States necessitate a strong employment eligibility verification process and a credible worksite enforcement program and other immigration reforms may be dependent on it, a number of challenges face its successful implementation. The EEV program shows promise for enhancing the employment verification process and reducing document fraud if implemented on a much larger scale, and USCIS and SSA have undertaken a number of steps to address many of the weaknesses we identified in the EEV program. USCIS has also spent the last several years planning for an expanded or mandatory program, and has made progress in several areas, but it is unclear at this time the extent to which USCIC's efforts will be successful under mandatory EEV. It is clear, however, that a mandatory EEV system will require a substantial investment in staff and other resources, at least in the near term, in both agencies. There are also issues, such as identity fraud and intentional misuse, that will remain a challenge to the system. Implementing an EEV system to ensure that all individuals working in this country are doing so legally and that undue burdens are not placed on employers or employees will not be an easy task within the timelines suggested in reform proposals. This concludes my prepared statement. I would be pleased to answer any questions you and the subcommittee members may have. For further information about this testimony, please contact Richard Stana at 202-512-8777. Other key contributors to this statement were Blake Ainsworth, Frances Cook, Michelle Cooper, Rebecca Gambler, Kathryn Godfrey, Lara Laufer, Shawn Mongin, Justin L. Monroe, John Vocino, Robert E. White, and Paul Wright. 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 opportunity for employment is one of the most powerful magnets attracting illegal immigration to the United States. The Immigration Reform and Control Act of 1986 established an employment eligibility verification process, but immigration experts state that a more reliable verification system is needed. In 1996, the former U.S. Immigration and Naturalization Service, now within the Department of Homeland Security (DHS), and the Social Security Administration (SSA) began operating a voluntary pilot program, called the Employment Eligibility Verification (EEV) program, to provide participating employers with a means for electronically verifying employees' work eligibility. Congress is considering various immigration reform proposals, some of which would require all employers to electronically verify the work authorization status of their employees at the time of hire. In this testimony GAO provides observations on the EEV system's capacity, data reliability, ability to detect fraudulent documents and identity theft, and vulnerability to employer fraud as well as challenges to making the program mandatory for all employers. This testimony is based on our previous work regarding the employment eligibility verification process and updated information obtained from DHS and SSA. A mandatory EEV program would substantially increase the number of employers using the system. As of May 2007, about 17,000 employers have registered to use the current voluntary EEV program, about half of which are active users. If participation in EEV were made mandatory, the approximately 5.9 million employers in the United States may be required to participate. Requiring all employers to use EEV would substantially increase the demands on DHS and SSA resources. DHS estimated that increasing the capacity of EEV could cost it $70 million annually for program management and $300 million to $400 million annually for compliance activities and staff. SSA officials estimated that expansion of the EEV program through this fiscal year would cost $5 million to $6 million and noted that the cost of mandatory EEV would be much higher and driven by increased workload of its field office staff that would be responsible for resolving queries that SSA cannot immediately confirm. DHS and SSA are exploring options to reduce delays in the EEV process. The majority of EEV queries entered by employers--about 92 percent--confirm within seconds that the employee is work authorized. About 7 percent of the queries cannot be immediately confirmed by SSA, and about 1 percent cannot be immediately confirmed by DHS. Resolving these nonconfirmations can take several days, or in a few cases even weeks. DHS and SSA are considering options for improving the system's ability to perform additional automated checks to immediately confirm work authorization, which may be important should EEV be mandatory. EEV may help reduce document fraud, but it cannot yet fully address identity fraud issues, for example, when employees present borrowed or stolen genuine documents. The current EEV program is piloting a photograph screening tool, whereby an employer can more easily identify fraudulent documentation. DHS expects to expand the use of this tool to all participating employers by September 2007. Although mandatory EEV and the associated use of the photograph screening tool offer some remedy, limiting the number of acceptable work authorization documents and making them more secure would help to more fully address identity fraud. The EEV program is vulnerable to employer fraud, such as entering the same identity information to authorize multiple workers. EEV is also vulnerable to employer misuse that adversely affects employees, such as employers limiting work assignments or pay while employees are undergoing the verification process. DHS is establishing a new Compliance and Monitoring program to help reduce employer fraud and misuse by, for example, identifying patterns in employer compliance with program requirements. Information suggesting employers' fraud or misuse of the system could be useful to other DHS components in targeting limited worksite enforcement resources and promoting employer compliance with employment laws.

The Centers for Disease Control and Prevention (CDC) in the Department of Health and Human Services is the federal agency primarily responsible for monitoring the incidence of foodborne illness in the United States. In collaboration with state and local health departments and other federal agencies, CDC investigates outbreaks of foodborne illnesses and supports disease surveillance, research, prevention efforts, and training related to foodborne illnesses. CDC coordinates its activities concerning the safety of the food supply with the Food and Drug Administration (FDA), which is also in the Department of Health and Human Services. With respect to the safety of meat, poultry, and eggs, CDC coordinates with the Food Safety and Inspection Service (FSIS) in the U.S. Department of Agriculture (USDA). CDC monitors individual cases of illness from harmful bacteria, viruses, chemicals, and parasites (hereafter referred to collectively as pathogens) that are known to be transmitted by foods, as well as foodborne outbreaks, through voluntary reports from state and local health departments, FDA, and FSIS. In practice, because CDC does not have the authority to require states to report data on foodborne illnesses, each state determines which diseases it will report to CDC. In addition, state laboratories voluntarily report the number of positive test results for several diseases that CDC has chosen to monitor. However, these reports do not identify the source of infection and are not limited to cases of foodborne illness. CDC also investigates a limited number of more severe or unusual outbreaks when state authorities request assistance. At least 30 pathogens are associated with foodborne illnesses. For reporting purposes, CDC categorizes the causes of outbreaks of foodborne illnesses as bacterial, chemical, viral, parasitic, or unknown pathogens. Although many people associate foodborne illnesses primarily with meat, poultry, eggs, and seafood products, many other foods--including milk, cheese, ice cream, orange and apple juices, cantaloupes, and vegetables--have also been involved in outbreaks during the last decade. Bacterial pathogens are the most commonly identified cause of outbreaks of foodborne illnesses. Bacterial pathogens can be easily transmitted and can multiply rapidly in food, making them difficult to control. CDC has targeted four of them--E. coli O157:H7, Salmonella Enteritidis, Listeria monocytogenes, and Campylobacter jejuni--as being of greatest concern. The existing data on foodborne illnesses have weaknesses and may not fully depict the extent of the problem. In particular, public health experts believe that the majority of cases of foodborne illness are not reported because the initial symptoms of most foodborne illnesses are not severe enough to warrant medical attention, the medical facility or state does not report such cases, or the illness is not recognized as foodborne. However, according to the best available estimates, based largely on CDC's data, millions of people become sick from contaminated food each year, and several thousand die. In addition, public health and food safety officials believe that the risk of foodborne illnesses is increasing for several reasons. Between 6.5 million and 81 million cases of foodborne illness and as many as 9,100 related deaths occur each year, according to the estimates provided by several studies conducted over the past 10 years. The wide range in the estimated number of foodborne illnesses and related deaths is due primarily to the considerable uncertainty about the number of cases that are never reported to CDC. For example, CDC officials believe that many intestinal illnesses that are commonly referred to as the stomach flu are caused by foodborne pathogens. People do not usually associate these illnesses with food because the onset of symptoms occurs 2 or more days after the contaminated food was eaten. Furthermore, most physicians and health professionals treat patients who have diarrhea without ever identifying the specific cause of the illness. In severe or persistent cases, a laboratory test may be ordered to identify the responsible pathogen. Finally, physicians may not associate the symptoms they observe with a pathogen that they are required to report to the state or local health authorities. For example, a CDC official cited a Nevada outbreak in which no illnesses from E. coli O157:H7 had been reported to health officials, despite a requirement that physicians report such cases to the state health department. Nevertheless, 58 illnesses from this outbreak were subsequently identified. In the absence of more complete reporting, researchers can only broadly estimate the number of illnesses and related deaths. Food safety and public health officials believe that several factors are contributing to an increased risk of foodborne illnesses. First, the food supply is changing in ways that can promote foodborne illnesses. For example, as a result of modern animal husbandry techniques, such as crowding a large number of animals together, the pathogens that can cause foodborne illnesses in humans can spread throughout the herd. Also, because of broad distribution, contaminated food products can reach more people in more locations. Subsequent mishandling can further compound the problem. For example, leaving perishable food at room temperature increases the likelihood of bacterial growth and undercooking reduces the likelihood that bacteria will be killed. Knowledgeable experts believe that although illnesses and deaths often result from improper handling and preparation, the pathogens were, in many cases, already present at the processing stage. Second, because of demographic changes, more people are at greater risk of contracting a foodborne illness. In particular, certain populations are at greater risk for these illnesses: people with suppressed immune systems, children in group settings like daycare, and the elderly. Third, three of the four pathogens CDC considers the most important were unrecognized as causes of foodborne illness 20 years ago--Campylobacter, Listeria, and E. coli O157:H7. Fourth, bacteria already recognized as sources of foodborne illnesses have found new modes of transmission. While many illnesses from E. coli O157:H7 occur from eating insufficiently cooked hamburger, these bacteria have also been found more recently in other foods, such as salami, raw milk, apple cider, and lettuce. Fifth, some pathogens are far more resistant than expected to long-standing food-processing and storage techniques previously believed to provide some protection against the growth of bacteria. For example, some bacterial pathogens (such as Yersinia and Listeria) can continue to grow in food under refrigeration. Finally, according to CDC officials, virulent strains of well-known bacteria have continued to emerge. For example, one such pathogen, E. coli O104:H21, is another potentially deadly strain of E. coli. In 1994, CDC found this new strain in milk from a Montana dairy. While foodborne illnesses are often temporary, they can also result in more serious illnesses requiring hospitalization, long-term disability, and death. Although the overall cost of foodborne illnesses is not known, two recent USDA estimates place some of the costs in the range of $5.6 billion to more than $22 billion per year. The first estimate, covering only the portion related to the medical costs and productivity losses of seven specific pathogens, places the costs in the range of $5.6 billion to $9.4 billion. The second, covering only the value of avoiding deaths from five specific pathogens, places the costs in the range of $6.6 billion to $22 billion. Although often mild, foodborne illnesses can lead to more serious illnesses and death. For example, in a small percentage of cases, foodborne infections can spread through the bloodstream to other organs, resulting in serious long-term disability or death. Serious complications can also result when diarrhetic infections resulting from foodborne pathogens act as a triggering mechanism in susceptible individuals, causing an illness such as reactive arthritis to flare up. In other cases, no immediate symptoms may appear, but serious consequences may eventually develop. The likelihood of serious complications is unknown, but some experts estimate that about 2 to 3 percent of all cases of foodborne illness lead to serious consequences. For example: E. coli O157:H7 can cause kidney failure in young children and infants and is most commonly transmitted to humans through the consumption of undercooked ground beef. The largest reported outbreak in North America occurred in 1993 and affected over 700 people, including many children who ate undercooked hamburgers at a fast food restaurant chain. Fifty-five patients, including four children who died, developed a severe disease, Hemolytic Uremic Syndrome, which is characterized by kidney failure. Salmonella can lead to reactive arthritis, serious infections, and deaths. In recent years, outbreaks have been caused by the consumption of many different foods of animal origin, including beef, poultry, eggs, milk and dairy products, and pork. The largest outbreak, occurring in the Chicago area in 1985, involved over 16,000 laboratory-confirmed cases and an estimated 200,000 total cases. Some of these cases resulted in reactive arthritis. For example, one institution that treated 565 patients from this outbreak confirmed that 13 patients had developed reactive arthritis after consuming contaminated milk. In addition, 14 deaths may have been associated with this outbreak. Listeria can cause meningitis and stillbirths and is fatal in 20 to 40 percent of cases. All foods may contain these bacteria, particularly poultry and dairy products. Illnesses from this pathogen occur mostly in single cases rather than in outbreaks. The largest outbreak in North America occurred in 1985 in Los Angeles, largely in pregnant women and their fetuses. More than 140 cases of illness were reported, including at least 13 cases of meningitis. At least 48 deaths, including 20 stillbirths or miscarriages, were attributed to the outbreak. Soft cheese produced in a contaminated factory was confirmed as the source. Campylobacter may be the most common precipitating factor for Guillain-Barre syndrome, which is now one of the leading causes of paralysis from disease in the United States. Campylobacter infections occur in all age groups, with the greatest incidence in children under 1 year of age. The vast majority of cases occur individually, primarily from poultry, not during outbreaks. Researchers estimate that 4,250 cases of Guillain-Barre syndrome occur each year and that about 425 to 1,275 of these cases are preceded by Campylobacter infections. While the overall annual cost of foodborne illnesses is unknown, the studies we reviewed estimate that it is in the billions of dollars. The range of estimates among the studies is wide, however, principally because of uncertainty about the number of cases of foodborne illness and related deaths. Other differences stem from the differences in the analytical approach used to prepare the estimate. Some economists attempt to estimate the costs related to medical treatment and lost wages (the cost-of-illness method); others attempt to estimate the value of reducing the incidence of illness or loss of life (the willingness-to-pay method). Two recent estimates demonstrate these differences in analytical approach. In the first, USDA's Economic Research Service (ERS) used the cost-of-illness approach to estimate that the 1993 medical costs and losses in productivity resulting from seven major foodborne pathogens ranged between $5.6 billion and $9.4 billion. Of these costs, $2.3 billion to $4.3 billion were the estimated medical costs for the treatment of acute and chronic illnesses, and $3.3 billion to $5.1 billion were the productivity losses from the long-term effects of foodborne illnesses. CDC, FDA, and ERS economists stated that these estimates may be low for several reasons. First, the cost-of-illness approach generates low values for reducing health risks to children and the elderly because these groups have low earnings and hence low productivity losses. Second, this approach does not recognize the value that individuals may place on (and pay for) feeling healthy, avoiding pain, or using their free time. In addition, not all of the 30 pathogens associated with foodborne illnesses were included. In the second analysis, ERS used the willingness-to-pay method to estimate the value of preventing deaths for five of the seven major pathogens (included in the first analysis) at $6.6 billion to $22 billion in 1992. The estimate's range reflected the range in the estimated number of deaths, 1,646 to 3,144, and the range in the estimated value of preventing a death, $4 million to $7 million. Although these estimated values were higher than those resulting from the first approach, they may have also understated the economic cost of foodborne illnesses because they did not include an estimate of the value of preventing nonfatal illnesses and included only five of the seven major pathogens examined in the first analysis. The federal food safety system has evolved over the years as changes were made to address specific health threats and respond to new technological developments. Often such changes occurred in reaction to a major outbreak of foodborne illness when consumers, industry, regulatory agencies, and the Congress agreed that actions needed to be taken. The system has been slow to respond to changing health risks, for a variety of reasons, including a lack of comprehensive data on the levels of risk and the sources of contamination. While current data indicate that the risk of foodborne illnesses is significant, public health and food safety officials believe that these data do not identify the level of risk, the sources of contamination, and the populations most at risk in sufficient detail. According to these experts, the current voluntary reporting system does not provide sufficient data on the prevalence and sources of foodborne illnesses. There are no specific national requirements for reporting on foodborne pathogens. According to CDC, states do not (1) report on all pathogens of concern, (2) usually identify whether food was the source of the illness, or (3) identify many of the outbreaks or individual cases of foodborne illness that occur. Consequently, according to CDC, FDA, and FSIS, public health officials cannot precisely determine the level of risk from known pathogens or be certain that they can detect the existence and spread of new pathogens in a timely manner. They also cannot identify all factors that put the public at risk or all types of food or situations in which microbial contamination is likely to occur. Finally, without better data, regulators cannot assess the effectiveness of their efforts to control the level of pathogens in food. More uniform and comprehensive data on the number and causes of foodborne illnesses could form the basis of more effective control strategies. A better system for monitoring the extent of foodborne illnesses would actively seek out specific cases and would include outreach to physicians and clinical laboratories. CDC demonstrated the effectiveness of such an outreach effort when it conducted a long-term study, initiated in 1986, to determine the number of cases of illness caused by Listeria. This study showed that a lower rate of illness caused by Listeria occurred between 1989 and 1993 during the implementation of food safety programs designed to reduce the prevalence of Listeria in food. In July 1995, CDC, FDA, and FSIS began a comprehensive effort to track the major bacterial pathogens that cause foodborne illnesses. These agencies are collaborating with the state health departments in five areas across the country to better determine the incidence of infection with Salmonella, E. coli O157:H7, and other foodborne bacteria and to identify the sources of diarrheal illness from Salmonella and E. coli O157:H7. Initially, FDA provided $378,000 and FSIS provided $500,000 through CDC to the five locations for 6 months. For fiscal year 1996, FSIS is providing $1 million and FDA is providing $300,000. CDC provides overall management and coordination and facilitates the development of technical expertise at the sites through its established relationships with the state health departments. CDC and the five sites will use the information to identify emerging foodborne pathogens and monitor the incidence of foodborne illness. FSIS will use the data to evaluate the effectiveness of new food safety programs and regulations to reduce foodborne pathogens in meat and poultry and assist in future program development. FDA will use the data to evaluate its efforts to reduce foodborne pathogens in seafood, dairy products, fruit, and vegetables. The agencies believe that this effort should be a permanent part of a sound public health system. According to CDC, FDA, and FSIS officials, such projects must collect data over a number of years to identify national trends and evaluate the effectiveness of strategies to control pathogens in food. Funding was decreased (on an annualized basis) for this project in 1996, and these officials are concerned about the continuing availability of funding, in this era of budget constraints, to conduct this discretionary effort over the longer term. While providing more comprehensive data would help federal food safety officials develop better control strategies, it would not address the structural problems that adversely affect the federal food safety system. As we previously testified to this Committee, the current system was not developed under any rational plan but evolved over many years to address specific health threats from particular food products and has not responded to changing health risks. As a result, the food safety system is a patchwork of inconsistent approaches that weaken its effectiveness. For example, as we reported in June 1992, food products posing the same risk are subject to different rules, limited inspection resources are inefficiently used, and agencies must engage in extensive and often unsuccessful coordination activities in an attempt to address food safety issues. While federal agencies have made progress in moving towards a scientific, risk-based inspection system, foods posing similar health risks, such as seafood, meat, and poultry, are still treated differently because of underlying differences in regulatory approach. For example, FDA's hazard analysis critical control point (HACCP) requirement for seafood processors differs from FSIS' proposed HACCP program for meat and poultry processors. Under FSIS' proposal, meat and poultry plants would be required to conduct microbiological tests to verify the overall effectiveness of their critical controls and processing systems. In comparison, FDA's HACCP program for seafood products has no testing requirement. Furthermore, because the frequency of inspection is based on the agencies' regulatory approach, some foods may be receiving too much attention, while other foods may not be receiving enough. FSIS will conduct oversight of industries that use HACCP programs on a daily basis and will continue to inspect every meat and poultry carcass. Conversely, FDA will inspect seafood plants about once every 2 years and will only inspect other food plants under its jurisdiction an average of about once every 8 years. As we stated in our June 1992 report, such widely differing inspection frequencies for products posing similar risk is an inefficient use of limited federal inspection resources. Moreover, federal agencies are often slow to address emerging food safety concerns because of fragmented jurisdictions and responsibilities. For example, in April 1992, we reported that jurisdictional questions, disagreement about corrective actions, and poor coordination between FDA and USDA had hindered the federal government's efforts to control Salmonella in eggs for over 5 years. At that time, we stated that the continuing nature of such problems indicated that the food safety structure--with federal agencies having split and concurrent jurisdictions--had a systemic problem. The system's fragmented structure limited the government's ability to deal effectively with a major outbreak of foodborne disease, especially when such an outbreak required joint agency action. Today, federal agencies are concerned with the potential impact on public health posed by Bovine Spongiform Encephalopathy (the so-called mad cow disease), which was the subject of your May 10, 1996, hearing. Because there is still no single, uniform food safety system, jurisdiction remains split between agencies. Ironically, FSIS is responsible for the safety of meat products sold to the public, but is not responsible for preventing cattle from being given feeds that could endanger public health. FDA is responsible. Mr. Chairman, this concludes my prepared remarks, we would be happy to respond to any questions you may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. 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Pursuant to a congressional request, GAO discussed foodborne pathogens and their impact on public health. GAO noted that: (1) millions of illnesses and thousands of deaths result annually from contaminated foods; (2) the actual incidence of foodborne illnesses is unknown because most cases go unreported; (3) public health officials believe that the risk of foodborne illnesses has increased over the last 20 years because of food production changes, broader distribution, food mishandling, demographic changes, and new and more resistant bacteria; (4) the Department of Agriculture estimates that the costs of foodborne illnesses range from $5.6 billion to over $22 billion per year; (5) foodborne illnesses can also cause long-term disabilities, such as reactive arthritis and paralysis; (6) states are not required to report all foodborne illnesses or their causes; (7) more uniform and comprehensive data on the number and causes of foodborne illnesses could lead to the development of more effective control strategies, but federal officials are not sure they can continue to fund such data collection efforts if budget cuts continue; (8) federal agencies often do not address emerging food safety concerns because there are different rules for foods posing the same risks and limited inspection resources; and (9) unsuccessful coordination of food safety activities results from agencies' fragmented responsibilities.

Reducing the costs and time of its decision-making and improving its ability to deliver what is expected or promised have not been given adequate attention throughout the Forest Service. As a result, deficiencies within the decision-making process that have been known to the agency for a decade or more have not been corrected. To compensate for the increased costs and time of decision-making and the inability to implement planned projects, the Forest Service must request more annual appropriations to achieve fewer planning objectives. to provide complete, reliable, consistent, and timely financial information. However, the Forest Service has made little progress in implementing the act's provisions. An audit of the agency's financial statements for fiscal year 1995 by Agriculture's Inspector General resulted in an adverse opinion because of "pervasive errors, material or potentially material misstatements, and/or departures from applicable Government accounting principles affecting several Financial Statement accounts." Among the audit's findings, the Inspector General reported that the Forest Service could not account for expenditures of $215 million in fiscal year 1995. As a result, Forest Service managers are unable to adequately monitor and control spending levels for various programs and activities relating to decision-making or to measure the extent to which changes affect costs and efficiency. Corrective actions to address accounting and financial reporting problems identified by the Inspector General are not scheduled to be implemented until the end of fiscal year 1998. Similarly, the Forest Service has not been successful in achieving the objectives in its forest plans or implementing planned projects. For example, in response to congressional concerns about the Forest Service not being able to deliver what is expected or promised, the Chief, in the fall of 1991, formed a task force of employees from throughout the agency to review the issue of accountability. The task force's February 1994 report set forth a seven-step process to strengthen accountability. Steps in the process include (1) establishing work agreements that include measures and standards with customer involvement, (2) assessing performance, and (3) communicating results to customers. However, the task force's recommendations were never implemented. Rather, they were identified as actions that the agency plans to implement over the next decade. The task force's recommendations, as well as those in other studies, are intended to address some of the long-standing deficiencies within the Forest Service's decision-making process that have driven up costs and time and/or driven down the ability to achieve planned objectives. These deficiencies include (1) not adequately monitoring the effects of past management decisions, (2) not maintaining a centralized system of comparable environmental and socioeconomic data, and (3) not adequately involving the public throughout the decision-making process. decisions, including their cumulative impact. Moreover, monitoring can be used as an effective tool when the effects of a decision may be difficult to determine in advance because of uncertainty or costs. However, the Forest Service (1) has historically given low priority to monitoring during the annual competition for scarce resources, (2) continues to approve projects without an adequate monitoring component, and (3) does not require its managers to report on the results of monitoring, as its current regulations require. Because of the inefficiencies in its decision-making process, the Forest Service must request more funds to accomplish fewer objectives during the yearly budget and appropriation process. For example, in fiscal year 1991, the Congress asked the Forest Service to develop a multiyear program to reduce the costs of its timber program by not less than 5 percent per year. The Forest Service responded to these and other concerns by undertaking three major cost-efficiency studies and is preparing to undertake a fourth. However, with no incentive to act, the agency has not implemented any of the recommended improvements agencywide. In the interim, the costs associated with preparing and administering timber sales have continued to rise. As a result, for fiscal year 1998, the agency is requesting $12 million, or 6 percent, more for timber sales management than was appropriated for fiscal year 1997 while proposing to offer 0.4 billion board feet, or 10 percent, less timber for sale. The Government Performance and Results Act of 1993 is designed to hold federal agencies more accountable for their performance by requiring them to establish performance goals, measures, and reports that provide a system of accountability for results. In addition, the Clinger-Cohen Act of 1996 (formerly entitled the Information Technology Management Reform Act of 1996) and the Paperwork Reduction Act of 1995 are intended to hold federal agencies more accountable for the adequacy of their information systems and data by providing that they shall establish goals, measure performance, and report on how well their information technology and data are supporting their mission-related programs. Although it is still too early to tell what impact these laws, together with the Chief Financial Officers Act, will have on the Forest Service, they provide a useful framework for strengthening accountability within the agency and improving the efficiency and effectiveness of its decision-making. Issues that transcend the agency's administrative boundaries and jurisdiction also affect the efficiency and effectiveness of the Forest Service's decision-making process. These issues include reconciling differences in the geographic areas that must be considered in reaching decisions under different planning and environmental laws. The Forest Service and other federal land management agencies are authorized to plan primarily along administrative boundaries, such as those defining national forests and parks. Conversely, environmental statutes and regulations require the agencies to analyze environmental issues and concerns along the boundaries of natural systems, such as watersheds and vegetative and animal communities. For example, regulations implementing the National Environmental Policy Act require the agencies to assess the cumulative impact of federal and nonfederal activities on the environment. Because the boundaries of administrative units and natural systems are frequently inconsistent, federal land management plans have often considered effects only on portions of natural systems or portions of the habitats of wide-ranging species, such as migratory birds, bears, and anadromous fish (including salmon). For example, the Interior Columbia River Basin contains 74 separate federal land units, including 35 national forests and 17 Bureau of Land Management districts, each with its own plan. Not analyzing effects on natural systems and their components at the appropriate ecological scale results in duplicative environmental analyses--in individual plans and projects--increasing the costs and time required for analysis and reducing the effectiveness of federal land management decision-making. Addressing issues that transcend the administrative boundaries and jurisdictions of the Forest Service and of other federal agencies will, at a minimum, require unparalleled coordination and cooperation among federal agencies. However, federal land management and regulatory agencies sometimes do not work efficiently and effectively together to address issues that transcend their boundaries and jurisdictions. Disagreements often stem from differing evaluations of environmental effects and risks, which in turn reflect the agencies' disparate missions and responsibilities. federal agencies are often not comparable, large gaps in the information exist, and federal agencies lack awareness of who has what information. Over the past few years, several major studies have examined the need to reconcile the differences in the geographic areas that federal agencies must consider when reaching decisions. Among the options that have been suggested are changes to the Council on Environmental Quality's regulations and guidance implementing the procedural provisions of the National Environmental Policy Act. According to Council officials, changes to the act's regulations and guidance are not being considered at this time. Instead, the Council plans to rely primarily on less binding interagency agreements. However, since federal agencies sometimes do not work efficiently and effectively together to address issues that transcend their boundaries and jurisdictions and often lack the environmental and socioeconomic data required to make informed decisions, strong leadership by the Council would help to ensure that interagency agreements accomplish their intended objectives. Finally, differences in the requirements of numerous planning and environmental laws, enacted primarily during the 1960s and 1970s, produce inefficiency and ineffectiveness in the Forest Service's decision-making. Differences among their requirements and differing judicial interpretations of their requirements have caused some issues to be analyzed or reanalyzed at various stages in the Forest Service's decision-making process, as well as in the decision-making processes of other federal agencies, without their timely resolution, increasing the costs and time of decision-making and reducing the ability of the Forest Service and other land management agencies to achieve the objectives in their plans. the plan. The listing may also prohibit the agency from implementing projects under the plans that may affect the species until the new round of consultations has been completed. For example, recent federal court decisions required the Forest Service to reinitiate consultations on several approved forest plans after a species of salmon in the Pacific Northwest and a species of owl in the Southwest were listed as threatened under the Endangered Species Act. The courts' rulings prohibited the agency from implementing projects under the plans that might affect the species until the new rounds of consultations with the Fish and Wildlife Service and/or the National Marine Fisheries Service had been completed. Additionally, through differing judicial interpretations of the same statutory requirements, the courts have established conflicting requirements. For example, three federal circuit courts of appeals have held that the approval of a forest plan represents a decision that can be judicially challenged and prohibited from being implemented. Conversely, two other federal circuit courts of appeals have held that a forest plan does not represent a decision and that only a project can be judicially challenged, at which time the adequacy of the plan's treatment of larger-scale environmental issues arising in the project can be reconsidered. Requirements to consider new information and events, coupled with differing judicial interpretations of the same statutory requirements, have made it difficult for the Forest Service and other federal agencies to predict when any given decision can be considered final and can be implemented. Agency officials perceive that the same issues are recycled under different planning and environmental laws rather than resolved in a timely manner. In addition, environmental laws generally address individual resources, such as endangered and threatened species, water, and air. Conversely, planning statutes generally establish objectives for multiple resources, such as sustaining diverse plant and animal communities, securing favorable water flow conditions, and preserving wilderness. These different approaches to achieving similar environmental objectives have sometimes been difficult for the Forest Service and other federal agencies to reconcile, at least in the short term. For example, prescribed burning to restore the forests' health and to sustain diverse plant and animal communities may be appropriate under the National Forest Management Act but may be difficult to reconcile in the short term with air quality standards under the Clean Air Act. In March 1995, the Secretary of Agriculture pledged to work with the Congress to identify statutory changes to improve the processes for implementing the Forest Service's mission. However, neither his analysis nor options for changing the current statutory framework suggested by the Forest Service in 1995 have been sent to the Congress. Administration officials have said that they are hesitant to suggest changes to the procedural requirements of planning and environmental laws because they believe that the Congress may also make substantive changes to the laws with which they would disagree. On the basis of our work to date, we believe that statutory changes to improve the efficiency and effectiveness of the Forest Service's decision-making process cannot be identified until after agreement is reached on which uses the agency is to emphasize under its broad multiple-use and sustained-yield mandate and how it is to resolve conflicts or make choices among competing uses on its lands. Our report to you and other requesters, to be issued this spring, will identify the increasing shift in emphasis in the Forest Service's plans from producing timber to sustaining wildlife and fish. This shift is taking place in reaction to requirements in planning and environmental laws--reflecting changing public values and concerns--and their judicial interpretations, together with social, ecological, and other factors. In particular, section 7 of the Endangered Species Act represents a congressional design to give greater priority to the protection of endangered species than to the current primary missions of the Forest Service and other federal agencies. When proposing a project, the Forest Service bears the burden of proof to demonstrate that its actions will not likely jeopardize listed species. The increasing emphasis on sustaining wildlife and fish conflicts with the older emphasis on producing timber and underlies the Forest Service's inability to achieve the goals and objectives for timber production set forth in many of the first forest plans. In addition, this attention to sustaining wildlife and fish will likely constrain future uses of the national forests, such as recreation. The demand for recreation is expected to grow and may increasingly conflict with both sustaining wildlife and fish and producing timber on Forest Service lands. While the agency continues to increase its emphasis on sustaining wildlife and fish, the Congress has never explicitly accepted this shift in emphasis or acknowledged its effects on the availability of other uses on national forests. Disagreement over the Forest Service's priorities, both inside and outside the agency, has not only hampered efforts to improve the efficiency and effectiveness of its decision-making but also inhibited it in establishing the goals and performance measures needed to ensure its accountability. If agreement is to be reached on efforts to improve the Forest Service's decision-making and if the agency is to be held accountable for its expenditures and performance, the Forest Service will need to consult with the Congress on its strategic long-term goals and desired outcome measures, as the Government Performance and Results Act requires. Such a consultation would create an opportunity for the Forest Service to gain a better understanding of which uses it is to emphasize under its broad multiple-use and sustained-yield mandate and how it is to resolve conflicts or make choices among competing uses on its lands. In summary, Mr. Chairman, the Forest Service's decision-making process is broken and in need of repair. While much can be done within the current statutory framework to improve the efficiency and effectiveness of the process, strong leadership, both throughout the Forest Service and within the Council on Environmental Quality, will be required. Moreover, sustained oversight by the Congress will also be important. Differences among the requirements of planning and environmental laws also need to be addressed. However, at a June 1996 hearing at which both you and we testified, you stressed that "form must follow function" and that the immediate priority is to clarify the Forest Service's functions. We agreed with you then, and we agree with you now. Clarifying priorities within the Forest Service's multiple-use and sustained-yield mission should provide the agency with a better understanding of which uses it is to emphasize under its broad multiple-use and sustained-yield mandate and how it is to resolve conflicts or make choices among competing uses on its lands. Once this is done, the legislative changes that are needed to clarify or modify congressional intentions and expectations can be identified. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed the preliminary results of its work on the decisionmaking process used by the Forest Service in carrying out its mission, focusing on the underlying causes of inefficiencies and ineffectiveness in the Forest Service's decisionmaking process. GAO noted that: (1) its ongoing work has identified three underlying causes of inefficiency and ineffectiveness in the Forest Service's decisionmaking process; (2) first, the agency has not given adequate attention to improving its decisionmaking process, including improving its accountability for expenditures and performance; (3) as a result, long-standing deficiencies within its decisionmaking process that have contributed to increased costs and time and/or the inability to achieve planned objectives have not been corrected; (4) second, issues that transcend the agency's administrative boundaries and jurisdiction have not been adequately addressed; (5) in particular, the Forest Service and other federal agencies have had difficulty reconciling the administrative boundaries of national forests, parks, and other federal land management units with the boundaries of natural systems, such as watersheds and vegetative and animal communities, both in planning and in assessing the cumulative impact of federal and nonfederal activities on the environment; (6) third, the requirements of numerous planning and environmental laws, enacted during the 1960s and 1970s, have not been harmonized; (7) as a result, differences among the requirements of different laws and their differing judicial interpretations require some issues to be analyzed or reanalyzed at different stages in the different decisionmaking processes of the Forest Service and other federal agencies without any clear sequence leading to their timely resolution; (8) additional differences among the statutory requirements for protecting resources, such as endangered and threatened species, water, air, diverse plant and animal communities, and wilderness, have also sometimes been difficult to reconcile; (9) however, on the basis of its work to date, GAO believes that statutory changes to improve the efficiency and effectiveness of the Forest Service's decisionmaking process cannot be identified until agreement is first reached on which uses the agency is to emphasize under its broad multiple-use and sustained-yield mandate and how it is to resolve conflicts or make choices among competing uses on its lands; and (10) disagreement over which uses should receive priority, both inside and outside the agency, has also inhibited the Forest Service in establishing the goals and performance measures needed to ensure its accountability.

INS processed approximately 1.3 million citizenship applications between August 31, 1995, and September 30, 1996; 1,049,867 of the applicants were naturalized. During this period, INS initiated a number of efforts, under a program called "Citizenship USA," to accelerate and streamline its process for naturalizing citizens. In its December report, KPMG stated that while INS' efforts greatly increased the volume of applicants who were processed and approved, the potential for error also increased during this period. In an effort to determine if past naturalization efforts were adjudicated correctly, INS reviewed selected naturalization cases approved between August 31, 1995, and September 30, 1996. EOIR was to provide quality assurance assistance for INS' review. KPMG, under contract with JMD, monitored and validated INS' review. A primary naturalization criterion is that applicants must be able to establish good moral character to become naturalized citizens. Under certain circumstances, applicants who fail to reveal their criminal histories or who have been convicted of certain crimes, such as crimes involving moral turpitude (e.g., certain felonies and certain misdemeanors), cannot, by statute, establish good moral character. To judge if any citizenship applicants have failed to establish good moral character, INS, with assistance from the FBI, was to identify those applicants who have criminal histories. Previously, to identify these applicants, INS required that aliens submit fingerprint cards with their applications for naturalization. Each fingerprint card was to include a complete set of fingerprints and other identifying information, such as the alien's name and date of birth. INS was to send each fingerprint card to the FBI for it to determine if an alien had a criminal history record on file. Part of the naturalization process was to include an interview between an INS adjudicator and the applicant. The interview, which is done under oath, was to include a discussion about any criminal history of the applicant--that is, arrests or convictions--which should be available at the time of the interview. To judge if naturalization cases that were processed between August 31, 1995, and September 30, 1996, were adjudicated correctly and if the naturalization process had adequate controls, INS reviewed selected cases to judge, on the basis of the information in the files, if the naturalized citizens were of good moral character. INS, with the FBI's assistance, identified 80,856 criminal histories for applicants believed to be naturalized during this period with records that included felonies, misdemeanors, or INS administrative arrests or convictions. An aspect of this review was to identify aliens who may not have revealed their arrests or convictions. After reviewing criminal histories provided by the FBI, INS identified 17,257 applicants who were naturalized between August 31, 1995, and September 30, 1996, with criminal history records of arrests for felonies or other potentially disqualifying crimes. To conduct the review, INS requested the 17,257 case files from its field offices. Only 16,858 of the requested case files were reviewed because INS field units could not locate 399 case files. Accordingly, INS reviewed 16,858 criminal histories and corresponding case files in an attempt to judge if these aliens should have been naturalized. Under KPMG's monitoring, INS activities included (1) collecting the appropriate criminal history records from the FBI, (2) sorting and categorizing these records, (3) matching (and filing) these records with the appropriate INS case file for the naturalized alien, (4) assigning case files to review adjudicators, and (5) ensuring that the case files were consistently reviewed and contained a standardized worksheet summarizing the results of the adjudicator's review. Using a standardized worksheet, INS adjudicators reviewed the case files of these aliens and made independent judgments about the initial adjudication decisions. KPMG monitored the review adjudicators' work. In addition to the 399 alien case files that INS could not locate, another estimated 300 criminal history records were not available for review and therefore were not included with the 80,856 criminal histories. The 300 criminal history records apparently had been in transit between the FBI and INS and were received too late to be included in the INS review. KPMG reported that INS' preliminary assessment of the approximately 300 alien criminal history records was that most of these aliens had only old administrative arrests or were never naturalized. Furthermore, INS concluded that even if the case files for these aliens had been received in time for the review, very few of them would have been included in the INS review. To help ensure consistency among the INS review adjudicators in their decisionmaking, KPMG took a number of actions. These actions included the following: teaching the adjudicators how to complete the standardized worksheets in a consistent manner, checking the case files and standardized worksheets after the adjudicators' reviews were completed, requiring a total review of all daily work from any adjudicators for whom significant errors in completing the standardized worksheets were found, requiring senior adjudicators to verify a sample of other adjudicators' work each day, and identifying adjudicators' recurring errors and providing additional guidance to those adjudicators to avoid the recurrence of the errors. In addition to the above actions, KPMG activities included (1) examining and categorizing each criminal history record and verifying that the record was part of the review, (2) safeguarding and securing files, and (3) promoting consistency of review adjudicator decisions by having discussions with the adjudicators when KPMG felt these discussions were needed. The INS adjudicators reviewed the case files of the 16,858 naturalized aliens with criminal history records that included records of arrests for felonies or other potentially disqualifying crimes to judge if the initial adjudications were proper. The review results were based only on the data in the case files at the time of the adjudicators' reviews. In some cases, data may have been removed from or added to the INS case files after the initial decisions were made and before the files were reviewed. Also, although the adjudicators who made the initial decisions to approve the aliens' naturalization applications had the benefit of discussing the naturalization applications with the aliens, the review adjudicators did not meet with the applicants. As shown in table 1, in its review of these 16,858 case files, INS designated each case as either "proper," "requires further action," or "presumptively ineligible." According to INS officials, a case was designated as proper if the data in the case file supported the initial decision to naturalize the individual. A case was designated as requires further action if the data in the case file were insufficient to support a proper decision yet did not appear to indicate that the individual was barred from being naturalized. For example, some case files did not contain data about the dispositions of arrests that may have affected the individuals' eligibility for naturalization. Cases involving a failure to disclose an individual's criminal history were also classified as requires further action because the determination of whether the failure to reveal the criminal history affected the individual's eligibility for naturalization required a legal determination that went beyond the scope of the INS review. A case was designated as presumptively ineligible if the data in the case file or the criminal history appeared to indicate that the alien should have been barred from being naturalized. INS is reviewing, for potential revocation, the 369 cases of those aliens who were judged to be presumptively ineligible as well as the 5,954 cases requiring further action. EOIR independently reviewed case files of previously naturalized aliens to provide quality assurance that INS' decisions during the review were unbiased. EOIR reviewed a statistically valid sample of 557 alien case files from the universe of 16,858 cases involving aliens who had criminal history records. EOIR's review was done separately from the INS adjudicators' review. In conducting the review, EOIR teams of two staff each reviewed the alien case files at the Lincoln Service Center. The initial EOIR team received an orientation regarding the mechanics of properly completing the standardized worksheet. The lead EOIR staff member returned to the service center to provide the orientation to each subsequent team. The EOIR reviewers and the INS review adjudicators had the same decisions in 439 of the 557 cases (or 79 percent). Specifically, EOIR and INS independently judged that 288 cases were proper, 147 cases required further action, and 4 cases were presumptively ineligible (see table 2). The results for the 118 cases in which INS and EOIR reached different decisions were as follows: in 6 cases, INS judged that the aliens were presumptively ineligible, while EOIR judged that in 1 of these cases the initial adjudication decision was proper and in the other 5 cases further action was required by INS field units; in 40 cases, INS judged that further action was required by its field units, while EOIR judged that in 36 of these cases the initial adjudication decisions were proper and in the other 4 cases the aliens were presumptively ineligible; and in 72 cases, INS judged that the initial adjudication decisions were proper, while EOIR judged that in 68 of these cases further action was required by INS field units and in the other 4 cases the aliens were presumptively ineligible. Regarding the differences between the INS and EOIR decisions, KPMG reported that much of the naturalization process and the review of case file information required the reviewers to make subjective analyses. Therefore, according to KPMG, it was highly improbable that the reviewers would reach full agreement on all of the cases. KPMG stated that the major contributing factor to differences in INS' and EOIR's judgments was the interpretation of case file documentation regarding the applicants' acknowledgment of prior criminal histories. KPMG added that, in many cases, EOIR and INS reviewers had to make subjective decisions as to whether sufficient case file documentation existed to justify their decisions. KPMG concluded that a 79-percent agreement rate between EOIR and INS reviewers was the most that could be reasonably expected when considering that the two groups worked independently, had varied backgrounds, and had to make many subjective analyses. KPMG provided no basis or analysis in its December report to support its conclusion that a 79-percent agreement rate was reasonable. We recognize the subjective nature of the reviews by the INS and EOIR reviewers (i.e., the reviewers had to interpret the data in the case files). We agree with the need to separate the two groups of reviewers to help enhance EOIR's quality assurance role. However, consistent with accepted social science standards regarding training, it would have been helpful in reviewing and interpreting the results of their reviews if the two groups had received similar training. For example, before reviewing the case files, the INS review adjudicators received training on the standardized worksheet that they were to complete and received a training manual to help them complete the standardized worksheet. On the standardized worksheet, adjudicators were required to summarize the data in the aliens' case files (e.g., arrest and conviction information) and evaluate the naturalization decision to be made regarding the alien--that is, proper, presumptively ineligible, or further action is required. The initial EOIR team was provided with an orientation and the lead EOIR staff member was responsible for providing the orientation to the other teams. However, the EOIR staff did not receive the same training provided to the INS review adjudicators even though they had to review the same files and complete the same standardized worksheet. Thus, the lack of such training may have contributed to some of the disagreement on the case files. For the 21 percent of the cases where INS and EOIR reviewers disagreed, the results were divided regarding which reviewer was more likely to judge that a particular naturalization was proper. For example, in 68 cases that INS judged were proper, EOIR judged that further action was required; in 36 other cases, EOIR judged them to be proper, but INS judged that further action was required. Although in these examples more of the INS judgments were in agreement with the initial adjudication, we could not conclude that a statistically significant difference existed between the INS and EOIR decisions. The agencies' overall judgments produced generally similar conclusions about the percentage of the naturalization decisions that had been made properly. For example, INS and EOIR judged that 65 percent (360 divided by 557) and 58 percent (325 divided by 557) of the cases were proper, respectively, and both INS and EOIR judged that 2 percent (10 divided by 557 and 12 divided by 557, respectively) of the cases were presumptively ineligible. As previously discussed, INS is reviewing the 6,323 cases--that is, the 5,954 cases that INS judged as requiring further action and the 369 cases that INS judged the aliens to be presumptively ineligible--for potential revocation. However, INS initially did not plan any additional action regarding the 72 cases in which EOIR disagreed with INS' judgment that the initial INS adjudicators' decisions were proper, which left unresolved questions about the soundness of INS' decisions in these cases. According to the INS attorney involved with the review of the 6,323 cases for potential revocation, INS did not know about the 72 cases. After we questioned what was being done with these cases, the attorney said that the 72 cases would be included with the 6,323 cases being reviewed. According to KPMG, JMD requested a list of the 72 cases, which KPMG provided on January 23, 1998. According to INS, it has located the 72 case files to be reviewed for potential revocation. In its December report, KPMG identified a number of conditions that may have had an effect on the accuracy and completeness of INS' review of its initial naturalization decisions. KPMG could not quantify the degree to which these conditions may have affected the ultimate decisions that the INS review adjudicators reached. These limiting factors included the following: The primary source of naturalization information came from an INS data system (Central Index System) that often has been found to be inaccurate. The differences in the INS and FBI information systems made it difficult to compare the INS records of naturalized citizens with the FBI criminal history records on aliens. INS was unable to locate 399 case files at the time of its review. The case file documentation varied significantly among INS offices; therefore, the case file documentation cannot be relied upon to definitively determine if the naturalization occurred. The INS review adjudicators' decisions may not be the same as the decisions they might have made in their home units for various reasons, such as multiple state penal codes with which the review adjudicators had little experience and criminal history records that had unclear descriptions of arrests and very often did not record the ultimate disposition of arrests. In our opinion, another limiting condition of the adjudicators' review was their need to totally rely on the information in the case files. Information may have been added to or removed from the case files after the initial adjudication was made and before KPMG took control of the files. INS reviewed the case files of 16,858 aliens with criminal history records who had been naturalized between August 31, 1995, and September 30, 1996. Subject to the limitations KPMG and we identified, INS judged that the case files of 6,323 aliens did not have sufficient information to determine if naturalization was proper or contained information that the aliens may have been improperly naturalized. INS is reviewing these cases for potential revocation. To provide quality assurance that INS' decisions during the review were unbiased, EOIR reviewed a statistically valid sample of 557 alien case files from the universe of 16,858 aliens. Our analysis showed that EOIR's and INS' overall judgments produced generally similar conclusions about the results--that is, the proportion of naturalization cases found to be proper, to require further action, and to be presumptively ineligible. However, for 72 of the cases that INS review adjudicators had judged were properly naturalized, EOIR staff judged that further action was required to decide whether the initial adjudications were proper or the aliens were presumptively ineligible. At the time of our review, INS initially was not planning any further action to judge if the naturalization decisions for the 72 cases were appropriate, thus leaving unresolved questions about the soundness of INS' decisions in these cases. After we discussed the 72 cases with an INS attorney involved with reviewing the cases for potential revocation, he said that these cases are being reviewed with the other 6,323 cases. The overall approach KPMG employed to monitor INS' judgments followed accepted social science standards. The standards KPMG used included (1) establishing procedures to ensure the appropriate collection and review of FBI criminal history records and the review of related alien case files, (2) promoting consistency in the judgments of INS adjudicators by providing training and using a standardized worksheet, and (3) identifying recurring adjudicator errors so that corrective action could be taken. In addition, KPMG's report disclosed limitations in the study procedures followed and discussed conditions that may have affected the accuracy and completeness of INS' review. KPMG concluded that the 79-percent agreement rate between INS and EOIR reviewers was the most that could be expected. Although KPMG did not disclose its basis for this conclusion, it seems reasonable to us that providing the EOIR staff with training similar to that provided to INS' review adjudicators might have helped to reduce any differences in how the two groups reached their decisions. On February 19, 1998, we met with officials from JMD, INS, EOIR, and KPMG who represented those organizations responsible for the data discussed in our report and provided the views of those organizations. The officials represented the Director of the Management and Planning Staff, JMD; the Director, EOIR; the Commissioner, INS; and the Principal, KPMG. These officials agreed with our draft report, including its conclusions, and provided clarifying suggestions, which we included in this final report where appropriate. Our draft report contained a recommendation that the Commissioner of INS ensure that its Office of General Counsel follow through with its plans to analyze the 72 cases along with the other 6,323 cases that INS is reviewing for potential revocation. During our discussion with the officials, they said that INS is now taking action to review these 72 case files. Accordingly, we deleted the recommendation from this report. We are providing copies of this report to the Attorney General; the Commissioner, INS; the Director, EOIR; the Director, Management and Planning Staff, JMD; the Director, Office of Management and Budget; KPMG; and other interested parties. Copies will also be made available to others upon request. Major contributors to this report were James M. Blume, Assistant Director; Barry Jay Seltser, Assistant Director; James M. Fields, Senior Social Science Analyst; Ann H. Finley, Senior Attorney; Michael H. Little, Communications Analyst; and Charlotte A. Moore, Communications Analyst. If you need any additional information or have any questions, please contact me on (202) 512-8777. Norman J. Rabkin Director, Administration of Justice Issues The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO reported on the Immigration and Naturalization Service's (INS) review of its case files of aliens who were naturalized between August 31, 1995 and September 30, 1996, and who the Federal Bureau of Investigation (FBI) had identified as having criminal history records, focusing on the: (1) results of the INS and Executive Office for Immigration Review's (EOIR) case reviews; and (2) approach used by KPMG Peat Marwick LLP to monitor INS' efforts to identify improperly naturalized aliens. GAO noted that: (1) after receiving criminal history records from the FBI, INS reviewed to case files of 16,858 aliens with records that included a felony arrest or conviction of a serious crime who were naturalized between August 31, 1995, and September 30, 1996; (2) INS reviewed these criminal history records and its case files in an attempt to judge if these aliens should have been naturalized; (3) in its review of these 16,858 case files, INS designated each case as either proper, requires further action, or presumptively ineligible; (4) INS designated 10,535 cases as proper, 5,954 cases as requires further action, and 369 cases as presumptively ineligible; (5) to provide quality assurance that INS' decisions during the review were unbiased, EOIR reviewed a statistically valid sample of 557 alien cases from the universe of 16,858 aliens; (6) EOIR and INS reached the same decisions in 439 (or 79 percent) of the 557 cases; (7) although there was a 21-percent disagreement rate between the INS and EOIR reviewers, GAO could not conclude that a statistically significant difference existed between the INS and EOIR decisions; (8) INS is reviewing for potential revocation the 6,323 cases that its adjudicators judged as requiring further action or presumptively ineligible; (9) although INS initially did not plan to review the 72 cases that EOIR's review indicated may also have involved improper naturalization decisions, an attorney involved in reviewing the 6,323 cases said that these 72 cases are being reviewed with the other cases; (10) in carrying out its monitoring responsibilities, KPMG used accepted social science standards; (11) the KPMG report: (a) established procedures to ensure the appropriate collection and review of FBI criminal history records and the review of related alien case files; (b) promoted consistency in the judgments of INS adjudicators by providing training and having the adjudicators use a standardized worksheet, and (c) identified recurring adjudicator errors so that corrective action could be taken; and (12) KPMG's report also: (a) disclosed limitations in the study procedures followed; and (b) discussed conditions that may have affected the accuracy and completeness of INS' review.

Mr. Chairman and Members of the Subcommittee: We welcome this opportunity to appear before you today to discuss three areas of concern raised by the Committee last summer in its fiscal year 1996 appropriations report on the Bureau of Alcohol, Tobacco and Firearms (ATF). Those concerns involved ATF's (1) use of force, (2) effect on the number of licensed firearms dealers, and (3) compliance with legislative restrictions on maintaining certain firearms licensee data. Today, we are releasing reports that address the first two concerns--use of force and licensing of firearms dealers. With respect to the third concern, data restrictions, our work is ongoing. As agreed, therefore, we will summarize our findings related to one data system--ATF's system for maintaining records of firearms licensees who have gone out of business. With regard to the use-of-force issue, you asked us to (1) identify and describe ATF's policies for the use of deadly force, (2) determine how ATF conveys its policies to agents, (3) determine the reasons for and the extent to which ATF uses dynamic entry and the equipment used to accomplish these entries, and (4) determine whether ATF has complied with its procedures for investigating shooting and alleged excessive force incidents. Moreover, you asked us to compare these issues with the way that the Department of Justice's Drug Enforcement Administration (DEA) and Federal Bureau of Investigation (FBI) address them. To place ATF's use-of-force incidents in perspective, from fiscal years 1990 through 1995, ATF, on average, arrested about 8,000 suspects but was involved in fewer than 10 reported shooting or alleged excessive force incidents annually. In October 1995, the Department of the Treasury and Justice adopted deadly force policies for their component agencies that are uniform except for certain agency mission-specific provisions. Both policies provide that officers may use deadly force only when the officer has a reasonable belief that the subject of such force poses an imminent danger of death or serious physical injury to the officer or another person. the new policy. The 1988 ATF and 1995 Treasury policies were consistent in that both policies generally authorized the use of such force only when the law enforcement officer reasonably believed or perceived that there was an imminent threat or danger of death or serious physical injury to the officer or another person. The two distinctions were that (1) the 1995 Treasury policy refers to the use of "deadly force," while the 1988 ATF policy referred more specifically only to the use of a "firearm" and (2) the 1995 Treasury policy allows for the use of deadly force only when the law enforcement officer has a "reasonable belief" that there is an imminent danger of death or serious physical injury, while the 1988 ATF policy allowed for the use of such force when the agent "perceives" such a threat. Additional discussion regarding these policies and distinctions, as well as those discussed below, is provided in chapter 2 (pp. 34 to 36) of our Use-of-Force report. In addition, the prior ATF policy was, with three distinctions, consistent with prior DEA and FBI policies. The prior ATF policy was consistent with prior DEA and FBI policies in that they generally authorized the use of deadly force only when the agents reasonably believed or perceived that there was a threat or danger of death or serious bodily injury to the agent or another person. The three distinctions were that (1) only ATF's policy provided the additional restriction that the threat of death or serious bodily harm be "imminent"; (2) the ATF and DEA policies referred to the shooting of "firearms," while the FBI policy used the term "deadly force"; and (3) the ATF policy used the term "perceives," while the DEA and FBI used the terms "reasonably believes" and "reason to believe," respectively. ATF conveys its deadly force policies to new agents through training. Our discussions with training officials, reviews of training materials and policies, and observations showed that the training provided new ATF agents to introduce them to the deadly force policies was consistent with the Treasury/ATF deadly force policies, and the types of training provided were consistent with the training provided to new DEA and FBI agents. from a law enforcement officer to one where a subject assaults an officer with the potential for serious bodily harm or death. The model also presents five corresponding levels of force that would be appropriate to respond to the subject's level of threat. Those responses range from verbal commands when the threat is low to deadly force when the threat is high. Emphasis is placed on resolving situations with the proper level of force while recognizing that situations can escalate and de-escalate from one level to another. Once training is completed, ATF requires that the use-of-force policies are to be reiterated to agents throughout their careers at quarterly firearms requalifications and during tactical operations briefings. DEA and FBI officials said that their deadly force policies also are to be reiterated at firearms requalifications. Dynamic entry, which relies on speed and surprise and may involve forced entry, is one of several tactical procedures used by ATF to execute search and arrest warrants. Dynamic entry was a principal tactical procedure used by ATF, DEA, and FBI when serving high-risk warrants--those where ATF believes that suspects pose a threat of violence--and entry to premises was required. ATF statistics on suspects arrested from firearms investigations during fiscal years 1990 through 1995 showed that 46 percent had previous felony convictions, 24 percent had a history of violence, and 18 percent were armed at arrest. All ATF case agents, including those assigned to special weapons and tactics units, known as Special Response Teams (SRT), are to be trained in the dynamic entry technique. From fiscal years 1993 through 1995, ATF conducted 35,949 investigations and arrested 22,894 suspects. During this same period, SRTs were deployed 523 times, and SRT members were involved in 3 intentional shooting incidents, 1 of which--the Waco operation--resulted in fatalities. We reviewed the available documentation for all 157 SRT deployments for fiscal year 1995 and found that the dynamic entry technique was used almost half the time and was the predominant technique used when entry to a building was required. In none of the 1995 SRT dynamic entries did ATF agents fire their weapons at suspects. vests. In addition to the standard equipment available, SRTs have access to additional firearms, such as bolt-action rifles, and specialized tactical equipment, such as diversionary devices. Equipment used by SRTs is generally comparable to that used by DEA and FBI agents during similar operations. ATF's procedures for reporting, investigating, and reviewing shooting and excessive force incidents, as revised in October 1994, are consistent with guidelines and/or standards recommended by the International Association of Chiefs of Police, the President's Council on Integrity and Efficiency, and the Commission on Accreditation for Law Enforcement Agencies. For example, agents are required to immediately report shooting incidents to their supervisors, incidents are to be investigated by an independent unit, and certain reports are to be reviewed by a review board on the basis of the nature and seriousness of the incident. Overall, DEA's and FBI's procedures for reporting, investigating, and reviewing shooting incidents are comparable to ATF's. Distinctions in the procedures include (1) DEA and FBI delegate some investigations to their field divisions but ATF does not and (2) DEA's and FBI's review boards include representatives from Justice--ATF's review board does not include representatives from Treasury. Although ATF's excessive force procedures are comparable to DEA's, with one distinction relating again to delegation, they are distinct from those employed by FBI. ATF is to investigate allegations of excessive force first and--if warranted--refer them to Justice for possible criminal investigation. In contrast, FBI is to refer all allegations of excessive force to Justice for possible criminal investigation before investigating the allegations itself. had been reviewed by a designated headquarters unit. Our review also showed that ATF's investigations of 38 reported shootings involving ATF agents firing their weapons at suspects found each to be justified and within the scope of its use-of-force policy. In addition, ATF's investigations found that 18 of 25 reported excessive force allegations in three misconduct categories were unsubstantiated. Four investigations found evidence of some agent misconduct, two investigations were ongoing at the time of our review, and one was closed without action because ATF determined that there was no need for further review. Agents found to have engaged in misconduct received written reprimands and/or suspensions. Regarding recent declines in the number of firearms dealers, you asked us to (1) determine the extent and nature of the declines; (2) determine what factors contributed to the declines, including whether ATF had a policy to reduce the number of dealers; and (3) obtain the views of pertinent organizations on the advantages and disadvantages of reducing the number of dealers. Since reaching a high point in April 1993, the number of firearms dealerssharply declined by about 35 percent, from about 260,700 to about 168,400 dealers as of September 30, 1995--the lowest number since fiscal year 1980. This decline occurred nationwide and ranged from 23 percent in Montana to 45 percent in Hawaii. To provide a context for interpreting the recent decline, appendix II shows the number of firearms dealers in fiscal years 1975 through 1995. licensees when compared to previous years. Also, a large number of licensees voluntarily surrendered their licenses. Appendix III provides detailed data for fiscal years 1975 through 1995 on application and license activity for all categories of licensees. Our review showed that various factors collectively contributed to the decline in the number of dealers. First, in January 1993, ATF initiated a National Firearms Program, which consisted of several regulatory enforcement strategies, including a strategy to closely scrutinize applicants for federal firearms dealer licenses and the operations of licensees to ensure strict compliance with the Gun Control Act of 1968, as amended. Under this program, the number of ATF full field inspections of firearms dealers and licensees increased. According to ATF, several factors led to this increased enforcement strategy. These factors included rising violence associated with the illegal use and sale of firearms, national media attention on the ease of obtaining a firearms dealer license, and ATF data that indicated that many licensees may not have been engaged in a firearms business. As a result, the number of ATF full field inspections of all applicants for federal firearms licenses and the operations of all such licensees increased from about 19,900 in fiscal year 1992 to a high of about 27,000 in fiscal year 1993--the period during which the National Firearms Program was initiated. Furthermore, from 1993 to 1995, the number of ATF inspections generally averaged about 9 percent of the total licensees, compared to 7 percent and lower before fiscal year 1993. As a result of its increased inspections, according to ATF, about 7,600 firearms dealer licensees voluntarily surrendered their licenses in fiscal years 1994 and 1995, the only 2 years for which ATF collected such data. Under ATF's National Firearms Program, when an inspection showed that a dealer was not "engaged in a firearms business" at the location shown on the license, ATF inspectors were to advise the dealer to voluntarily surrender the license before implementing a formal revocation action. In addition, ATF used telephone interviews, called preliminary inspections, in fiscal years 1993 through 1995 as a means of scrutinizing federal firearms dealer applicants. According to ATF, a substantial portion of the approximately 2,500 applications abandoned and 7,200 applications withdrawn by applicants during fiscal year 1993 was directly attributable to ATF's preliminary inspections. A second factor contributing to the declines was an August 1993 memorandum from the President directing Treasury and ATF to take actions to ensure compliance with federal firearms license requirements. The President pointed out that there were over 287,000 federal firearms licensees (all categories), many of which he stated probably should not have been licensed because they were not engaged in a legitimate firearms business. A third contributing factor was the Federal Firearms License Reform Act of 1993, passed by Congress in late November 1993. This act increased the licensing fees for obtaining and renewing a federal firearms dealer license. A fourth contributing factor was ATF's revisions to the licensing application process that were done in late 1993 and early 1994 in response to the President's August 1993 memorandum. ATF significantly revised the application form by adding a number of questions and requirements for supporting information to help it determine whether applicants intended to engage in the firearms business. For example, ATF required applicants to (1) submit fingerprints and photographs of themselves, (2) furnish a diagram of the business premises where their firearms inventories were located, and (3) provide a description of their security system for safeguarding firearms inventories. In July 1995, ATF reduced the number of questions and amount of supporting documents required. requiring applicants for licenses to certify that their firearms business would comply with state and local laws. Finally, along with federal laws and administration actions contributing to the decline, the enforcement of state and local laws may have contributed to the reduction in the number of firearms dealers. These include licensing, taxing, and other business-related laws. Although ATF intensified its enforcement efforts, we found no evidence from our review of ATF documents and interviews with numerous ATF officials that ATF had a policy or sought to reduce the number of licensed dealers by some targeted number. Instead, we found that ATF's strategy since 1993 had been to closely scrutinize firearms dealer applicants and licensees to ensure strict compliance with the Gun Control Act. While ATF had no policy to reduce the number of dealers to a targeted number, it recognized that its strategy of increased enforcement, along with the legislative actions, would likely result in a reduction in the number of dealers. We contacted officials from seven organizations to obtain comments on the advantages and disadvantages of reducing the number of licensed firearms dealers. Appendix IV contains the names and descriptions of the organizations, which represented the firearms industry, firearms consumers, law enforcement, and gun control interests. The officials from the seven organizations provided us with a variety of views on the advantages and disadvantages of reducing the number of firearms dealers. Their views generally concerned the effect that declines in the number of firearms dealers may have on crime, regulatory enforcement, and economics. Their views ranged from those who believed that by reducing the number of dealers there could be less crime and better monitoring of dealers to those who feared that dealer decreases would curb competition, raise prices, and limit the lawful availability of firearms. Along with these views, the officials from the seven organizations provided their views on the reasons for the declines in the number of firearms dealers, which confirmed the results of our analysis regarding factors contributing to the declines. licensee data. For these hearings, we agreed to focus on ATF's Out-of-Business Records System and its role in the firearms tracing process. Specifically, our objectives were to (1) describe ATF's overall firearms tracing process and, specifically, the Out-of-Business Records System and its role in the process; (2) determine the number and results of ATF's firearms traces and the number of out-of-business records processed and used; and (3) determine whether the Out-of-Business Records System complies with legislative data restrictions. We also agreed to assess information on the Out-of-Business Records System that ATF supplied to one Subcommittee member. Detailed results and the scope and methodology of our review pertaining to ATF's Out-of-Business Records System are included in appendix V. The Gun Control Act requires federal firearms licensees to maintain records of firearms transactions and make these records available to ATF under certain circumstances. Through the use of these records, ATF provides criminal firearms tracing services to law enforcement agencies. To perform traces, ATF needs to know the manufacturer and serial number of the gun. ATF's National Tracing Center (NTC) traces the ownership of firearms by using documentation, such as out-of-business licensee records, which are maintained in ATF's data systems, and/or by contacting manufacturers, importers, wholesalers, and retailers (i.e., firearms dealers). NTC's objective is to identify the last known purchaser of the firearm. NTC considers a trace completed when it traces the firearm to a retail firearms licensee or purchaser or when it cannot identify the purchaser. From fiscal years 1992 through 1995, ATF received a total of about 263,000 trace requests. During this period, the number of trace requests ATF completed more than doubled, from about 43,000 in fiscal year 1992 to about 86,200 in fiscal year 1995. ATF completed a total of about 243,600 trace requests during this 4-year period. In about 41 percent of the completed trace requests, ATF identified a retail firearms licensee or purchaser of the traced firearm. regulations requiring firearms licensees that permanently discontinued their businesses to forward their records to ATF within 30 days following the discontinuance. The Firearms Owners' Protection Act of 1986 codified this reporting requirement. Accordingly, since the enactment of the Gun Control Act, ATF has maintained the out-of-business records at a central location, which is currently at NTC in Falling Waters, West Virginia. Before fiscal year 1991, ATF maintained these records in hard copy. Performing traces by manually searching these copies was very time consuming and labor intensive. ATF also had storage space problems. In 1991, ATF began a major project to microfilm these records and destroy the originals. This system still resulted in time-consuming traces. In fiscal year 1992, using a minicomputer ATF created a computerized index of the microfilm records. The index contained information, including the firearm's serial number and the firearms licensee number, to tell the tracing staff which microfilm cartridge to search and where on the cartridge the record was located. The indexed information that is captured by the minicomputer is then stored on a mainframe computer's database to allow searches of the indexed information. Information, such as the firearm purchaser's name or other identifying information, remains stored on the microfilm and is not computerized. ATF officials said all traces now begin with a query of the Out-of-Business Records System. During fiscal years 1992 through 1995, ATF received records from about 68,700 firearms licensees that went out of business. During this time, the number of licensees that went out of business more than doubled, from about 34,700 in 1992 to about 75,600 in 1995, and the percent of licensees that sent in their records increased by about three-fourths, from about 25 percent to about 43 percent. Also, during this period, ATF officials estimated that ATF microfilmed about 47 million documents contained in about 20,000 boxes. In addition, the officials estimated that ATF used the out-of-business licensees' records to help complete about 42 percent of all completed trace requests during this period. 18 U.S.C. 926(a), prohibits ATF from issuing any rule or regulation, after the date of that act, requiring that (1) firearms licensee records (or any portion thereof) be recorded at or transferred to a federal, state, or local government facility or (2) any system of registration of firearms, firearms owners, or firearms transactions or dispositions be established. In a March 1995 letter to one Subcommittee member following hearings on Treasury's fiscal year 1996 budget request, ATF described its maintenance and use of the out-of-business dealers' records and explained that it believes these records are handled in compliance with the law.Specifically, ATF concluded that the storage and retrieval systems used for these records had been designed to comply with the statutory restriction relating to the establishment of a registration system for firearms, firearms owners, or firearms transactions or dispositions. We concur with this conclusion. Our detailed legal analysis is contained in appendix V. Furthermore, with regard to the operation of the Out-of-Business Records System, our review of ATF's system documentation and discussions with ATF officials, along with our observation of the out-of-business records process at NTC, basically confirmed that ATF was operating the system in a manner consistent with the way it was designed by ATF and described in Treasury's March 1995 letter. We found no evidence that ATF captures and stores the firearms purchasers' names or other identifying information from the out-of-business records in an automated file. ATF provided oral comments on a draft of our testimony at a meeting with the ATF Director and other top-level officials on April 16, 1996. With regard to the use-of-force and firearms dealer licensee issues, the officials reiterated their previous comments on the respective reports, i.e., our presentation of the facts was accurate, thorough, and balanced. They also agreed with our findings and conclusions regarding the Out-of Business Records System and provided some technical comments, which we incorporated where appropriate. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions you or the other Subcommittee members might have.

GAO discussed the Bureau of Alcohol, Tobacco and Firearms (ATF), focusing on its: (1) policy on the use of force; (2) licensing of firearms dealers; and (3) compliance with legislative restrictions on maintaining certain firearms licensee data. GAO noted that: (1) between fiscal year (FY) 1990 and FY 1995, ATF arrested an annual average of 8,000 suspects and had fewer than 10 reported shootings or alleged incidents of excessive force; (2) ATF deadly force and training policies are consistent with Drug Enforcement Agency (DEA) and Federal Bureau of Investigation (FBI) policies; (3) when serving high-risk warrants, ATF, DEA, and FBI use dynamic entry, a tactic that may involve forced entry and is used to gain rapid entry to premises; (4) in none of the FY 1995 ATF Special Response Team deployments did agents fire their weapons and in about half, agents used dynamic entries; (5) ATF procedures for reporting, investigating, and reviewing shootings and alleged excessive force cases are consistent with DEA and FBI procedures; (6) ATF complied with its reporting, investigating, and reviewing procedures, determined that all ATF shootings were justified, determined that most excessive force allegations were unsubstantiated, and punished agents determined to have engaged in misconduct; (7) between 1993 and 1995, the number of licensed firearms dealers declined by about 35 percent due to increased ATF law enforcement and new licensing laws; and (8) the ATF firearms licensee data system complies with legislative restrictions.

Both the Clean Water and Drinking Water SRF programs authorize EPA to provide states and local communities with independent and sustainable sources of financial assistance, such as low- or no-interest loans, for projects that protect or improve water quality and that are needed to comply with federal drinking water regulations and protect public health. The Clean Water SRF program was established in 1987 under the Clean Water Act, which was enacted to protect surface waters, such as rivers, lakes, and coastal areas, and to maintain and restore the physical, chemical, and biological integrity of these waters. The Drinking Water SRF program was established in 1996 under the Safe Drinking Water Act, which was enacted to establish national enforceable standards for drinking water quality and to guarantee that water suppliers monitor water to ensure compliance with standards. The Recovery Act provided $6 billion for EPA's Clean Water and Drinking Water SRF programs. This amount represents a significant increase over the federal funds awarded to the base SRF programs in recent years. From fiscal years 2000 through 2009, annual appropriations averaged about $1.1 billion for the Clean Water SRF program and about $833 million for the Drinking Water SRF program. The Recovery Act funds represent a significant federal investment in the nation's water infrastructure at a time when, according to a 2010 Congressional Budget Office report, overall spending on infrastructure has been declining, and when reported problems with the quality and safety of water supplies have raised questions about the condition of the nation's infrastructure. In addition to increasing funds, the Recovery Act included some new requirements for the SRF programs. First, projects funded with Recovery Act SRF program funds had to be under contract--ready to proceed-- within 1 year of the act's passage, or by February 17, 2010. Second, states had to use at least 20 percent of these funds as a "green reserve" to provide assistance for green infrastructure projects, water- or energy- efficiency improvements, or other environmentally innovative activities. Third, states had to use at least 50 percent of Recovery Act funds to provide "additional subsidies" for projects in the form of principal forgiveness, grants, or negative interest loans (loans for which the rate of interest is such that the total payments over the life of the loans are less than the principal of the loans). Uses for these additional subsidies can include helping economically disadvantaged communities build water projects, although these uses are not a requirement of the act. Congress incorporated two of these requirements--green projects and additional subsidies--into the fiscal year 2010 and 2011 non-Recovery Act, or base, SRF program appropriations. In addition to program-specific provisions, water projects receiving Recovery Act funds had to meet the act's Buy American and Davis-Bacon provisions. The Recovery Act generally requires that all of the iron, steel, and manufactured goods used in the project be produced in the United States, subject to certain exceptions. Federal agencies could issue waivers for certain projects under specified conditions, for example, using American-made goods was inconsistent with the public interest or i f the cost of goods was unreasonable; the act limits the "unreasonable co st" exception to those instances when inclusion of American-made iron, steel, or other manufactured goods would increase the overall project cost by more than 25 percent. Furthermore, agencies do not need to use American-made goods if they were not sufficiently available or not of satisfactory quality. In addition, the Recovery Act applied Davis-Bacon provisions to all Recovery Act-funded projects, requiring contractors and subcontractors to pay all laborers and mechanics at least the prevailing wage rates in the local area where they were employed, as determined by Contractors were required to pay these workers the Secretary of Labor. weekly and submit weekly certified payroll records. To enhance transparency and accountability over Recovery Act funds, Congress and the administration built numerous provisions into the act, including a requirement that recipients of Recovery Act funding-- including state and local governments, private companies, educational institutions, nonprofits, and other private organizations--report quarterly on a number of measures. (Recipients, in turn, may award Recovery Act funds to subrecipients, which are nonfederal entities.) These reports are referred to as "recipient reports," which the recipients provide through one Web site, www.federalreporting.gov (Federalreporting.gov) for final publication through a second Web site, www.recovery.gov (Recovery.gov). Recipient reporting is overseen by the responsible federal agencies, such as EPA, in accordance with Recovery Act guidance provided by the Office of Management and Budget (OMB). Under this guidance, the federal agencies are required to conduct data quality checks of recipient data, and recipients can correct the data, before they are made available on Recovery.gov. Furthermore, additional corrections can be made during a continuous correction cycle after the data are released on Recovery.gov. A significant aspect of accountability for Recovery Act funds is oversight of spending. According to the federal standards of internal control, oversight should provide managers with current information on expenditures to detect problems and proactively manage risks associated with unusual spending patterns. In guidance issued in February 2009, OMB required each federal agency to develop a plan detailing the specific activities--including monitoring activities--that it would undertake to manage Recovery Act funds. EPA issued its first version of this plan in May 2009, as required, and updated this document as OMB issued new guidance. Nationwide, the 50 states have awarded and obligated the almost $6 billion in Clean Water and Drinking Water SRF program funds provided under the Recovery Act and reported using the majority of these funds for sewage treatment infrastructure and drinking water treatment and distribution systems, according to EPA data. In the nine states we reviewed, states used these funds to pay for infrastructure projects that help to address major water quality problems, although state officials said that in some cases, Recovery Act requirements changed their priorities or the projects selected for funding. The nine states also used their Recovery Act funding to help economically disadvantaged communities, although officials indicated that they continue to have difficulty helping these communities. As of March 30, 2011, states had awarded funds for contracts and obligated the $4 billion in Clean Water SRF program funds and $2 billion in Drinking Water SRF program funds provided under the Recovery Act. As we reported in May 2010, EPA indicated that all 50 states met the Recovery Act requirement to award Recovery Act funds to contracted projects by February 17, 2010, 1 year after the enactment of the Recovery Act. In the 2 years since the Recovery Act was passed, approximately 79 percent, or $3.1 billion, of the Clean Water SRF program funds and approximately 83 percent, or $1.7 billion, of the Drinking Water SRF program funds have been drawn down from the Treasury by states. Across the nation, the states have used the $6 billion in Recovery Act Clean and Drinking Water SRF program funds to support more than 3,000 water quality infrastructure projects. As shown in figure 1, the states used the majority of their Recovery Act Clean Water SRF program funds to pay for secondary and advanced treatment at wastewater treatment plants, as well as projects to prevent or mitigate sanitary sewer overflow. Wastewater treatment involves several processes, including primary treatment to remove suspended solids; secondary treatment to further remove contaminants using biological processes; and tertiary or advanced treatment to remove additional material in wastewater, such as nutrients or toxic chemicals. Sanitary sewer overflows can occur as a result of inclement weather and can pose significant public health and pollution problems, according to EPA. As shown in figure 2, the states used about half of their Recovery Act Drinking Water SRF program funds to pay for projects to transmit and distribute drinking water, including pumps and pipelines to deliver water to customers. States used about 40 percent of their funds for projects to treat and store drinking water. In addition to requiring that projects awarded funds be under contract within 1 year of the act's passage, the Recovery Act required that states use at least 20 percent of their funds for "green" projects. According to EPA data, all states met the 20-percent green requirement, with $1.1 billion of total Clean Water SRF program funds going to green projects and $544 million of total Drinking Water SRF program funds going to green projects. The goal of supporting green projects is to promote green infrastructure, energy or water efficiency, and innovative ways to sustainably manage water resources. Green infrastructure refers to a variety of technologies or practices--such as green roofs, porous pavement, and rain gardens--that use or mimic natural systems to enhance overall environmental quality. In addition to retaining rainfall and snowmelt and allowing them to seep into groundwater, these technologies can mitigate urban heat islands, and sequester carbon. Figure 3 shows the amount of Clean Water and Drinking Water SRF program funds that states awarded to green projects by type of project. Nationwide, states also met the Recovery Act requirement to provide at least 50 percent of the Clean Water and Drinking Water SRF program funds as additional subsidies in the form of principal forgiveness, negativ interest loans, or grants. Of the total Recovery Act funds awarded, 76 e percent of Clean Water SRF Recovery Act funds and 70 percent of Drinking Water SRF Recovery Act funds were distributed as additional subsidies. Figure 4 shows the total Clean Water and Drinking Water Recovery Act funds awarded by states as principal forgiveness, negative interest loans, or grants. The remaining funds will be provided as low- or no-interest loans that will recycle back into the programs as subrecipients repay their loans. In the nine states we reviewed, Recovery Act Clean and Drinking Water SRF funding has been used to address the major clean and drinking water problems in the state. The nine states we reviewed received a total of about $832 million in Recovery Act SRF program funds--about $579 million for their Clean Water SRF programs and about $253 million for their Drinking Water SRF programs. In total, these funds supported 419 clean and drinking water projects. Officials in the states we reviewed said, however, that Recovery Act priorities--particularly the need for projects to be under contract 1 year after the passage of the Recovery Act or green projects--either changed their priorities for ranking and funding projects or changed the projects they funded. To award SRF program funds, each of the nine states we reviewed used a system to score and prioritize water projects seeking funds to address water quality problems. To do this, states generally rank or group water infrastructure projects, submitted by local municipalities or utilities, using a system of points. The projects with the most points are considered the highest priority on the list of projects for funding and, in all but one state we reviewed, state officials used their ranking system to address major water problems. In most of the nine states we reviewed, compliance is a key aspect of their ranking system, allowing points to be awarded to infrastructure projects that help the states eliminate causes of noncompliance with federal or state water quality standards and permits. Officials in most of the nine states said that they generally obtain information on their water systems' compliance with federal and state water quality standards through discussions with their program compliance staff and from state databases. Officials in the nine states we reviewed told us that the Recovery Act requirements--the readiness of a project to proceed; the green project requirement; and, to a lesser degree, the Buy American and Davis-Bacon provisions--caused them to modify their ranking systems or otherwise modify the list of projects that receive Recovery Act funding. Readiness of a project to proceed. In the nine states, officials included readiness to proceed and other Recovery Act requirements in their ranking system and selected projects on the basis of that ranking system or said that they did not fund--or bypassed--top-ranked projects that were not ready to proceed to construction by February 17, 2010, 1 year after the passage of the Recovery Act. For example, Washington State's two top- ranked clean water projects did not receive Recovery Act SRF program funds because they could not meet the February 2010 deadline. The projects were to decommission septic systems and construct a wastewater treatment plant to reduce phosphorus discharges to the Spokane River. In Wyoming, many of the projects that were not ready to proceed were water treatment plants, which state officials said take longer to design and plan for construction. Although these higher-ranked projects did not receive Recovery Act funds, at least two states were able to fund these projects in other ways, such as through state grants or non-Recovery Act SRF program funds. Green project requirement. Three states listed green projects separately from other projects. For example, Washington State officials told us that they established a green projects category because they had anticipated that energy and water efficiency projects (green projects) would not score well under their ranking system, which focuses on water quality protection and improvements. Other states funded green projects ahead of higher- ranked projects. For example, Maryland bypassed many projects to fund the first green-ranked project on its list. Similarly, Nevada did not fund 11 higher-ranked projects and funded a lower-ranked drinking water project that had green components. Buy American and Davis-Bacon provisions. State officials identified a few projects that did not proceed because potential subrecipients either did not want to meet one or more Recovery Act requirements, such as the Buy American and Davis-Bacon provisions, or did not want to increase the cost of their projects. For example, local officials in Alabama withdrew their application for a drinking water project because the project was already contracted without Buy American and Davis-Bacon wage requirements, and an addendum to the contract to meet the regulations would have increased the project's cost. Similarly, officials in all nine states said that a few communities chose not to apply for or withdrew from the Recovery Act funding process to avoid paperwork or the additional costs associated with the act's requirements. For example, Wyoming officials said that potential subrecipients for three clean water projects refused funding, citing time constraints or difficulty meeting Buy American requirements. Although the Recovery Act did not require states to target Clean and Drinking Water SRF program funds to economically disadvantaged communities, six of the nine states that we reviewed distributed more than $123 million in clean water funds, and eight of the nine states distributed almost $78 million in drinking water funds, to these communities. This amount represents about 24 percent of the almost $832 million in Recovery Act funds that the states were awarded. As shown in table 2, a large majority of the funds provided to these communities were provided as additional subsidies--grants, principal forgiveness, and negative interest loans. According to officials in five states, they provided additional subsidies to economically disadvantaged communities because the communities would otherwise have had a difficult time funding projects. For example, officials in Nevada told us that clean and drinking water subsidies were directed to such communities because these communities not only have a difficult time funding projects, they also have some of the projects with the highest priority for addressing public health and environmental protection concerns. New Mexico officials told us that they directed additional drinking water subsidies to economically disadvantaged communities because these communities have historically lacked access to capital. In addition, officials in a few other states told us that small and economically disadvantaged communities often lack the financial means to pay back loans from the SRF programs or lack funds to pay for the upfront costs of planning and designing a project. Officials in at least two states also said that many small and economically disadvantaged communities even lack full-time staff to help manage the water infrastructure. Even with the additional subsidies available for projects, officials in a few states said that small and economically disadvantaged communities found it difficult to obtain Recovery Act funds. For example, Missouri officials told us that the Recovery Act deadline was the single most important factor hindering the ability of small and economically disadvantaged communities from receiving funding. New Mexico officials also told us that because small and economically disadvantaged communities typically do not have funds to plan and develop projects, few could meet the deadline and several projects that sought Recovery Act funds could not be awarded funding owing to the deadline. EPA's Office of Inspector General (OIG) noted an additional challenge for EPA related to economically disadvantaged communities. In April 2011, the OIG reported that EPA could not assess the overall impact of Recovery Act funds on economically disadvantaged communities because it did not collect data on the amount of SRF program funds distributed to economically disadvantaged communities nationwide. The OIG recommended that EPA establish a system that can target program funds to its objectives and priorities, such as funding economically disadvantaged communities. For the quarter ending December 2009 through the quarter ending in June 2010, the number of full-time equivalent jobs (FTE) paid for with Recovery Act SRF program funds increased each reporting quarter from about 6,000 to 15,000 quarterly FTEs for planning, designing, and building water projects, as shown in figure 5. As projects are completed and funds spent, the number of FTEs funded has declined to about 6,000 for the quarter ending March 2011. Following OMB guidance, states reported FTEs that included only the jobs directly paid for with Recovery Act funding, not the employment impact on suppliers of materials (indirect jobs) or on the local communities (induced jobs). In addition, state officials told us that, although funding varies from project to project, 10 percent to 80 percent of a project's funding is typically for materials such as cement for buildings and equipment such as turbines, pumps and centrifuges, and the remainder pays for labor or FTEs. To oversee Recovery Act projects and funds, EPA developed an oversight plan, as required by OMB. In response to our May 2010 bimonthly review and recommendation, EPA updated its guidance to include specific steps to monitor compliance with Recovery Act Clean and Drinking Water SRF program provisions. Our current work is showing that EPA and the states have made progress in implementing EPA's updated plan, which included details on frequency, content, and documentation needed for regional reviews of state programs and state reviews of projects. EPA officials said that regional staff are visiting all 50 states and reviewing their Clean and Drinking Water SRFs according to its plan. Furthermore, officials in the nine states we reviewed indicated that they have visited Recovery Act projects at least once during construction, as required in EPA's oversight plan. Our May 2010 report identified the challenge of maintaining accountability for Recovery Act funds and recommended improved monitoring of Recovery Act funds by EPA and the states. As we note above, our current work shows that EPA and the nine states we reviewed have made progress in addressing this challenge. Two challenges EPA and the states faced in spending Recovery Act SRF program funds may continue as requirements introduced with the Recovery Act are incorporated into the base programs. Specifically, in fiscal years 2010 and 2011, the Clean and Drinking Water SRF programs were required to include green projects and additional subsidization provisions. Encouraging green projects. The effort to support green projects was included in EPA's fiscal year 2010 and 2011 appropriations for the base Clean and Drinking Water SRF programs. As we discussed above, under the green requirement in the Recovery Act, in certain cases state officials said they had to choose between a green water project and a project that was otherwise ranked higher to address water quality problems. We found similar results in our May 2010 report, when officials in some of the 14 states we reviewed said that they gave preference to green projects for funding purposes, and sometimes ranked those projects above another project with higher public health benefits. In addition to competing priorities for funding, EPA's OIG found, in its February 2010 report, that a lack of clear guidance on the green requirement caused confusion and disagreements as to which projects were eligible for green funding. Officials in two of the nine states we reviewed noted that the goal of supporting green projects was not difficult to achieve because they had already identified green projects, but officials in four other states said that achieving the 20-percent green project goal was difficult to achieve, leading one official to suggest that green projects be encouraged without setting a fixed percentage of program funds. Providing subsidization. The fiscal years 2010 and 2011 appropriations for the Clean and Drinking Water SRF programs also continued the requirement to provide additional subsidies in the form of principal forgiveness, negative interest loans, or grants. The subsidy provisions reduced the funds available to use as a subsidy from a minimum of 50 percent of total Recovery Act funds to a minimum of 30 percent of base SRF program funds. As with the Recovery Act, the appropriations in fiscal year 2010 and 2011 do not require this additional subsidy to be targeted to any types of projects or communities with economic need, and as the recent EPA OIG report notes, there are no requirements for EPA or the states to track how these subsidies are used. The Clean and Drinking Water SRF programs were created to be a sustainable source of funding for communities' water and wastewater infrastructure through the continued repayment of loans to states. Officials in four of the nine states we reviewed identified a potential challenge in continuing to provide a specific amount of subsidies while sustaining the clean and drinking SRF programs as revolving funds. State officials pointed out that when monies are not repaid into the revolving fund, the reuse of funds is reduced and the purpose of the revolving SRF program changes from primarily providing loans for investments in water infrastructure to providing grants. Mr. Chairman, Ranking Member, and Members of the Committee, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Committee might have. For further information regarding this statement, please contact David C. Trimble at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this statement include Jillian Fasching, Susan Iott, Jonathan Kucskar, Carol Peterson, Beverly Ross, Carol Herrnstadt Shulman, Dawn Shorey, Kathryn Smith, and Kiki Theodoropoulos. 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 American Recovery and Reinvestment Act of 2009 (Recovery Act) included $4 billion for the Environmental Protection Agency's (EPA) Clean Water State Revolving Fund (SRF) and $2 billion for the agency's Drinking Water SRF. This testimony is based on GAO's ongoing review of clean and drinking water projects. It provides preliminary observations on (1) the status and use of Recovery Act SRF program funds nationwide and in nine selected states, (2) jobs funded by the Recovery Act SRF programs and federal and state efforts to oversee the programs, and (3) challenges, if any, that states have faced in implementing Recovery Act requirements. For this ongoing work, GAO is, among other things, obtaining and analyzing EPA nationwide data on the status of Recovery Act clean and drinking water funds and projects, as well as information from a nonprobability sample of nine states that it had not reviewed in previous bimonthly reports. These states represent all but one of EPA's 10 regions. GAO is also interviewing EPA and state officials about their experiences with the Recovery Act clean and drinking water funds Nationwide, the 50 states have awarded and obligated the almost $6 billion in Clean Water and Drinking Water SRF program funds provided under the Recovery Act and reported using the majority of these funds for sewage treatment infrastructure and drinking water treatment and distribution systems, according to EPA data. These funds supported more than 3,000 water quality infrastructure projects nationwide. Since the Recovery Act was passed, states have drawn down $3.1 billion (79 percent) of the Clean Water SRF program funds and $1.7 billion (83 percent) of the Drinking Water SRF program funds provided under the Recovery Act. States also met the act's requirements that at least (1) 20 percent of the funds provided be used to support "green" projects, such as those that promote energy or water efficiency, and (2) 50 percent of the funds provide additional subsidies in the form of loans for which the principal is forgiven, loans for which the repayment is less than the principal (negative interest loans), or grants. In the nine states GAO reviewed, Recovery Act funds have paid for 419 infrastructure projects that help to address major water quality problems, although state officials said that in some cases, Recovery Act requirements changed their priorities for ranking projects or the projects selected. For example, because some projects could not meet the act's requirement to have funds under contract by February 17, 2010, some states provided Recovery Act funds to lower-ranked projects. Some states provided funding to these priority projects in other ways, such as through state grants or non-Recovery Act SRF funds. In addition, although not required by the Recovery Act, the nine states used 24 percent of the funds they received to pay for projects in economically disadvantaged communities, the majority of which was provided as additional subsidies. States reported that the Recovery Act SRF programs funded an increasing amount of full-time equivalent (FTE) positions from the quarter ending December 2009 through the quarter ending June 2010, from 6,000 FTEs to 15,000 FTEs, declining to 6,000 FTEs for the quarter ending in March 2011 as projects were completed. EPA and the states are overseeing Recovery Act projects and funds using EPA's oversight plan, updated in June 2010 in response to recommendations GAO made to specify procedures for oversight. The fiscal year 2010 and 2011 appropriations for the SRF programs continue the green project and additional subsidy requirements. State officials GAO interviewed identified challenges in implementing these requirements for the Clean and Drinking Water SRF programs, including: (1) Encouraging green projects. Officials in some states said that the goal of supporting green projects is important but that the percent of funds specifically dedicated to green funds (20 percent) was difficult to achieve. (2) Providing subsidies. Officials in several of the nine states noted that when monies are not repaid into revolving funds to generate future revenue for these funds, the SRF program purpose changes from primarily providing loans for investments in water infrastructure to providing grants.

Consular officers issued about 6.2 million nonimmigrant visas in 1996--an increase of approximately 16 percent over the number issued in 1992. The total budget for consular relations activities has also increased significantly in recent years. The budget grew from about $259 million in fiscal year 1992 to an estimated $470 million in fiscal year 1998. The State Department's Bureau of Consular Affairs Program Plan for fiscal years 1998-99 (an annually updated planning document containing strategies for executing the Bureau's mission) notes that the greatest demand for visas is in advanced developing countries such as Brazil and South Korea, among others. Table 1 shows the numbers of nonimmigrant visas issued at the top five nonimmigrant visa-issuing posts in fiscal year 1996. Foreign visitors traveling to the United States are a significant source of revenue for U.S. businesses. According to the Department of Commerce's International Trade Administration Tourism Industries Office, foreign visitors spent close to $70 billion in the United States in 1996. The office's figures indicate that Brazilian visitors spent over $2.6 billion in the United States, or more than $2,900 per visit, during the same period. In order to safeguard U.S. borders and control the entry of foreign visitors into the country, U.S. immigration laws require foreign visitors from most countries to have a visa to enter the United States. However, the United States currently waives the requirement for visitor visas for citizens of 26 countries considered to pose little risk for immigration and security purposes. According to a consular official, Brazil does not currently qualify for visa waivers primarily because the refusal rate for Brazilian visa applications exceeds the allowable limit of less than 2.5 percent in each of the previous 2 years and less than a 2 percent average over the previous 2 years. The Department of State has primary responsibility abroad for administering U.S. immigration laws. Consular officers at overseas posts are responsible for providing expeditious visa processing for qualified applicants while preventing the entry of those that are a danger to U.S. security interests or are likely to remain in the United States illegally. State's Bureau of Consular Affairs develops policies and manages programs needed to administer and support visa-processing operations at overseas posts and has direct responsibility for U.S.-based consular personnel. State's geographic bureaus, which are organized along regional lines (such as the Bureau of Inter-American Affairs), have direct responsibility for the staffing and funding of overseas consular positions. The process for handling nonimmigrant visas varies among overseas posts. Among the methods used to serve visa applicants, posts (1) receive applicants on a "first-come, first-served" basis, (2) operate appointment systems to schedule specific dates and times for applying, (3) employ travel agencies to act as intermediaries between applicants and the consulate, and (4) use "drop boxes" for collecting certain types of visa applications. Individual posts may use one or various combinations of these approaches. In addition to submitting a written application and supporting documentation, an applicant must be interviewed by a consular officer, unless the interview is waived. Consular officers may request additional documentation to validate the applicant's intention to return home or confirm that sufficient financial resources are available for the trip. Consular officers are also responsible for deterring the entry of aliens who may have links to terrorism, narcotics trafficking, or organized crime. Nine of the 26 consulates we reviewed, including the one in Sao Paulo, experienced backlogs in processing nonimmigrant visas to the United States in fiscal year 1997. The backlogs ranged from 8 to 52 days and occurred primarily during peak travel seasons for tourists. State does not systematically compile information on visa processing turnaround times at overseas posts nor has it established a time standard for processing visas. However, the Deputy Assistant Secretary for Visa Services indicated that a maximum wait of 1 week (5 business days) for an appointment to apply for a nonimmigrant visa is desirable. She also told us that an additional 1 or 2 days are generally needed to process the visa after the appointment occurs. Thus, we concluded that a maximum desirable total turnaround time for appointment system cases would generally be 7 business days. Since the total turnaround times for other processing methods are generally shorter than for appointment systems, we used 7 business days as a cutoff point beyond which we considered a backlog to exist for all processing methods. Although consulates often manage to process nonimmigrant visa applications within 7 business days during periods of low demand, turnaround times lengthen significantly at some consulates when demand is high. Peak periods generally occur during the summer months or winter holiday season. Of the nine posts that had peak-season backlogs exceeding 7 business days, four had turnaround times that were less than 15 business days and five had turnaround times that were 15 business days or more. These figures represent the highest turnaround times that posts reported among the various application methods that they use. Table 2 lists the total turnaround times for processing visas during peak periods at the five posts that had backlogs that were 15 business days or more in fiscal year 1997. At the consulate in Sao Paulo, Brazil, turnaround times varied depending on the visa processing method involved. In fiscal year 1997, about 63 percent of the consulate's nonimmigrant visa applications were submitted through travel agents, and about 27 percent were handled through the consulate's appointment system. The remaining 10 percent were processed using other methods such as a "drop box." Visa applications submitted through travel agents were subject to a total turnaround period of 10 business days during periods of high demand and less than 5 business days during periods of low demand. Turnaround times for those who requested an appointment to apply for a visa reached as long as 20 days during busy periods--twice the length we noted in our 1992 report on visa-processing backlogs. In nonpeak periods, the turnaround time for those who requested appointments was 9 business days. For fiscal year 1997, approximately 86,000 applicants used the consulate's appointment system. Consulate officials told us that the turnaround time for applications received through the "drop-box" method is generally kept within 5 business days during both peak and nonpeak periods. State pointed out that, while the Sao Paulo consulate's turnaround times have increased since 1992, the volume of nonimmigrant visa applications processed in Sao Paulo has also increased from 150,088 in fiscal year 1992 to 319,341 in fiscal year 1997. State reported that the Sao Paulo consulate processed an average of 1,250 nonimmigrant visas per day in fiscal year 1997. During the same period, the number of consular section foreign service officer positions increased from four to seven. In 1995, the Sao Paulo consulate established an appointment system to alleviate long lines outside the consulate that were causing complaints from neighbors and negative reports in the local press. The consulate also began employing appointment delays as a disincentive to applying in person and to encourage applicants to apply for visas through the consulate's travel agency program--a technique that it considered to be more efficient. As part of this approach, the consulate initiated a practice of not scheduling any appointments on Wednesdays, so that consular officers could concentrate on processing travel agency cases that day. Sao Paulo consular officials told us that this approach had been successful in reducing the length of applicant lines, increasing the use of the consulate's travel agency program, and improving productivity. On the other hand, the total turnaround time increased for those applying for visas in person through the appointment system. According to the Consul General in Brasilia, the Sao Paulo consulate's appointment system and its practice of closing to the public on Wednesdays unfairly penalizes applicants that apply in person. He said that the consulate should develop an approach that enables it to provide high levels of service for all application methods. Officials in State's Bureau of Inter-American Affairs told us that the Brazil Desk received an average of one complaint per week from U.S. companies concerning difficulties that their Brazilian business associates were having in obtaining visas in Sao Paulo. The Consul General in Brasilia said that as many as 10 visa applicants from the Sao Paulo consular district underwent the inconvenience of traveling to and applying for visas in Brasilia each day rather than in Sao Paulo because they had encountered delays and other difficulties in Sao Paulo. He added that an additional unknown number travel to the consulate in Rio de Janeiro each day or simply elect not to travel to the United States at all. Representatives of the travel industry in Brazil told us that, while there have been substantial improvements in reducing visa backlogs and long lines at the Sao Paulo consulate in recent years, they still receive complaints about the length of time that it takes to obtain a U.S. visa in Sao Paulo. A representative of the American Chamber of Commerce in Brazil agreed that there had been improvements in recent years but said that the process remains particularly troublesome for Brazilian business executives who sometimes need to obtain visas on an emergency basis for unexpected business trips to the United States. Consular officers face a number of obstacles to providing expeditious service in processing visas. Inadequate consular staffing at overseas posts and other staffing-related issues were identified as barriers to timely processing of visas by the majority of posts that we reviewed. Other impediments to efficient processing include inadequate computer systems, equipment, and consular facilities. Increased attention devoted to preventing suspect applicants from entering the United States has also led to delays. Similar to what we reported in 1992, consular personnel cited staffing problems as some of the most persistent barriers to processing visas efficiently. Nineteen of the 26 consulates we reviewed reported staffing problems, such as staffing gaps due to transfers of foreign service officers during peak periods or inadequate permanent staffing positions. Of particular concern were staffing gaps that occurred during peak seasons. Since the summer months are among the busiest periods for processing nonimmigrant visas at many posts, consular sections should be operating at full capacity during these periods. However, according to consular officials, they often are not because State's annual personnel reassignments take place then. A consular official in Bogota told us that the lengthy wait for appointments there was due in large part to extended staffing gaps. Officials in the Bureau of Consular Affairs said that State's system of mass employee transfers during the summer months is intended to promote fairness in the assignment bidding process and convenience for officers with school-age children, even though it does not result in optimal staff coverage during peak periods. Some consulates reported that, even when all of their authorized positions are filled, staffing levels are inadequate, particularly at posts that have experienced significant increases in visa demand. Figure 1 depicts overseas foreign service officer staffing for visa services and nonimmigrant visa work load trends from fiscal years 1993 through 1996. According to a senior consular official, the hiring of junior officers--the primary source of consular staff support--has not kept pace with foreign service officer attrition over the last several years. This has resulted in staffing shortages in consular sections at many overseas posts. The Bureau of Consular Affairs Program Plan for fiscal years 1998-99 stated that the shortage of consular officers had seriously undermined efforts to meet the increasing demand for consular services. Another staffing issue that consular officials raised concerned State's process for allocating staff at overseas posts. The Bureau of Consular Affairs does not control assignments of consular positions at overseas posts; rather, State's geographic bureaus are in charge of these positions. Consular officials said that this arrangement causes delays in reallocating positions to correspond with shifting work loads at various posts. Such reallocations are particularly troublesome when they involve moving positions from one geographic bureau to another. For example, if a U.S. consulate in a Latin American country encountered a significant increase in consular work load while a consulate in East Asia experienced a corresponding decline, the Bureau of Consular Affairs would not have the authority to shift one or more consular positions from one consulate to the other. Rather, it would have to convince the Bureau of East Asian and Pacific Affairs to relinquish the positions and the associated funding, while persuading the Bureau of Inter-American Affairs to accept them. A senior consular official told us that the Bureau of Consular Affairs had recently proposed to the Under Secretary for Management that the Bureau be given greater control over the staffing and funding of overseas consular positions. The official said that the Under Secretary for Management is still considering the proposal. With regard to the adequacy of staffing in Sao Paulo in particular, consulate officials there told us that consular section staffing is insufficient to meet the high demand for nonimmigrant visas. The officials said that, due to transfers of foreign service officers and other factors, the unit had been staffed with a full contingent of authorized positions for only 6 months in the last 2 years. In addition, even when the section is fully staffed, the number of authorized positions is inadequate. At the time of our recent visit to Sao Paulo, the nonimmigrant visa section had seven foreign service officer positions, one of which was vacant. The unit also had 19 foreign national employee positions, including a receptionist, and 4 U.S. family member positions, 1 of which was vacant. Consular section officials said that, to reduce visa backlogs to within 7 working days, they would need two additional foreign service officers, five additional foreign national employees, and two additional U.S. family member employees. The Sao Paulo consular section sometimes employs additional U.S. family members to provide assistance on a temporary basis but has experienced problems securing such staff in time to optimize their help during peak periods. Consulate officials told us that the complexities of the various funding and hiring mechanisms for obtaining temporary staff make it difficult to quickly hire them. The officials added that the low salaries for family member staff also make it hard to attract applicants among the few eligible family members at the post. According to a senior consular official, there are no current plans to address staffing shortages specifically at the consulate in Sao Paulo. The official said that State has staffing shortages worldwide and that it plans to hire new foreign service officers to help deal with the shortages. Sao Paulo's permanent position staffing needs will be considered along with the needs of other posts as part of the normal resource allocation process. The official added that State has also taken measures to temporarily fill peak season staffing gaps in overseas consular sections. Consular officials pointed to inadequate computer and other equipment as further barriers to efficient visa processing. Fourteen of the 26 consulates we reviewed reported to us that they had such problems. One consulate noted that the vast majority of delays in processing visas were caused by computer equipment and systems failures. Another consulate reported in its "consular package" (an annual report to the Bureau of Consular Affairs on each post's consular operations) that frequent and prolonged breakdowns in the system for performing name checks on visa applicants had hindered visa processing during the peak summer season. Consular officials told us that there is a need for additional and better auxiliary equipment such as high-capacity fax machines and telephone answering machines. Inadequate physical facilities also impede efficient visa processing at some consulates --a problem noted in our 1992 report as well. Thirteen of the 26 consulates we reviewed identified poor work space or inadequate physical structures as a major impediment to efficient processing. For example, Sao Paulo consular officials said that inadequate space limited their options for dealing with increased demand for visas. To illustrate this problem, the consulate had been able to offer a relatively short turnaround time for former visa holders who dropped off their applications for renewal near the entrance to the consulate grounds; there, a foreign national employee provided information, determined whether the applicant qualified for this method, and checked the applications for completeness. However, there is insufficient physical space to expand the use of this method at this location. Consulate officials told us that they could explore the use of an offsite location for collecting "drop-box" applications. As a result of heightened concerns about terrorism and illegal immigration in recent years, the U.S. government launched a number of initiatives to strengthen U.S. border security. These efforts included financing new technology for providing consular officers with comprehensive information on persons who may represent a threat to U.S. security. Consular officials noted that, although the enhanced systems helped bolster border security, they sometimes resulted in increased visa-processing times. For example, name-check systems now identify many more applicants as potential suspects; therefore, consular officers must take additional time to review these cases in determining eligibility for visas. Achieving an appropriate balance between the competing objectives of facilitating the travel of eligible foreign nationals to the United States and preventing the travel of those considered ineligible poses a difficult challenge for consular officers. Consular officers told us that a renewed emphasis on holding them personally accountable for visa decisions on suspect applicants had led to greater cautiousness and an increase in the number of requests for security advisories from Washington. As a result, while same-day processing of visas used to be commonplace, consular officials told us that greater requirements related to border security had made same-day service more the exception than the rule. State has made a number of changes in an effort to improve its visa-processing operations in recent years, and some of these initiatives could help in overcoming barriers to timely visa issuance. It has devised methods for handling staffing problems and developed a model to better plan for future resource needs at consulates abroad. State has improved computer and telecommunications systems and has other equipment upgrades underway, some of which will help address visa-processing problems. In addition, State has undertaken an initiative to identify and implement better work load management practices for visa processing at overseas posts. However, State has yet to define and integrate time standards as part of its strategy to improve the processing of nonimmigrant visas. Establishing such standards could help in identifying visa-processing backlogs, better equipping State to determine the corrective measures and resources needed. According to a senior consular official, State plans to hire over 200 new foreign service officers in fiscal year 1998 to help solve staffing shortages created by gaps between hiring and attrition levels in recent years. State has also begun experimenting with a number of approaches to fill peak-season staffing gaps at overseas consular sections. For example, the Bureau of Consular Affairs recently established a cooperative program with American University, located in Washington, D.C., to hire and train university students to work in consular positions in Washington, thus allowing the consular personnel that hold these positions to temporarily fill summer staffing gaps overseas. The Bureau also recruits retired foreign service officers to fill overseas consular staffing gaps on a temporary basis and is developing a "consular fellows" pilot program to fill vacant entry-level consular positions. The fellows program involves hiring temporary employees with foreign language skills to serve as consular staff on a short-term basis. State has also expanded the use of temporary employment of U.S. foreign service family members at overseas posts in recent years. Family members often perform administrative and procedural tasks in support of consular officers. Officials at one post told us that extended staffing gaps and shortages had caused them to rely on family member employees to perform a wider range of duties than they had in the past. The officials said that doing so enabled the post to keep its nonimmigrant visa-processing turnaround time under 7 business days. State has developed a consular staffing model based on visa work load and related information that it plans to use to help determine adequate consular staffing and to help identify personnel from surplus areas that could be moved to understaffed ones. The current model does not include foreign national employees--an important element of overall consular staffing at overseas posts. Also, according to one consular official, the model may be based on outdated data that does not take into account the increased visa demand and other changes in some countries. State is refining and updating the model to address these limitations and to factor in the impact of other visa-processing improvement efforts. State made major investments in computer and telecommunications infrastructure in recent years and has other equipment upgrades under way for overseas posts that issue visas. For example, every visa-issuing post now has a machine-readable visa system and automated name-check capability. State has also begun installing second generation upgrades to the machine-readable visa system at posts. State plans to install the necessary hardware and software to run this upgraded system at 100 posts in fiscal year 1998 and to have the system in all visa-issuing posts by the end of fiscal year 1999. The equipment upgrades have resulted in significant improvements in some aspects of visa processing. For example, improvements in some backup systems for name checks now allow visa processing to continue when on-line connections with Washington are not operating. In the past, such disruptions resulted in significant delays in processing visas. More importantly, according to consular officials, the upgrades have resulted in better and more comprehensive information about applicants who might pose a security threat, thus contributing to higher quality decision-making with respect to visa applications. In an effort to identify and implement better work load management practices for visa processing, State established a Consular Workload Management Group in November 1996. Although the effort is still ongoing, the group has already identified a number of practices. Among them were the following: Recorded General Information. This system allows the applicant to get information about the application process without tying up staff resources. A 900-type telephone number, in which the user pays the cost of a call, can be established for this purpose. An Appointment System. An appointment system can reduce the applicant's waiting time in line and enable the post to control its work load by specifying the number of applicants who can be seen in a given day. Such a system allows an applicant to schedule an interview at a specific date and time. Prescreening. This procedure requires an employee to ask an applicant a few questions and to quickly determine whether the applicant is clearly eligible to receive a visa or whether the applicant must be interviewed by an officer. Noncashier Fee Collection. This process allows applicants to pay the machine-readable visa fee at a bank or other financial institution. The applicant then presents the fee payment receipt when processing the application, thus eliminating the need for a cashier at the post to handle the fee transaction. Travel Agency/Corporate Referral Program. This practice allows posts to designate selected travel agencies and large companies to perform some initial processing of nonimmigrant visa applicants who meet certain criteria. Agencies and companies are trained to ensure that applicants' documents are in order and are frequently asked to enter pertinent data on the application form. In some cases, agencies and companies forward information to the post electronically, usually via computer diskette. Other practices identified include public information campaigns urging applicants to apply well in advance of their intended travel dates and the use of color-coded boxes to simplify the return of passports on particular days. Some of the practices identified are easy to implement, such as color coding; others are more complex, such as establishing noncashier fee collection systems. The willingness and ability to implement these practices varies by post. According to consular officials, State is currently in the process of identifying posts that are already employing these practices. It is important to note that, while some of these practices can aid in better managing consular work loads, the use of such tools does not guarantee a reduction in visa-processing times. In some cases, these techniques may actually contribute to backlogs, depending on how they are managed. One of the most controversial tools in this respect is the appointment system. According to some consular officials, posts inevitably schedule fewer appointments per day than the number of applicants, causing backlogs and public relations problems. Consular management must deal with increased phone calls and requests for emergency processing when the wait for an appointment becomes unreasonably long. All nine of the surveyed posts that had peak-season backlogs in fiscal year 1997, including the consulate in Sao Paulo, used appointment systems. On the other hand, some high-volume posts that did not use appointment systems managed to keep the total turnaround time for processing visas under 7 business days, even in periods of very high demand. For example, in Rio de Janeiro, the total turnaround time for processing "walk-in" nonimmigrant visa applications was 2 days during peak and nonpeak seasons. The post in Mexico City issued visas the same day that applicants walked in, whether in peak or nonpeak seasons; however, a post official told us that applicants often have to wait for several hours in line. According to Deputy Assistant Secretary for Visa Services, State does not systematically compile information on visa processing turnaround times at overseas posts nor has it established formal timeliness standards for visa processing. State's consular guidance makes references to the importance of minimizing waiting time and return visits for visa applicants but does not specifically address total turnaround time. On the other hand, State has timeliness standards for issuing passports to U.S. citizens within 25 days after receiving the application. The usefulness of such standards in helping to manage for results is now widely recognized. Some consulates continue to experience backlogs in processing nonimmigrant visas. Although State has taken a number of actions to improve its visa-processing operations, it has not made a systematic effort to identify and address visa-processing backlogs on a global basis. We believe that State's improvement efforts need to be guided by formal timeliness standards for issuing nonimmigrant visas. Establishing such standards could assist in identifying backlogs, putting State in a better position to determine the resources and actions needed to correct them. Timeliness standards could also help State's efforts to implement better work load management practices and to improve long-range planning for staffing and other resource needs. To determine the appropriate level and mix of resources needed and to take full advantage of ongoing efforts to improve visa operations, we recommend that the Secretary of State develop timeliness standards for processing nonimmigrant visas. In its written comments on a draft of this report, State said that the report was a balanced and informative account of the problems faced by consular posts abroad. While State did not directly disagree with the report's recommendation that it develop timeliness standards for processing nonimmigrant visas, State indicated that setting and meeting such standards should be linked to the adequacy of resources. State also expressed concern that timeliness standards might be overemphasized to the detriment of border security goals. State said that imposing rigid standards could adversely affect consular officers' thoroughness in scrutinizing visa applicants. We agree that setting and meeting timeliness standards should be linked to the adequacy of resources. In fact, we believe that such standards could assist in identifying backlogs, and therefore put State in a better position to determine the level of resources needed to achieve desired levels of both service and security. They could also help State to better manage its resources. We recognize the importance of maintaining quality in the adjudication of visas and believe this element should be built into any timeliness standards or implementing regulations. We also note that some of State's overseas posts have already established their own timeliness standards for processing nonimmigrant visas and have managed to meet them, even though some of these posts are located in areas considered to be at high risk for visa fraud. We are sending copies of this report to the Secretary of State and interested congressional committees. We will also make copies available to others upon request. Please contact me at (202) 512-4128 if you or any of your staff have any questions concerning this report. The major contributors to this report are listed in appendix III.

Pursuant to a congressional request, GAO reviewed how Department of State consulates process visas for visitors (nonimmigrants) to the United States, focusing on the: (1) extent and nature of visa processing backlogs in Sao Paulo, Brazil, and at other consulates; (2) factors affecting consulates' ability to process nonimmigrant visas in a timely manner; and (3) activities planned or under way to improve nonimmigrant visa processing. GAO noted that: (1) visa processing backlogs are a problem for some consulates, including the one in Sao Paulo; (2) the visa backlogs at the consulates GAO reviewed varied widely, ranging from 8 to 52 days; (3) the longest delays occurred during peak travel periods such as the summer months and winter holiday season; (4) factors that affected consulates' ability to process nonimmigrant visas in a timely manner included inadequate consular staffing and other staffing-related issues as well as inadequate computer systems, facilities, and other equipment; (5) an increased emphasis on preventing the entry of illegal immigrants, terrorists, and other criminals also contributed to delays; (6) State has initiatives under way to address staffing problems, upgrade equipment, and identify and implement practices that could improve visa processing at overseas posts; and (7) however, it does not systematically gather data on visa processing turnaround times and has not yet set specific timeliness standards to help guide its improvement program.

Title XIX of the Social Security Act established Medicaid as a federal-state partnership that finances health care for low-income individuals, including children, families, the aged, and the disabled. Medicaid is an open-ended entitlement program and provided health coverage for an estimated 53.9 million individuals in 2010.federal requirements, each state administers and operates its Medicaid Within broad program in accordance with a state Medicaid plan, which must be approved by CMS. A state Medicaid plan details the populations that are served, the categories of services that are covered (such as inpatient hospital services, nursing facility services, and physician services), and the methods for calculating payments to providers. The state Medicaid plan also describes the supplemental payments established by the state and specifies which providers are eligible to receive supplemental payments and what categories of service are covered. Any changes a state wishes to make in its Medicaid plan, such as establishing new payments or changing methods for developing provider payment rates, must be submitted to CMS for review and approval as a state plan amendment. States may also receive approval from CMS for a waiver from certain Medicaid requirements in order to conduct a Medicaid demonstration, and these demonstrations may include supplemental payments. These demonstrations allow states to test new approaches to deliver or pay for health services through Medicaid. Under certain demonstrations, a state may cover populations or services that would not otherwise be eligible for federal Medicaid funding under federal rules. Some states, including California and Massachusetts, have also in recent years been allowed to make supplemental payments under Medicaid demonstrations. The terms and conditions governing such demonstrations are specific to each demonstration. All states make supplemental Medicaid payments to certain providers. DSH payments are made to hospitals and cannot exceed the unreimbursed cost of furnishing inpatient and outpatient services to Medicaid beneficiaries and the uninsured. Non-DSH supplemental payments can be made to hospitals or other providers (such as nursing homes or groups of physicians) for any category of service provided on a fee-for-service basis. For example, a state might make non-DSH supplemental payments on a quarterly basis to county-owned nursing facilities that serve low-income populations to fill the gap between what regular Medicaid rates pay toward the cost of services and higher payments permitted through the UPL. Supplemental payments are typically made for services provided on a fee-for-service basis, rather than those provided through Medicaid managed care contracts. Non-DSH supplemental payments need to be approved by CMS. To obtain the federal matching funds for Medicaid payments made to providers, each state files a quarterly expenditure report to CMS--the CMS-64. This form compiles state payments in over 20 categories of medical services, such as inpatient hospital services and outpatient hospital services. States are required to report total DSH payments made to hospitals and mental health facilities separately from other Medicaid payments in order to receive reimbursement for them. From 2001 through 2009, when completing the CMS-64 to obtain federal matching funds for non-DSH supplemental payments, states combined their non-DSH supplemental payments with their regular payments--those made using states' regular Medicaid payment rates. During this period, CMS requested that states report their non-DSH supplemental payments in a separate informational section of the CMS-64 that was not the basis for states receipt of federal matching funds. Instead, states received federal matching funds based on their reports of expenditure totals that included both regular and non-DSH supplemental payments. In 2008, we found that states reported making $6.3 billion in non-DSH supplemental payments during fiscal year 2006, but that not all states reported their non-DSH supplemental payments separately from other expenditures of Starting with the first quarter of fiscal year 2010, CMS's the same type.new reporting procedures requested that states report certain non-DSH supplemental payments separately from their regular payments on the section of the CMS-64 used to claim federal matching funds.CMS continues to provide federal matching funds to states that report these payments in combination with regular payments on this form. The data CMS finalized for fiscal year 2010 show that states and the federal government spent at least $32 billion for DSH and non-DSH supplemental payments during fiscal year 2010, with the federal share of these payments totaling at least $19.8 billion. States reported $17.6 billion in DSH payments and $14.4 billion in non-DSH supplemental payments during fiscal year 2010, but state reporting of non-DSH supplemental payments separately from regular payments was incomplete, so the exact amount of non-DSH supplemental payments is unknown. States reported $17.6 billion in DSH payments during fiscal year 2010, with the federal government reimbursing states $9.9 billion for its share of these payments. Fifty of the 51 states reported making DSH payments during fiscal year 2010, with total reported payments ranging from about $650,000 for South Dakota to over $3.1 billion for New York.10 states reporting the largest total DSH payments in fiscal year 2010 The accounted for more than 70 percent of the $17.6 billion nationwide total, and the 4 states with the largest total DSH payments--New York, California, Texas, and New Jersey--accounted for almost half (47 percent) of the nationwide total. In assessing the contribution of DSH payments to each state's overall spending, we found that DSH payments as a percentage of states' reported Medicaid payments varied considerably among the states. Among states that reported DSH payments, the percentage ranged from less than 1 percent (Arizona, Delaware, North Dakota, South Dakota, Wisconsin, and Wyoming) to 17 percent (New Hampshire). Figure 1 provides information on the amount of each state's DSH payments and each state's DSH payments as a percentage of its total Medicaid expenditures. (App. II lists each state's reported DSH payments during fiscal year 2010, the federal share of those payments, the state's total Medicaid payments, and each state's total reported DSH payment as a percentage of the state's total Medicaid payments and of total nationwide DSH payments.) The majority of DSH payments were to hospitals for traditional inpatient and outpatient services. During fiscal year 2010, 83 percent of the nationwide total of reported DSH payments ($14.7 billion) was paid to hospitals for traditional inpatient and outpatient services and 17 percent of the total ($2.9 billion) was paid to mental health facilities for inpatient and outpatient mental health services. During fiscal year 2010, states separately reported making $14.4 billion in non-DSH supplemental payments (of which the federal share was $9.9 billion), primarily for inpatient hospital services.states were to report non-DSH supplemental payments on the CMS-64 separately from their regular payments for six categories of service. Thirty states separately reported non-DSH payments during fiscal year 2010, with reported payments ranging from $125,000 for Vermont to $3.1 billion for Texas. In assessing the contribution of non-DSH supplemental payments to each state's overall spending, we found that non-DSH supplemental payments as a percentage of states' Medicaid spending also varied considerably across the 30 states that separately reported these payments, ranging from 1 percent for Vermont to over 17 percent for Illinois. Figure 2 provides information on the amount of each state's non-DSH supplemental payments and each state's non-DSH supplemental payments as a percentage of its total Medicaid expenditures. (App. II lists each state's reported non-DSH supplemental payments during fiscal year 2010, the federal share of those payments, the state's total Medicaid payments, and each state's total reported non-DSH supplemental payments as a percentage of the state's total Medicaid payments and of total nationwide non-DSH supplemental payments.) Of the six categories of service for which states reported making non-DSH supplemental payments, states reported the largest amount of payments for inpatient hospital services. States reported $11 billion in non-DSH supplemental payments for inpatient services (with a federal share of $7.7 billion). States reported $1.8 billion in non-DSH supplemental payments for outpatient services (with a federal share of $1.15 billion). (See fig. 3.) The proportion of a state's reported expenditures that were non-DSH supplemental payments varied across states and categories of service. In some states, non-DSH supplemental payments represented very little of the state's reported expenditures for a category of service, while in other states, non-DSH supplemental payments represented more than one-third of the state's reported expenditures for a category of service. For example, 27 states separately reported non-DSH supplemental payments for inpatient hospital services, and the percentage of their expenditures for inpatient hospital services that were non-DSH supplemental payments ranged from less than 1 percent (Virginia and Washington) to 48 percent (Tennessee); 13 states separately reported non-DSH supplemental payments for outpatient hospital services, and the percentage of their expenditures for outpatient hospital services that were non-DSH supplemental payments ranged from less than 1 percent (Texas) to 57 percent (Illinois); and 16 states separately reported non-DSH supplemental payments for physician and surgical services, and the percentage of their expenditures for physician and surgical hospital services that were non-DSH supplemental payments ranged from less than 1 percent (Oklahoma) to 34 percent (West Virginia). See appendix II for more information about each state's reported total and non-DSH supplemental payments for inpatient hospital services, outpatient hospital services, nursing facility services, physician and surgical services, other practitioners' services, and intermediate care facility services. The exact amount of non-DSH supplemental payments nationwide is unknown, in part because not all states that made non-DSH supplemental payments in 2010 reported them on the CMS-64 separately from regular payments, and some states separately reported some but not all of their non-DSH supplemental payments. For example, Georgia reported $0 for non-DSH supplemental payments during fiscal year 2010, but according to CMS, it made non-DSH supplemental payments of $120.6 million for nursing home services during 2010. CMS officials told us that they are aware that some states did not separately report all of their non-DSH supplemental payments. Officials stated that they have taken, and are taking, steps to improve states' reporting of non-DSH supplemental payments for the six categories of service. They told us that after revising the form CMS-64 to include lines for separate reporting of certain non-DSH supplemental payments, they monitored states' reports of these payments and, as a result, they learned that some states had not reported these payments separately. They then took steps to improve states' reporting of these payments, for example, by training state staff in the use of the revised form CMS-64 and asking regional CMS staff to work with states to identify and resolve reporting problems. CMS officials also noted, however, that some states encountered technical difficulties with their state databases. For example, CMS officials told us that the data systems used by some states in 2010 did not permit them to separate the non-DSH supplemental payments from their regular payments. CMS officials confirmed that states did not separately report all non-DSH supplemental payments in 2010 and acknowledged that CMS cannot definitively determine the extent to which reporting is incomplete. The 39 states that separately reported non-DSH supplemental payments during either 2006 or 2010 (or both) reported an increase of $8.1 billion in non-DSH supplemental payments during this period. Most of this increase was from 15 states that reported during both years, and most of the reported increase was for inpatient hospital services. However, because of the potential for underreporting of supplemental payments for one or both years, the extent of the actual increase and the contributing factors cannot be quantified. Our examination of information from CMS and from public sources about changes in 11 judgmentally selected states indicates that some states were making new and modified non-DSH supplemental payments during this period, contributing to the reported increase. Changes in reporting also contributed to the increase. The 39 states that separately reported non-DSH supplemental payments during either 2006 or 2010, or during both years, together reported $8.1 billion more in non-DSH supplemental payments during 2010 than 2006. Nineteen states separately reported some non-DSH supplemental payments during both years, with 15 of those states reporting more for these payments during 2010 and 4 of those states reporting less for these payments during 2010. Eleven states reported non-DSH supplemental payments separately only during 2010, and 9 states reported non-DSH supplemental payments separately only during 2006. (See fig. 4 and table 1.) Most of the $8.1 billion increase was from the 15 states that separately reported non-DSH supplemental payments during both years, with higher non-DSH supplemental payments reported during 2010. The increase in these states ranged from $1 million (Washington) to $2.3 billion (Texas). For the 4 states that separately reported lower non-DSH supplemental payments during 2010, the decrease ranged from $12 million (Oklahoma) to $608 million (North Carolina). The largest change in non-DSH supplemental payments separately reported during 2006 and 2010 was for inpatient hospital services. The net increase in these separately reported payments was $6.3 billion, and the number of states that separately reported non-DSH supplemental payments for inpatient hospital services increased from 23 during 2006 to 27 during 2010. (App. III lists the amounts each state reported separately for non-DSH supplemental payments during 2006 and 2010 and the categories of service for which they reported these payments.) Because of the potential underreporting of non-DSH supplemental payments during one or both of the years examined, the extent of the actual increase cannot be quantified. On the basis of some reports, Medicaid spending on hospital services is increasing, and growth in non-DSH supplemental payments has been cited as a contributing factor. A January 2012 article on the growth in U.S. health spending found that while overall Medicaid spending growth slowed in 2010, Medicaid spending growth on hospital services increased in 2010 compared to 2009. The researchers attributed the growth in Medicaid spending for hospital services, in part, to a large amount of non-DSH supplemental payments reported during the last quarter of calendar year 2010. A March 2012 report by the Medicaid and CHIP Payment and Access Commission found that states reported over $23 billion in non-DSH supplemental payments for hospital services during 2011. Information from CMS and from public sources about changes in 11 judgmentally selected states suggests that some increases from 2006 to 2010 in reported non-DSH supplemental payments were due to increases in payments states made after establishing new non-DSH supplemental payments or increasing their existing non-DSH supplemental payments. The available information suggests that changes to existing payments also resulted in some decreases from 2006 to 2010 in reported non-DSH supplemental payments, including, for example, when states terminated non-DSH supplemental payments. In recent years, states have submitted and received approval to implement new non-DSH supplemental payments, according to CMS officials. Available information, maintained by CMS and derived from state Medicaid plans from 11 selected states, indicates that new or modified supplemental payments made by states contributed to increased non-DSH supplemental payments. For example: Illinois reported $1.4 billion more for non-DSH supplemental payments for inpatient hospital services during 2010 than during 2006. From 2006 through 2010, Illinois established new non-DSH supplemental payments for inpatient hospital services and also modified several existing payments for these services. Taken together, these new and modified payments were estimated to result in an increase in Illinois's supplemental payments for inpatient services by about $1.2 billion during fiscal year 2010. Colorado reported $411 million more for non-DSH supplemental payments for inpatient and outpatient hospital services during 2010 than during 2006. Colorado established a set of new non-DSH supplemental payments for inpatient and outpatient hospital services. These supplemental payments were to a variety of hospital types, including rural hospitals, hospitals with neonatal intensive care units, and state teaching hospitals. Effective on July 1, 2009, these new payments were estimated to result in an increase in payments of about $300 million during fiscal year 2010. Arkansas reported $173 million more for non-DSH supplemental payments for inpatient hospital services during 2010 than during 2006. Arkansas made new non-DSH supplemental payments for inpatient hospital services provided by private hospitals, and it also modified existing non-DSH supplemental payments for inpatient hospital services. Arkansas's new supplemental payments, effective July 1, 2009, were estimated to increase the state's supplemental payments for inpatient services by about $110 million during fiscal year 2010. South Carolina reported $39 million for non-DSH supplemental payments for nursing facility services during 2010, but did not report making such payments during 2006. South Carolina had suspended certain non-DSH supplemental payments for nursing facility services prior to fiscal year 2006, but it reinstated these payments, effective on October 1, 2008, with a slight change to payment qualification criteria. Reinstating these payments was estimated to increase payments by about $25 million during fiscal year 2010. According to the available information about changes in these 11 judgmentally selected states, some states' non-DSH supplemental payments decreased from 2006 to 2010 because they terminated supplemental payments or made changes to their Medicaid programs that reduced supplemental payments. For example: North Carolina reported $607 million less in non-DSH supplemental payments for inpatient and outpatient hospital services in 2010 than in 2006. According to CMS, North Carolina discontinued making non-DSH supplemental payments to non-state government hospitals, effective on October 1, 2006. Discontinuation of these payments for inpatient and outpatient hospitals would have resulted in a reduction in payments. Georgia reported $221 million less in non-DSH supplemental payments for inpatient and outpatient hospital services in 2010 than in 2006. Georgia implemented a managed care program in 2007, and according to CMS, the state estimated that its supplemental payments (which generally can only be made for services provided on a fee-for-service basis) were reduced by more than $100 million per year as a result. Missouri reported paying $70 million in non-DSH supplemental payments for inpatient hospital services during 2006 and did not report making such payments during fiscal year 2010. According to CMS, the state reported that it did not make non-DSH supplemental payments for inpatient services during fiscal year 2010 because the State General Assembly did not approve funding for such payments. Changes in state reporting of non-DSH supplemental payments also contributed to differences in amounts between 2006 and 2010. In some cases, an apparent increase in non-DSH supplemental payments was due, at least in part, to more complete reporting of non-DSH supplemental payments in 2010 than in 2006. For example: Pennsylvania reported $0 for non-DSH supplemental payments during 2006 and $410 million for non-DSH supplemental payments for nursing facility services during 2010, for an apparent increase of $410 million in supplemental payments. However, Pennsylvania made, but did not separately report, non-DSH supplemental payments for nursing home services during 2006. South Carolina reported $0 for non-DSH supplemental payments for physician and surgical services during 2006 and $46 million for non-DSH supplemental payments for these services during 2010, for an apparent increase of $46 million in supplemental payments. However, CMS told us that South Carolina paid $43 million for non-DSH supplemental payments for physician and surgical services during 2006, so the actual increase in payments for these services from 2006 to 2010 was $3 million, not $46 million. In contrast, an apparent decrease in some states' non-DSH supplemental payments was due, at least in part, to not reporting these payments separately during 2010. For example, as noted above, Georgia made, but did not separately report, non-DSH supplemental payments during 2010. States that did not separately report payments during 2010, but did separately report them in 2006, created the appearance of decreases in non-DSH supplemental payments. Medicaid supplemental payments can help ensure that providers make important services available to Medicaid beneficiaries. However, the transparency and accountability of these often very large payments have been lacking. Although CMS has instituted new reporting procedures for, and more complete reporting of, non-DSH supplemental payments, the exact amount of these payments is still not known because not all states have provided complete information as CMS requested during 2010. Nevertheless, as reporting of non-DSH supplemental payments becomes more complete, the significance of these payments, in terms of cost, growth, and contribution to total Medicaid payments for those providers receiving them, is becoming clearer. Identifying and monitoring Medicaid supplemental payments and ensuring that they, along with regular Medicaid payments, are consistent with federal requirements are complex tasks that will require continued vigilance by CMS. Ongoing federal efforts to improve the completeness of reporting of Medicaid supplemental payments are important for effective oversight and to better understand these payments' role in financing Medicaid services. We provided a draft of this report to HHS for review. HHS stated that HHS and CMS will continue their ongoing efforts to improve states' reporting of Medicaid supplemental payments. HHS's letter is reprinted in appendix IV. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Health and Human Services, the Administrator of the Centers for Medicare & Medicaid Services, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix V. This appendix provides information about our analyses of reported supplemental Medicaid expenditures and our analyses of information from selected states. Supplemental Medicaid payments include Disproportionate Share Hospital (DSH) payments to hospitals and other supplemental payments to hospitals or other providers, which we refer to as non-DSH supplemental payments. To determine what supplemental Medicaid payments states reported during fiscal year 2010 and how non-DSH supplemental payments reported during 2010 compared with those reported during 2006, we obtained and analyzed data about the Medicaid expenditures states reported during these 2 years. To examine reasons for differences between 2006 and 2010 in reported non-DSH supplemental payments, and to obtain additional information about states' reports of these payments, we obtained information from the Centers for Medicare & Medicaid Services (CMS) and public sources about non-DSH supplemental payments in a nongeneralizable, judgmental sample of 11 states. In addition, we reviewed relevant federal laws, regulations, and guidance; our prior work on supplemental Medicaid payments; and other relevant documentation. We also interviewed officials from CMS. To determine what Medicaid payments states reported, we examined data from the standardized expenditure reports states submit to CMS on a quarterly basis using form CMS-64. States have 30 days after the end of a quarter to submit this form and must certify that the data are correct to the best of their knowledge. CMS reviews these reports and works with states to resolve any questions before certifying them as final. CMS transfers the certified, finalized data into a Financial Management Report (FMR) and makes annual data available on its website. CMS allows states to make adjustments to their prior CMS-64 submissions for up to 2 years. The annual FMR incorporates adjustments reported by the states by applying reported adjustments to the fiscal year during which they are reported, even if an adjustment corrects expenditures reported during an earlier fiscal year. Expenditures reported during fiscal year 2010. We obtained fiscal year 2010 FMR data from CMS on December 22, 2011. These data reflected adjustments to expenditures reported by states on the quarterly reports filed during fiscal year 2010 and included states' reported total Medicaid expenditures, DSH expenditures, and any non-DSH expenditures the states reported separately from their other expenditures. Fiscal year 2010 was the most recent year for which certified data were available from all 50 states and the District of Columbia. To assess the reliability of the fiscal year 2010 data, we reviewed the steps CMS took to ensure the accuracy of expenditure data and we examined the data for outliers or other unusual values, which we discussed with CMS officials. We determined that the data were sufficiently reliable to describe the expenditures reported by the states during fiscal year 2010, although as discussed in this report, we found that states' separate reporting of non-DSH supplemental payments was incomplete. Expenditures reported during fiscal year 2006. We obtained data about expenditures reported during fiscal year 2006 as part of work we For that work, we obtained reported DSH payments reported in 2008. from CMS's FMR for fiscal year 2006, which included adjustments reported by states for prior years. To obtain data about non-DSH supplemental payments, we extracted expenditure data that had been reported on a section of the CMS expenditure report--the form CMS-64.9I--that states were to use for informational purposes during 2006 to identify non-DSH supplemental payments made under Medicaid's Upper Payment Limit regulations.adjustments states reported through their CMS-64.9I entries during fiscal year 2006 and through October 5, 2007. As described in our 2008 report, our assessment of the reliability of the fiscal year 2006 data included review of the steps CMS took to ensure the accuracy of expenditure data submitted to the Medicaid Budget and Expenditure System, comparison to data we obtained from a nongeneralizable sample of 5 states, and We adjusted these data to reflect comparison to similar data published by the Urban Institute. We determined that the data were sufficiently reliable to describe the expenditures identified by the states during fiscal year 2006, although as we discussed in our earlier report, we concluded that states' separate reporting of non-DSH supplemental payments was incomplete. Our analyses of reported DSH and non-DSH payments included identification of state-by-state and nationwide expenditures for DSH and non-DSH supplemental payments in both absolute (dollar amount) and relative (percentage) terms. DSH payments can be made to hospitals for traditional inpatient and outpatient services and to mental health facilities for inpatient and outpatient mental health services; we examined reported payments to both types of hospitals. Non-DSH supplemental payments can be made for various categories of service (such as inpatient hospital services or physician and surgical services) provided by hospitals or other types of providers (such as nursing homes or intermediate care facilities); we examined payments for specific categories of services. Some states may not have separately reported all of their non-DSH supplemental payments during 2006 or 2010. We did not quantify the extent to which states did not separately report their supplemental payments. Therefore, we may not be capturing the full amount of states' non-DSH supplemental payments or the degree to which these payments have changed over time. We did not examine whether changes in non-DSH supplemental payments were associated with changes in states' regular Medicaid payments. To examine reasons for differences between 2006 and 2010 in reported non-DSH supplemental payments, and to obtain additional information about states' reports of these payments, we obtained information from CMS and public sources about non-DSH supplemental payments in a judgmental sample of 11 states selected to include a mix of relevant characteristics. We selected a nongeneralizable sample of states, including some that separately reported non-DSH supplemental payments (1) in fiscal year 2006, but not 2010 (Georgia and Missouri); (2) in fiscal year 2010, but not 2006 (Maine, Massachusetts, and Pennsylvania); and (3) both (Arkansas, Colorado, Illinois, North Carolina, South Carolina, and Texas). These states differed in absolute and relative changes in reported non-DSH supplemental payments and changes in categories of service for which payments were reported. The information we used to select states included published information as well as preliminary information from CMS. (For more information about non-DSH supplemental payments made by these states in 2006 and 2010, see app. III.) For each of our selected states, we asked CMS to provide us with documentation, such as state plan amendments, that could shed light on observed differences from 2006 to 2010 in reported non-DSH supplemental payments. We reviewed this information, along with information from other public sources (such as states' websites) to identify possible reasons for changes in reported payments and to develop rough estimates of the financial impact of planned changes. The state plan amendments states submit when proposing new supplemental payments, or modifications to existing payments, include an estimate of the financial impact of the state plan amendment. This estimate is intended to reflect the impact of the state plan amendment as a whole, even if the amendment covers several changes. CMS officials told us that these estimates are the best available estimates of the financial impact of changes states make to their state plans. We did not attempt to develop a full, dollar-by-dollar explanation of any state's changes from 2006 to 2010 in reported amounts of non-DSH supplemental payments. We did not determine the accuracy of states' estimates of the financial impact of their state plan amendments. Information from our judgmental sample of 11 states cannot be generalized to other states. This appendix provides state-by-state and nationwide information about the DSH and non-DSH supplemental Medicaid payments reported during fiscal year 2010 by the states and the District of Columbia. Table 2 shows states' reported Medicaid payments, their DSH and non-DSH supplemental payments, the federal share of DSH and non-DSH supplemental payments, and the percentage of the state Medicaid payments that was for DSH and non-DSH supplemental payments. Table 3 shows states' reported DSH payments, including payments for traditional and mental health hospitals (as dollar amounts and as a percentage of the state DSH payments), total DSH payments, and total DSH payments as a percentage of the national total for DSH payments. Table 4 shows states' reported non-DSH supplemental payments, including the amounts states reported for certain categories of service (as dollar amounts and as a percentage of the state non-DSH supplemental payments), total non-DSH supplemental payments, and total non-DSH supplemental payments as a percentage of the national total for non-DSH supplemental payments. The six categories of service listed are those for which CMS requested information-- inpatient hospital services, outpatient hospital services, nursing facility services, physician and surgical services, other practitioners' services, and intermediate care facility services. Tables 5 through 10 provide additional information about states' reported Medicaid payments for the six categories of service for which CMS obtained information about non-DSH supplemental payments-- inpatient hospital services, outpatient hospital services, nursing facility services, physician and surgical services, other practitioners' services, and intermediate care facility services. For each of these six categories, the tables provide the states' reported Medicaid payments, non-DSH supplemental payments, the federal share of the non-DSH payments, and the percentage of the state Medicaid payments for this category that was for non-DSH supplemental payments. This appendix provides state-by-state and nationwide information about non-DSH supplemental Medicaid payments reported during 2006 by the states and District of Columbia in comparison to similar payments reported during 2010. Table 11 shows the total amount of non-DSH supplemental payments states reported during 2006 and 2010 and the change from 2006 to 2010 in these amounts, both as a dollar amount and as a percentage of the 2006 total. Table 12 shows states' reported non-DSH supplemental payments for specific categories of service during 2006 and 2010. In addition to the contact named above, Tim Bushfield, Assistant Director; Kristen Joan Anderson; Helen Desaulniers; Sandra George; Giselle Hicks; Roseanne Price; and Jessica C. Smith made key contributions to this report. Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington, D.C.: March 1, 2011. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 2011. Medicaid: Ongoing Federal Oversight of Payments to Offset Uncompensated Hospital Care Costs Is Warranted. GAO-10-69. Washington, D.C.: November 20, 2009. Medicaid: CMS Needs More Information on the Billions of Dollars Spent on Supplemental Payments. GAO-08-614. Washington, D.C.: May 30, 2008. Medicaid Financing: Long-standing Concerns about Inappropriate State Arrangements Support Need for Improved Federal Oversight. GAO-08-650T. Washington, D.C.: April 3, 2008. Medicaid Financing: Long-Standing Concerns about Inappropriate State Arrangements Support Need for Improved Federal Oversight. GAO-08-255T. Washington, D.C.: November 1, 2007. Medicaid Financing: Federal Oversight Initiative Is Consistent with Medicaid Payment Principles but Needs Greater Transparency. GAO-07-214. Washington, D.C.: March 30, 2007. Medicaid Financial Management: Steps Taken to Improve Federal Oversight but Other Actions Needed to Sustain Efforts. GAO-06-705. Washington, D.C.: June 22, 2006. Medicaid Financing: States' Use of Contingency-Fee Consultants to Maximize Federal Reimbursements Highlights Need for Improved Federal Oversight. GAO-05-748. Washington, D.C.: June 28, 2005. Medicaid: States' Efforts to Maximize Federal Reimbursements Highlight Need for Improved Federal Oversight. GAO-05-836T. Washington, D.C.: June 28, 2005. Medicaid: Intergovernmental Transfers Have Facilitated State Financing Schemes. GAO-04-574T. Washington, D.C.: March 18, 2004. Medicaid: Improved Federal Oversight of State Financing Schemes Is Needed. GAO-04-228. Washington, D.C.: February 13, 2004. Major Management Challenges and Program Risks: Department of Health and Human Services. GAO-03-101. Washington, D.C.: January 2003. Medicaid: HCFA Reversed Its Position and Approved Additional State Financing Schemes. GAO-02-147. Washington, D.C.: October 30, 2001. Medicaid: State Financing Schemes Again Drive Up Federal Payments. GAO/T-HEHS-00-193. Washington, D.C.: September 6, 2000. Medicaid: Disproportionate Share Payments to State Psychiatric Hospitals. GAO/HEHS-98-52. Washington, D.C.: January 23, 1998. Medicaid: Disproportionate Share Hospital Payments to Institutions for Mental Diseases. GAO/HEHS-97-181R. Washington, D.C.: July 15, 1997. Medicaid: States Use Illusory Approaches to Shift Program Costs to Federal Government. GAO/HEHS-94-133. Washington, D.C.: August 1, 1994.

GAO designated Medicaid a high-risk program because of concerns about its size, growth, and inadequate fiscal oversight. The program cost the federal government and states an estimated $383 billion in fiscal year 2010. In addition to regular Medicaid payments to providers, states make supplemental payments, including DSH payments, which are intended to offset the uncompensated costs of care provided to uninsured individuals and Medicaid beneficiaries. States also make other supplemental payments, which we refer to as non-DSH supplemental payments, to hospitals and other providers, for example, to help offset the costs of care provided to Medicaid beneficiaries. GAO and others have raised concerns about the transparency of states' Medicaid supplemental payments. GAO was asked to provide information on supplemental payments. GAO examined (1) how much states reported paying in supplemental Medicaid payments during fiscal year 2010 and (2) how non-DSH supplemental payments reported during 2010 compared with those reported during 2006 and reasons for differences. GAO analyzed CMS's Medicaid expenditure data for all states and information from CMS and other sources about non-DSH supplemental payments in a nongeneralizable sample of 11 states selected to capture a mix of relevant characteristics. In its comments on a draft of GAO's report, HHS stated that HHS and CMS will continue their ongoing efforts to improve states' reporting of supplemental Medicaid payments. States reported $32 billion in Medicaid supplemental payments during fiscal year 2010, but the exact amount of supplemental payments is unknown because state reporting was incomplete. On expenditure reports used to obtain federal funds filed with the Department of Health and Human Services' (HHS) Centers for Medicare & Medicaid Services (CMS), states reported the following: A total of $17.6 billion in Disproportionate Share Hospital (DSH) payments. The 10 states reporting the largest total DSH payments in fiscal year 2010 accounted for more than 70 percent of the nationwide total, with 4 states-- New York, California, Texas, and New Jersey--accounting for almost half (47 percent). DSH payments as a percentage of total Medicaid payments varied considerably--ranging from 1 to 17 percent--among the 50 states that reported DSH payments. A total of $14.4 billion in non-DSH supplemental payments to hospitals and other providers. Because not all states reported these payments separately, complete information is not available. Like DSH payments, non-DSH supplemental payments as a percentage of total state Medicaid spending varied considerably--also ranging from 1 to 17 percent--among the 30 reporting states. These payments can also constitute a large portion of states' expenditures for particular categories of services, such as inpatient or outpatient hospital, nursing facility, or physician and surgical services. For example, non-DSH supplemental payments for inpatient hospital services ranged from 1 to 48 percent of state expenditures for these services among reporting states. CMS officials told GAO that they were taking steps to improve states' reporting of non-DSH supplemental payments, including working with states to train staff on reporting of payments and on identifying and resolving reporting problems. States' reported non-DSH supplemental payments were more than $8 billion higher during 2010 than during 2006, the year for which GAO previously reported on the amount of these payments. More complete state reporting of payments and new and modified supplemental payments were factors in this increase. The information available to identify changes from 2006 to 2010 came from 39 states that separately reported non-DSH supplemental payments during either 2006 or 2010 or both. Most of the increase was from the 15 states that reported some payments in both years and reported higher non-DSH supplemental payments during 2010 than 2006. In addition, most of the reported increase was for inpatient hospital services. In 11 selected states, GAO found that new and modified supplemental payments contributed to some increases. For example, new and modified supplemental payments for hospital services in Colorado and Illinois are estimated to increase the states' non-DSH supplemental payments by about $300 million and $1 billion per year, respectively. However, data limitations prevented GAO from quantifying the full extent to which the increase was attributable to new and modified payments. In light of the apparent increase in non-DSH supplemental payments, ongoing federal efforts to improve the completeness of reporting are important for effective oversight and to better understand the payments' role in financing Medicaid services.

From the start of the CAARS program in 2005 until the course correction in December 2007, DNDO planned the acquisition and deployment of CAARS machines without understanding that they would not fit within existing primary inspection lanes at CBP ports of entry. This occurred because during the first year or more of the program DNDO and CBP had few discussions about operating requirements for primary inspection lanes at ports of entry. In addition, the CAARS program was among numerous acquisition programs about which we previously reported that appropriate DHS oversight was lacking. Furthermore, the development of the CAARS algorithms--a key part of the machine needed to identify shielded nuclear materials automatically--did not mature at a rapid enough pace to warrant acquisition and deployment. Moreover, the description of the progress of the CAARS program used to support funding requests in DNDO's budget justifications for fiscal years 2009 through 2011 was misleading because it did not reflect the actual status of the program. From the inception of the CAARS program until the decision in December 2007 to cancel acquisition of the program, DNDO and CBP had few, if any, in-depth discussions about CBP's requirements to be able to use radiography in primary inspection lanes. According to DNDO officials, they requested information from CBP on its user requirements for the CAARS system, but CBP was slow to respond to these requests. DNDO continued with its plans to develop CAARS machines because, according to DNDO officials, at the time it was thought that a solution was urgently needed to be able to detect shielded nuclear materials in primary inspection lanes. In discussing this with senior CBP officials, they said that DNDO officials did not attempt to meet with them during the beginning of the CAARS program. When CBP and DNDO officials met, shortly before the course correction, CBP officials said they made it clear to DNDO that they did not want the CAARS machines because they would not fit in primary inspections lanes and would slow down the flow of commerce through these lanes and cause significant delays. In our view, had CBP and DNDO officials met early in the development of the program to discuss CBP's needs and operational requirements, as stated in DHS's acquisition policy at the time, it is unlikely that DNDO would have found reason to move forward with its plan to develop and acquire CAARS technology. Nonetheless, in September 2006, DNDO awarded contracts to three CAARS vendors. In December 2007, DNDO decided to cancel the acquisition of CAARS and limit any further work to a research and development effort. In recent joint discussions with CBP and DNDO officials, they acknowledged that communication between the two agencies could have been improved during the early part of the CAARS program. They said they communicate much more routinely now and that, in their view, it would be unlikely that the communication problems associated with the CAARS program would reoccur. DNDO did not follow DHS acquisition protocols for the CAARS program. Specifically, in 2008, we reported that CAARS was among numerous major DHS acquisition programs that did not have a mission needs statement--a required DHS acquisition document that formally acknowledges that the need for an acquisition is justified and supported. DHS policy also called for programmatic reviews at key decision points and required certain analytical documents. However, CAARS did not undergo annual department level reviews as called for nor did DNDO program officials obtain or prepare basic analytical documents. For example, one of these documents, a concept of operations (CONOPS), was intended to demonstrate how CBP would use CAARS machines in primary inspection areas at the ports. However, as a result of inadequate communication and collaboration between CBP and DNDO discussed earlier, no CONOPS was developed during the early phase of the CAARS program. Ultimately, according to DNDO officials, once DNDO made the decision to cancel the acquisition portion of CAARS in December 2007, a CONOPS was no longer required. According to DNDO officials, at the time of the inception of the CAARS program, there was a widespread view within DNDO that something had to be done to provide CBP with the capability to detect highly shielded nuclear material in primary inspection lanes. DNDO officials acknowledged that the agency decided to move forward with the CAARS program despite the fact that automatic detection, a key feature of CAARS, depended on the rapid development of algorithms that were technologically immature. The algorithms are critical because they provide the capability for CAARS to automatically detect highly shielded nuclear material in primary inspection areas without the need for extensive operator review and interpretation of an image--two factors that could adversely affect CBP's ability to avoid delays to the flow of commerce along with its overall effectiveness in detecting highly shielded nuclear material. Although algorithms supporting the CAARS technology were technologically immature, DNDO created an aggressive production and deployment schedule that was to begin in August 2008, the end of DNDO's planned 2-year development period for the CAARS program. At the time it decided on this production milestone, DNDO officials said it was likely that the algorithms would be developed in time to meet the start of planned production. However, the technology did not develop as expected and contributed to DNDO's decision to cancel the acquisition phase of CAARS. For fiscal year 2009 through fiscal year 2011, DHS justified annual budget requests to Congress by citing significant plans and accomplishments of the CAARS program, including that CAARS technology development and deployment was feasible, even though DNDO had made the decision in December 2007 to cancel the acquisition of CAARS. For example, in its fiscal year 2009 budget justification, DHS stated that a preliminary DNDO/CBP CAARS production and deployment program had been successfully developed and that CAARS machines would be developed that would detect both contraband and shielded nuclear material with little or no impact on CBP operations. The fiscal years 2010 and 2011 DHS budget justifications both cited that an ongoing testing campaign would lead to a cost benefit analysis, followed by rapid development of a prototype that would lead to a pilot deployment at a CBP point of entry. Furthermore, the fiscal year 2010 budget justification stated that while the CAARS technology was less mature than originally estimated, successful development was still feasible. However, DHS's description and assessment of the CAARS program in its budget justification did not reflect the actual progress of the program. Specifically, DNDO officials told us that when they made their course correction and cancelled the acquisition part of the program in 2007, they also decided not to conduct a cost benefit analysis because such analyses are generally needed to justify going forward with acquisitions. In addition, DNDO completed CAARS testing in March 2010; however, as of today, the final test results for two of the three CAARS machines are not yet available. Currently, no CAARS machines have been deployed. CAARS machines from various vendors have either been disassembled or sit idle without being tested in a port environment, and CBP is considering whether to allow DNDO to collect operational data in a port environment. During recent discussions with DNDO officials, they agreed that the language in the budget justifications lacked clarity and stated that they are not planning to complete a cost benefit analysis since such analyses are generally associated with acquisition programs. Based on our review of the CAARS program and our reports on DNDO efforts to develop an advanced RPM called the advanced spectroscopic portal (ASP), we have identified lessons learned for DHS to consider in its continuing efforts to develop the next generation of radiography imaging technology. Despite the importance of coordinating crosscutting program efforts, we have reported that weak coordination of those efforts has been a long- standing problem in the federal government and has proven to be difficult to resolve. We have also reported that agencies can enhance and sustain their collaborative efforts. One way we reported that agencies can enhance coordination is to agree on roles and responsibilities and establish mutually reinforcing or joint strategies. As discussed, DNDO did not coordinate and collaborate with CBP early in the development of the CAARS program to identify CBP's needs and requirements. According to DHS budget documents, in fiscal year 2011, the responsibility for research and development of advanced radiography will shift from DNDO to S&T. Leading up to this transition, there is confusion related to roles and responsibilities among DNDO, S&T, and CBP. For example, DNDO officials said they have requested permission from CBP to collect operational data in a port environment on an enhanced radiography machine. However, CBP officials stated that they had already purchased, operationally tested, and deployed 11 of these machines in secondary inspection areas. We recently discussed this issue at a joint meeting with DNDO and CBP officials. CBP and DNDO officials agreed that there was confusion over this issue, and both agencies agreed with the need to collect operational data on this enhanced radiography machine, and CBP has begun making arrangements to do so. Also, S&T officials said that they are about to contract out for radiography imaging technology for CBP that will improve imaging capabilities. DNDO officials told us that S&T's efforts will include development of radiography capabilities to detect shielded nuclear material, while S&T officials told us that this is not an area of their focus. As DHS transitions its research and development of radiography, DHS officials said that a draft memorandum of agreement intended to clarify roles and responsibilities for cooperation and coordination among DNDO, CBP, and S&T has not been finalized. Completing the memorandum of agreement to clarify roles and responsibilities before proceeding with the research, development, and deployment of radiography technology could give DHS reasonable assurance that problems resulting from a lack of clearly defined roles and responsibilities in the CAARS program do not recur. In discussions with senior officials from DHS, DNDO, CBP and S&T, they all agreed with the need for the memorandum and said that they intend to work toward finalizing the draft memorandum of agreement. DNDO officials said that they were aware of the DHS draft management directive in 2006 that was intended to guide management and oversight of acquisition programs like CAARS but did not follow it. DHS policy officials acknowledged that at the time CAARS was in its early stages, DHS was continuing the process of organizing and unifying its many disparate components and there was not strong oversight over its major programs, including CAARS. Policy officials told us the oversight review process is more robust today. However, we reported in June 2010 that DHS acquisitions need further improvement and sustained management attention. For example, while DHS' current management directive includes more detailed guidance than the previous 2006 management directive for programs to use in preparing key documentation to support component and departmental decision making, it is not applied consistently and most major programs have not been reviewed. DNDO was simultaneously engaged in a research and development phase while planning for an acquisition phase of the CAARS program. In this regard, we have previously reported that separating technology development from product development and acquisition is a best practice that can help reduce costs and deliver a product on time and within budget because separation of the technology development phase from production in particular helps to ensure that (1) a sound business case is made for the product, (2) product design is stable, and (3) production processes are mature and the design is reliable. At the time that the CAARS program was in its early stages, DHS and DNDO did not have clearly defined ways to define and communicate the maturity of technology leading to acquisition. We have previously reported on the need for a disciplined and knowledge-based approach of assessing technology maturity, such as using technology readiness levels. In that report, we recommended that technologies need to reach a high readiness level before an agency should make a commitment to production. DNDO officials acknowledged that CAARS algorithm's readiness level was not high enough to warrant entering into the acquisition phase. As we testified in June 2009 on DNDO's testing of ASPs, a primary lesson to be learned regarding testing is that the push to replace existing equipment with the new portal monitors led to an ASP testing program that lacked the necessary rigor. We reported that testing programs designed to validate a product's performance against increasing standards for different stages in product development are a best practice for acquisition strategies for new technologies and if properly implemented, would provide rigor to DHS's testing of other advanced technologies. For further information about this statement, please contact Gene Aloise at (202) 512-3841 or [email protected]; or Stephen L. Caldwell at 202-512- 9610 or [email protected]. Dr. Timothy Persons (Chief Scientist), Ned Woodward (Assistant Director), Mike Harmond, Jonathan Kucskar, Linda Miller, Ron Salo, Kiki Theodoropoulos, and Franklyn Yao also made key contributions to this testimony. Maritime Security: DHS Progress and Challenges in Key Areas of Port Security. GAO-10-940T. Washington, D.C.: July 21, 2010. Combating Nuclear Smuggling: DHS Has Made Some Progress but Not Yet Completed a Strategic Plan for Its Global Nuclear Detection Efforts or Closed Identified Gaps, GAO-10-883T, Washington D.C.: June 30, 2010. Supply Chain Security: Feasibility and Cost-Benefit Analysis Would Assist DHS and Congress in Assessing and Implementing the Requirement to Scan 100 Percent of U.S.-Bound Containers. GAO-10-12. Washington, D.C.: Oct. 30, 2009. Combating Nuclear Smuggling: Lessons Learned from DHS Testing of Advanced Radiation Detection Portal Monitors, GAO-09-804T, Washington, D.C.: June 25, 2009. Combating Nuclear Smuggling: DHS Improved Testing of Advanced Radiation Detection Portal Monitors, but Preliminary Results Show Limits of the New Technology. GAO-09-655. Washington D.C.: May 21, 2009. Nuclear Detection: Domestic Nuclear Detection Office Should Improve Planning to Better Address Gaps and Vulnerabilities. GAO-09-257. Washington, D.C.: Jan. 29, 2009, Combating Nuclear Smuggling: DHS's Program to Procure and Deploy Advanced Radiation Detection Portal Monitors is Likely to Exceed the Department's Previous Cost Estimates. GAO-08-1108R. Washington, D.C.: Sept. 22, 2008. Supply Chain Security: CBP Works with International Entities to Promote Global Customs Security Standards and Initiatives, but Challenges Remain. GAO-08-538. Washington, D.C.: Aug. 15, 2008 Maritime Security: National Strategy and Supporting Plans Were Generally Well-Developed and Are Being Implemented. GAO-08-672. Washington, D.C.: June 20, 2008. Supply Chain Security: Challenges to Scanning 100 Percent of U.S.- Bound Cargo Containers. GAO-08-533T. Washington, D.C.: June 12, 2008. Supply Chain Security: U.S. Customs and Border Protection Has Enhanced Its Partnership with Import Trade Sectors, but Challenges Remain in Verifying Security Practices. GAO-08-240. Washington, D.C.: Apr. 25, 2008. Supply Chain Security: Examination of High-Risk Cargo at Foreign Seaports Have Increased, but Improved Data Collection and Performance Measures Are Needed. GAO-08-187. Washington, D.C.: Jan. 25, 2008. Department of Homeland Security: Billions Invested in Major Programs Lack Appropriate Oversight. GAO-09-29. Washington, D.C.: Nov. 18, 2008). Maritime Security: The SAFE Port Act: Status and Implementation One Year Later. GAO-08-126T. Washington, D.C.: Oct. 30, 2007. Combating Nuclear Smuggling: Additional Actions Needed to Ensure Adequate Testing of Next Generation Radiation Detection Equipment. GAO-07-1247T. Washington, D.C.: Sept. 18, 2007. Department of Homeland Security: Progress Report on Implementation of Mission and Management Functions. GAO-07-454. Washington, D.C.: Aug. 17, 2007. International Trade: Persistent Weaknesses in the In-Bond Cargo System Impede Customs and Border Protection's Ability to Address Revenue, Trade, and Security Concerns. GAO-07-561. Washington, D.C.: Apr. 17, 2007. Combating Nuclear Smuggling: DHS's Decision to Procure and Deploy the Next Generation of Radiation Detection Equipment is Not Supported by Its Cost-Benefit Analysis. GAO-07-581T. Washington, D.C.: Mar. 14, 2007. Combating Nuclear Smuggling: DNDO Has Not Yet Collected Most of the National Laboratories' Test Results on Radiation Portal Monitors in Support of DNDO's Testing and Development Program. GAO-07-347R. Washington, D.C.: Mar. 9, 2007. Combating Nuclear Smuggling: DHS's Cost-Benefit Analysis to Support the Purchase of New Radiation Detection Portal Monitors was Not Based on Available Performance Data and Did not Fully Evaluate All the Monitors' Costs and Benefits. GAO-07-133R. Washington, D.C.: Oct. 17, 2006. Cargo Container Inspections: Preliminary Observations on the Status of Efforts to Improve the Automated Targeting System. GAO-06-591T. Washington, D.C.: Mar. 30, 2006. Combating Nuclear Smuggling: Challenges Facing U.S. Efforts to Deploy Radiation Detection Equipment in Other Countries and in the United States. GAO-06-558T. Washington, D.C.: Mar. 28, 2006. Combating Nuclear Smuggling: DHS Has Made Progress Deploying Radiation Detection Equipment at U.S. Ports-of-Entry, but Concerns Remain. GAO-06-389. Washington, D.C.: Mar. 22, 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 Department of Homeland Security's (DHS) Domestic Nuclear Detection Office (DNDO) is charged with developing and acquiring equipment to detect nuclear and radiological materials to support federal efforts to combat nuclear smuggling. Also within DHS, Customs and Border Protection (CBP) has the lead for operating systems to detect nuclear and radiological materials entering the country at U.S. ports of entry. In 2005, DNDO began working on the cargo advanced automated radiography system (CAARS) intending that it be used by CBP to detect certain nuclear materials in vehicles and containers at U.S. ports of entry. However, in 2007 DNDO decided to cancel the acquisition phase of the program and convert it to a research and development program. GAO was asked to examine events that led to DNDO's decision to cancel the acquisition phase of the program and provide lessons learned from DNDO's experience. This statement is based on prior GAO reports from March 2006 through July 2010 and ongoing work reviewing DHS efforts to develop radiography technology. For ongoing work, GAO reviewed CAARS planning documents and interviewed DHS, DNDO, and CBP officials. GAO provided a draft of the information in this testimony to DHS and component agencies, which provided technical comments and which were incorporated as appropriate. From the start of the CAARS program in 2005 until DNDO cancelled the acquisition phase of the program in December 2007, DNDO pursued the acquisition and deployment of CAARS machines without fully understanding that they would not fit within existing primary inspection lanes at CBP ports of entry. This occurred because during the first year or more of the program DNDO and CBP had few discussions about operating requirements at ports of entry. When CBP and DNDO officials met, shortly before DNDO's decision to cancel the acquisition phase of the program, CBP officials said they made it clear to DNDO that they did not want the CAARS machines because they would not fit in primary inspections lanes and would slow down the flow of commerce through these lanes and cause significant delays. Also, the CAARS program was among numerous DHS acquisition programs about which GAO reported in 2008 that appropriate oversight was lacking. Further, the development of the CAARS algorithms (software)--a key part of the machine needed to identify shielded nuclear materials automatically--did not mature at a rapid enough pace to warrant acquisition and deployment. Also, the description of the progress of the CAARS program used to support funding requests in DNDO's budget justifications was misleading because it did not reflect the actual status of the program. For example, the fiscal years 2010 and 2011 DHS budget justifications both cited that an ongoing CAARS testing campaign would lead to a cost-benefit analysis. However, DNDO officials told GAO that when they cancelled the acquisition part of the program in 2007, they also decided not to conduct any associated cost benefit analysis. During recent discussions with DNDO officials, they agreed that the language in the budget justifications lacked clarity, and they have no plans to prepare a cost benefit analysis. Based on GAO's review of the CAARS program and its prior reports on DHS development and acquisition efforts, GAO identified lessons learned for DHS to consider in its continuing efforts to develop the next generation of radiography imaging technology. For example, GAO previously reported that agencies can enhance coordination by agreeing on roles and responsibilities. In this regard, a draft memorandum of agreement among DHS agencies that intends to clarify roles and responsibilities in developing technologies and help ensure effective coordination has not been finalized. Completing this memorandum could give DHS reasonable assurance that problems associated with the CAARS program do not recur. In discussions with senior officials from DHS, DNDO, CBP and S&T, they all agreed with the need for the memorandum and said that they intend to work toward finalizing the draft memorandum of agreement. Other lessons GAO identified include (1) engage in a robust departmental oversight review process (2) separate the research and development functions from acquisition functions (3) determine the technology readiness levels before moving forward to acquisition, and (4) rigorously test devices using actual agency operational tactics before making decisions on acquisition.

In recent years, steep declines have occurred in some of IRS's compliance programs for individual taxpayers, as have broad declines in its efforts to collect delinquent taxes. These trends have triggered concerns that taxpayers' motivation to voluntarily comply with their tax obligations could be adversely affected. Taxpayers' willingness to voluntarily comply with the tax laws depends in part on their confidence that their friends, neighbors, and business competitors are paying their fair share of taxes. IRS's compliance programs, including audits, document matching, and other efforts, are viewed by many as critical to maintaining the public's confidence in our tax system. Looking across all four of IRS's major enforcement programs between fiscal years 1993 and 2002 reveals a somewhat mixed picture, as shown in figure 1. The four programs and their trends are as follows: The math error program that identifies obvious errors such as mathematical errors, omitted data, or other inconsistencies on the filed tax return. Using only the math error count, which is consistent throughout the 10 years, the math error contact rate rose 33 percent (from 3.59 to 4.79 percent). The document matching program that identifies unreported income using information returns filed by third parties such as employers and banks. Document matching rates went up and down at various times but ended 45 percent lower (from 2.37 percent to 1.30 percent) in 2002 compared to 1993. The nonfiler program that identifies potential nonfilers of tax returns by using information return and historical filing data. The nonfiler rates also went up and down but ended in 2002 about where they were in 1993. The audit program that checks compliance in reporting income, deductions, credits and other issues on tax returns through correspondence or in face-to-face meetings with an IRS auditor. Comparing 1993 to 2002, the audit contact rate dropped 38 percent (from 0.92 to 0.57 percent) even though it rose significantly between 1993 and 1995. Figure 2 shows compliance program trends based on income ranges. Although audit rates for individual taxpayers in higher and middle-income ranges rose slightly in 2002, overall they were significantly lower in 2002 than in 1993, while the rate for the lowest income range was virtually the same in 2002 as in 1993. The audit contact rates for the highest and lowest income individuals essentially converged at around .8 percent in fiscal years 2001 and 2002. Most of the audits of the lowest income individuals dealt with EIC claims. Document matching contact for all three income ranges rose somewhat between 2001 and 2002. However, rates for all three income ranges ended significantly lower in 2002 than 1993 following similar patterns of change over the years. Data on contact rates by income level were not available for the math error and nonfiler programs. As we reported in May 2002, between fiscal years 1996 and 2001 trends in the collection of delinquent taxes showed almost universal declines in collection program performance, in terms of coverage of workload, cases closed, direct staff time used, productivity, and dollar of unpaid taxes collected. Although IRS's workload generally declined for two of those indicators, workload and cases closed, the collection work it completed declined more rapidly creating an increasing gap as show in figure 3. During that 6-year period, the gap between the new collection workload and collection cases closed grew at an average annual rate of about 31 percent. The increasing gap between collection workload and collection work completed led IRS in March 1999 to start deferring collection action on billions of dollars in delinquencies. IRS's inventory of delinquent accounts was growing and aging and the gap between its workload and capacity to complete work was increasing. Officials recognized that they could not work all collection cases, and they believed that they needed to be able to deal with taxpayers more quickly, particularly taxpayers who were still in business and owed employment taxes. By the end of fiscal year 2002, after the deferral policy had been in place for about 3 and one-half years, IRS had deferred taking collection action on about $15 billion in unpaid taxes, interest, and penalties. IRS' deferral of collection action has declined somewhat since the deferral policy was adopted. Although the rate has declined from 45 percent in 2000 to about 32 percent in 2002, IRS is still deferring collection action on about one out of three collection cases. Many parties have expressed concern about these trends in IRS's compliance and collection programs. Since the mid-1990s, we have issued six reports on IRS compliance and collection trends in response to congressional concerns. During annual oversight hearings on IRS, Congress often raises questions about the declining audit rate and possible effects on compliance. In recent years, congressional concerns as well as IRS's requests have resulted in efforts to augment IRS's staffing levels. In fact, the former IRS Commissioner's report to the IRS Oversight Board during September 2002 made what was perhaps the most explicit case for additional staffing to address IRS's compliance and collection performance. Although the Commissioner recognized that IRS needed to improve the productive use of its current resources, he cited a need for an annual 2 percent staffing increase on top of planned productivity increases over 5 years to help reverse the trends. In terms of the collection of tax debts, the IRS Commissioner estimated that an almost 60 percent gap exists between IRS's collection workload and the work it has completed. Closing this gap, according to the Commissioner, would require 5,450 new full-time staff. IRS also has been looking for ways to free resources for compliance programs by boosting productivity or reducing workload in other areas. In our recent Performance and Accountability Series report on the Treasury Department, we cite the collection of unpaid taxes as one of the management challenges facing IRS. In that report, we state that IRS is in various stages of planning and implementing management improvements, including reengineering compliance and collection practices. However, as of September 30, 2002, IRS's inventory of known unpaid taxes totaled $249 billion, of which $112 billion has some collection potential, and is at risk. Since 2001, IRS's budget requests have made increasing its compliance and collection staff one of several key priorities. For example, in its 2001 budget request IRS asked for funding for the Staffing Tax Administration for Balance and Equity initiative, which was designed to provide additional staff for examination, collection, and other enforcement activities. However, as shown in figures 4 and 5, staffing in two key compliance and collection occupations were lower in 2002 than in 2000. This continues a general trend of declining staffing in these occupations for a number of years. The declines in compliance and collection staffing occurred for several reasons, including increased workload and unbudgeted costs. In September 2002, the Commissioner attributed the decline in compliance staffing to increases in workload in other essential operations, such as processing returns, issuing refunds, and answering taxpayer mail. In the most recently completed fiscal year, 2002, IRS faced unbudgeted cost increases, such as rent and pay increases, of about $106 million. As a result, IRS had to delay hiring revenue agents and officers. IRS noted in its 2002 budget request that any major negative changes in the agency's financial posture, such as unbudgeted salary increases, will have a negative effect on staffing levels. For fiscal year 2004, IRS is requesting $10.4 billion, an increase of 5.3 percent over fiscal year 2003 requested levels, and 100,043 full-time equivalents (FTE). Also, IRS's 2004 budget request is its second in a row to propose increased spending for higher priority areas that would be funded, in part, with internal savings redirected from other areas. Specifically, IRS proposes to devote an additional $454 million and 3,033 more FTEs to enhance programs, including compliance and some customer service areas. As shown in figure 6, $166 million of the enhancements would be funded from internal savings with the remainder funded from the budget increase. We commend IRS for identifying savings to be reinvested in operations to improve IRS performance. This approach implements a key principle of IRS's long-term modernization effort. Under this approach, the reengineering of IRS's work processes, much of which depends on investments in computer modernization, would automate or eliminate work, improve productivity, and free staff time that could then be redirected to higher priority customer service and compliance activities. Some caution is appropriate, however, in considering whether the additional FTEs will be realized. In addition to the potential that some cost increases may not be funded as in prior years, revised projections developed since the 2004 budget request was prepared raise questions about IRS's ability to achieve all the savings projected and shift resources to compliance as planned. IRS has revised the savings associated with several reengineering efforts identified in the 2004 budget request. Revisions this far in advance of the start of the fiscal year are not a surprise. They do indicate some uncertainty associated with the budget request's savings projections. For example, most significant reengineering efforts planned for fiscal year 2004, in terms of FTEs and dollars to be saved, will not achieve all of their projected savings because the efforts were based on assumptions that will not be realized, according to IRS data and officials. IRS's effort to improve the efficiency of compliance support activities, the single most significant effort, depended partially on IRS implementing individual compliance savings projects in 2003. This effort was projected to save 394 FTEs and almost $26 million. However, due in part to delays until 2004 to allow for additional testing, this effort is now expected to save about 30 percent of the original projections through the end of fiscal year 2004. IRS now projects that the seven most significant efforts will save 1,073 FTEs and $60.5 million, down from original projections of 1,356 FTEs and $77.7 million. Reengineering efforts may not achieve all of their savings goals, in part, because of the long time lag between when IRS begins developing its budget request and when the fiscal year begins. As with most other federal agencies, IRS usually begins formulating its budget request about 18 months before the start of the fiscal year and about 10 months before the President submits his budget to Congress. With planning beginning so far ahead of the budget's actual execution, inevitable intervening events, such as delays in implementing computer systems, make the assumptions upon which projections are based no longer realistic. In addition to lower current estimates of the potential savings from the seven most significant reengineering estimates, some of the other reengineering efforts listed in the 2004 budget request are not well defined. This raises questions about whether they will achieve their savings goals. For example, IRS still is reviewing its procedures to identify ways to make tax return processing more efficient. Although IRS projected this effort to save 203 FTEs and $6.9 million, it has not yet identified the operational areas that will be reengineered. IRS officials said that the projected savings are based on a 2 percent efficiency increase, but they are currently determining how to achieve that goal. According to IRS budget officials, IRS uses its budget formulation process to establish productivity goals, although the responsible business units may not know specifically how savings will be achieved. Officials said that this approach encourages innovation in meeting performance goals while identifying ways to save FTEs and budget dollars. IRS's 2004 budget submission requests $100 million and 650 FTEs for a new initiative to improve compliance in one area in which noncompliance is known to be a concern: EIC. Although Treasury and IRS have made progress in defining the scope and nature of the initiative, many details about its implementation are still to be settled as planning for and implementation of the initiative proceed simultaneously. IRS hopes that this effort will reduce EIC noncompliance without unnecessarily burdening or discouraging those who are eligible for and claim EIC. Given its scope, potential effects on EIC claimants, and planned rapid expansion, the success of the initiative will depend on careful planning and close management attention as IRS implements the initiative. Begun in 1975, the EIC is a refundable tax credit available to certain low- income, working taxpayers. Two stated long-term objectives of Congress have been: 1) to offset the impact of Social Security taxes on low-income individuals; and 2) to encourage these same individuals to seek employment, rather than depend on welfare benefits. Researchers have reported that the EIC has been a generally successful incentive-based antipoverty program, as was intended by Congress. For tax year 2001, about $31 billion was paid to about 19 million EIC claimants. However, in addition to its successes, the EIC program has historically experienced high rates of noncompliance--including both overclaims and underclaims of benefits. For over a decade we have reported on IRS's efforts to reduce EIC noncompliance. Due to persistently high noncompliance rates, we have identified the EIC program as a high-risk area for IRS since 1995. An IRS study of 1985 tax returns estimated that the EIC overclaim in that year rate was 39.1 percent. The results of subsequent EIC compliance studies conducted by IRS are shown in table 1. In 1997, Congress instructed IRS to improve EIC compliance through expanded customer service and outreach, strengthened compliance, and enhanced research efforts. For these efforts Congress authorized a 5-year, EIC-specific appropriation of $716 million. Although the 5-year period elapsed in fiscal year 2002, Congress appropriated $145 million specifically for EIC compliance for fiscal year 2003. For fiscal year 2004, IRS is requesting $153 million for this appropriation; the $100 million request for the new EIC initiative is separate. Early in 2002, when the results of IRS's most recent study of EIC compliance for tax year 1999 were released, the Assistant Secretary of the Treasury and the IRS Commissioner established a joint task force to seek new approaches to reduce EIC noncompliance. The task force sought to develop an approach to validate EIC claimants' eligibility before refunds are made, while minimizing claimants' burden and any impact on EIC's relatively high participation rate. Through this initiative, administration of the EIC program would become more like that of a social service program such as Food Stamps or Social Security Disability, where proof of eligibility is required prior to receipt of any benefit. Based on its various studies of EIC noncompliance, IRS determined that three specific areas account for a substantial portion of EIC noncompliance. These three areas--qualifying child eligibility, improper filing status, and income misreporting (also called "underreporter")-- account for nearly 70 percent of all EIC refund errors, according to IRS. The joint Treasury/IRS task force designed an initiative that would address each of these sources of EIC noncompliance. Filers that improperly claim qualified children represent the single largest area of EIC overclaims, on a dollar basis. Under the proposed initiative, IRS will attempt to verify all taxpayers' claims for EIC-qualifying children under two criteria: a residency and a relationship certification. IRS plans to use third-party databases and other means to verify qualifying children for an estimated 80 percent of EIC claimants. All other EIC claimants will be asked to provide additional eligibility documentation prior to the filing season. Those who do not respond and/or are unable to document their eligibility will have the EIC portion of their returns frozen. If taxpayers do not provide documentation before the filing season, IRS plans to require them to provide it during or after the filing season. When and if they document their eligibility, the EIC portion of their returns will be released. Initially, beginning in the summer of 2003, IRS intends to select 45,000 EIC claimants whose qualifying child residency or relationship requirements could not be verified from available databases. IRS plans under its initiative to contact these taxpayers and give them the opportunity to provide verifying documentation for the child (or children) that is (are) claimed to qualify for the EIC. The two components of establishing qualifying child eligibility--the claimant's relationship to the child, and residency with the claimant for more than 6 months--will be treated somewhat differently. Taxpayers who establish their qualifying child relationship will not have to do so in future years but all taxpayers will have to show annually that the children lived with them for the required time. IRS expects to expand the program in July 2004 by starting to contact approximately 2 million taxpayers; in another planned expansion in July 2005, IRS would contact 2.5 million taxpayers. The other two parts of this initiative will cover an additional 180,000 high- risk filers for tax year 2003--5,000 to verify their filing status and 175,000 to verify their income. Criteria for selecting the 5,000 cases in the filing status category have not yet been determined. They will be drawn from tax year 2003 cases. For the 175,000-case income verification initiative, IRS will use document matching to identify EIC filers who have a history of misreporting income in order to increase (or receive) the EIC. Based on that history, these taxpayers' returns are to be flagged when their 2003 EIC claims are filed. Any EIC refund portion of each return is then to be frozen until IRS can verify the taxpayers' income through document matching or audit procedures in the fall of 2003. These filers will be identified out of tax year 2002 and 2003 cases. Table 2 shows IRS's projections for future casework in all three initiative areas. Although the Treasury/IRS task force and now IRS have made progress in defining the scope and nature of this initiative, many details about its implementation are still to be settled. IRS expects to learn lessons from initial sample cases it will work in 2003 that will be incorporated into planned expansions of the effort later in 2003 and in 2004. IRS officials said that estimates of the number of new employees that will be needed and their training requirements are evolving. For example, although IRS's 2004 budget submission identifies 650 FTEs for this initiative, current plans are for a much lower staffing level at this point. In addition, cost and FTE estimates are based on historical data that may not be directly comparable to the staffing and technological demands of the initiative. Based on these estimates, of the $100 million 2004 request, IRS has proposed budgeting just under $55 million for direct casework in the three compliance areas. The remaining $45 million is allocated to technology improvements and management, development, and implementation costs related to the three targeted compliance areas. Fundamental to the precertification of qualifying children is the development of clear forms that identify the specific types of documentation IRS will accept to substantiate that a qualifying child meets the relationship and residency tests for EIC. IRS is currently working with others, like the Taxpayer Advocate, to develop these new forms, which are to be used beginning this summer. Recently, concerns have been expressed about IRS's intention to request marriage certificates as proof of relationship to the qualifying child. We have not looked at this specific issue. However, our 2002 report noted that EIC forms and instructions that IRS used for similar attempts to determine qualifying child eligibility could be confusing to taxpayers and required documents that EIC claimants had difficulty obtaining. When taxpayers have been disallowed the EIC through an IRS audit, they are required to substantiate their qualification for the EIC--that is, "recertify"--before they can receive the credit again. As part of this process, IRS's forms indicated that EIC claimants could, for example, use medical records to prove a child's residency with them. However, EIC claimants faced difficulty in providing such records. Low-income working families are less likely to have stable relationships with medical service providers and their children are less likely to have routine medical care. IRS officials said that they plan to pretest the proposed precertification forms both to determine whether they are clear and understandable to EIC claimants but also to determine whether the claimants can provide the required information. This is a critical step in implementing the initiative. We recently reported that IRS seldom tests the new and revised individual tax forms and instructions. Ensuring consistent interpretation of documentation gathered in the new initiative will also be important. In our 2002 report, we noted that IRS examiners did not consistently assess documentation for qualifying children. For example, we asked 21 examiners to examine five EIC scenarios. The 21 examiners did not agree for any of the scenarios, and, in some cases, the examiners reached widely varying judgments about whether the evidence was sufficient to support an EIC claim. In order to better ensure consistent and accurate decisions based on documentation submitted, we recommended that IRS provide training to its examiners. Administering the EIC is not an easy task for IRS. IRS has to balance its efforts to help ensure that all qualified persons claim the credit with its efforts to protect the integrity of tax system and guard against fraud and other forms of noncompliance associated with EIC. This initiative is a substantial undertaking with a relatively aggressive implementation schedule. Although it appears to be targeted to address known compliance issues, its success will depend on careful planning and close management attention. Any one of many challenges could put the initiative at risk. These include whether, for instance, the proposed new forms will result in evidence that IRS can use to verify relationship and residency requirements. Further, IRS must determine whether lessons from the first attempts to verify the eligibility of relatively small numbers of EIC claimants can be learned and incorporated before the substantial expansion of the initiative in fiscal years 2004 and 2005. IRS's 2004 budget requests $2 million and legislative authorization for use of private collection agencies (PCA) to assist IRS in collecting certain types of delinquent tax debt. IRS proposes to fund continuing use of PCAs from a to-be-established revolving fund that would receive a portion of taxes collected through use of PCAs. As with its EIC initiative, IRS has defined the parameters for its use of PCAs, but many key details for implementing the initiative remain to be resolved. These implementation details, such as identifying delinquent debt cases suitable for PCAs to pursue and protecting taxpayer rights, will be critical if the initiative is to succeed. If the PCA initiative is authorized, IRS will need to put focused management attention on planning and monitoring the implementation of the PCA initiative to ensure proper handling of these issues. As previously noted, IRS's inventory of delinquent debt is growing and aging, with the gap between its workload and capacity to complete work increasing. As a consequence, IRS has been deferring about one in three new delinquency cases without pursuing any collection action. This practice is contrary to the experience of Treasury and IRS, which indicates that referring eligible debts for collection as early as possible greatly enhances the success of collection efforts. The former IRS Commissioner estimated in 2002 that it would take 5,450 FTEs and $296.4 million for IRS to bridge the gap between its workload and capacity to complete the collection casework. To help bridge this gap, Treasury has proposed an initiative to reach taxpayers to obtain payment on delinquent debt through the assistance of PCAs. Under this initiative, IRS would give PCAs specific, limited information on outstanding tax liabilities, such as types of tax, amount of the outstanding liabilities, tax years affected, and prior payments. Based on the information provided by the IRS, PCAs would then be permitted to locate and contact taxpayers, requesting payment of liabilities (i.e., tax, interest, or penalty) in full or in installments (within 3 years, as specified by IRS). If a taxpayer's last known address is incorrect, the PCAs would search public records for the correct address. PCAs are not to be permitted to contact third parties to locate taxpayers. PCAs would not be allowed to accept payments; all payments must be made to IRS. PCAs would generally have 12 to 24 months to attempt collection. Afterwards, uncollected accounts are to be redistributed to other PCAs for additional collection efforts. Because PCAs would have no enforcement power, the initiative would allow the IRS to focus its own enforcement resources on more complex cases and issues. Other procedural conditions under the proposal include requiring PCAs to inform taxpayers of the availability of assistance from the Taxpayer Advocate. Furthermore, PCAs would not be permitted to take any enforcement action against a taxpayer, such as seizing assets to satisfy the debt. To ensure that taxpayer rights and privacy would be safeguarded, PCAs would be governed by the same rules by which IRS is governed. Initially, IRS plans to stagger implementation of the initiative. For the first 6 months, IRS will place collection cases with no more than five PCAs, with a total volume estimate not to exceed 50,000 cases per month for the first 3 months. IRS will contract with additional PCAs at a 6-month interval with an anticipated rate of 2.6 million total cases annually by the time all agencies have been operational for 1 full year. Assigned case inventory rates will depend on a number of factors, including PCA performance, ability to manage new inventory, quality control, volume of cases referred to IRS for review, and readiness of IRS to supply cases. Based on this implementation framework, Treasury has projected revenue estimates of $46 million in 2004, and $476 million from 2004 through 2008. In order to implement the PCA initiative, IRS must ensure that it will have the capacity to fulfill its responsibilities under the proposed contracts and to oversee the PCAs. Further, it must make some difficult design decisions. One significant capacity issue concerns whether IRS will be able to identify those delinquent debts with the highest probability of resolution through PCA contacts. Earlier pilot efforts to study use of PCAs in 1996 and 1997 were hindered, in part, because IRS was unable to do this. For example, we reported that the numbers and types of collection cases sent to PCAs during those pilots were significantly different from those anticipated in the pilot program's original design. This resulted in substantially fewer collection cases than PCAs could productively work to make the effort cost-effective. IRS realizes that identifying appropriate cases for referral to PCAs is a key issue. While IRS proposes using "case selection analytics" to identify appropriate cases, the analytical model has not been developed. Another IRS capacity issue relates to the cases that PCAs, for several reasons, will refer back to IRS. For instance, under the proposed arrangement, if a taxpayer was unable to fully pay the delinquent debt, the case would be referred back to IRS. Some cases would then go to a different PCA; therefore, the success of that PCA's efforts in these cases would depend on how well IRS reprocesses the cases. Until some experience is gained under the proposed program, it will be difficult to reliably estimate the number of cases that will be referred back to IRS and the number of resources it will need to devote to the cases. Other IRS capacity issues concern, for instance, how many resources it will take to administer the contracts and to oversee the PCAs' performance. IRS expects to have up to 12 contractors, 2 of which would be small businesses, and proposed procedures call for on-site visits and some direct observation of PCAs' collection efforts. IRS would also need to ensure PCAs' performance, such as having adequate procedures to safeguard taxpayer information before and after the contracts are awarded, and that it and the PCAs have secure computer systems to manage the work flow. How the PCAs will be compensated is a key design decision that must be finalized. On the one hand, IRS needs to provide the PCAs an incentive to be efficient in collecting the delinquent debts and on the other hand, it must ensure that the incentive does not lead to inappropriate performance pressure on PCA staff. IRS intends to make part of PCAs' compensation dependent on other factors, such as quality of service, taxpayer satisfaction, and case resolution, in addition to collection results. Both the law and IRS policy prohibit IRS managers from using records of tax enforcement results, such as dollars collected and taxes assessed, to evaluate employee performance or set production goals. IRS and Treasury report that existing taxpayer protections would be fully preserved under the PCA initiative. Specifically, as with IRS employees, PCA employees could not be evaluated based on tax enforcement results. IRS is considering using a "balanced scorecard" to measure contractors' performance, but has not proposed specifically how this compensation balance will be struck. Finally, although the revolving fund mechanism presents potential advantages to IRS in better ensuring that it can pursue delinquent tax debts, IRS has not done a cost analysis on implementing the PCA initiative versus expanding the use of traditional IRS collection activities. We have not seen any plans to do so in the future. Some IRS officials believe that because IRS telephone collection staff have a broader scope of authority (e.g., the ability to levy a bank account to satisfy the debt) and greater experience with collecting delinquent taxes, IRS telephone staff are likely to be more effective and cost-efficient than PCAs. PCAs, however, may have advantages that IRS lacks. A number of factors would need to be considered in doing a cost analysis, and a comparison may not be possible without having some experience in using PCAs to collect this type of debt. Although IRS has received increases in its budgets since fiscal year 2001 in part to increase staffing to enhance in its compliance and collection programs, IRS has been unable to achieve the desired staffing levels. Based on past experience and uncertainty regarding some expected internal savings that would enable IRS to reallocate staff to these programs, fiscal year 2004 staff increases might not fully materialize. Today's hearing provides a useful venue for the Subcommittee to explore these funding issues and how IRS should prioritize its efforts. IRS has defined the scope and nature of its proposed new initiatives to address known sources of EIC noncompliance and to use private collection agencies to assist in collecting certain delinquent taxes. However, in both cases IRS faces significant challenges in moving forward to successfully implement the proposals. In commenting on a GAO report on IRS's National Research Program--IRS's ongoing effort to measure the level of taxpayers' compliance while minimizing the burden on taxpayers selected for the study--the former Commissioner said that IRS would not compromise the quality of the program in order to meet the program's target date. We believe this is a sound standard for these efforts as well. Careful planning for and testing of key implementation steps can help ensure the initiatives' success. This completes my prepared statement. I would be pleased to respond to any questions. For further information on this testimony, please contact Michael Brostek at (202) 512-9110 or [email protected]. Individuals making key contributions to this testimony include Leon Green, Demian Moore, Neil Pinney, and Tom Short. 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.

Taxpayers' willingness to voluntarily comply with tax laws depends in part on their confidence that friends, neighbors, and business competitors are paying their fair share of taxes. The Internal Revenue Service's (IRS) programs to ensure compliance and to collect delinquent taxes are viewed by many as critical for maintaining the public's confidence in our tax system. Congress asked GAO to present information on trends in IRS's compliance and collection programs and to discuss issues related to IRS's efforts to increase staffing for these programs. GAO was also asked to discuss IRS's plans to launch new initiatives to reduce noncompliance with the Earned Income Tax Credit (EIC) and to use private collection agencies to assist in collecting delinquent taxes. From fiscal years 1993 through 2002, IRS's four major compliance programs for individual taxpayers had mixed trends in the portion of taxpayers they contacted with two declining, one increasing, and one staying relatively the same. Among the programs, IRS's often-cited audit rate declined about 38 percent. From fiscal years 1996 through 2001, IRS's collection program experienced almost universal declines in workload coverage, cases closed, direct staff time used, productivity, and dollars of unpaid taxes collected. Many parties have expressed concern about the compliance--especially audit--and collections trends for their potential to undermine taxpayers' motivation to fulfill their tax obligations. Since 2001 IRS has sought more resources including increased staffing for compliance and collections. Despite receiving requested budget increases, staffing levels in key occupations were lower in 2002 than in 2000. These declines occurred for reasons such as unbudgeted expenses consuming budget increases and other operational workload increases. Based on past experience and uncertainty regarding some expected internal savings, fiscal year 2004 anticipated staff increases might not fully materialize. IRS's 2004 budget proposes a substantial initiative to address known sources of EIC noncompliance. IRS intends to ramp up the initiative rapidly with planning and implementation proceeding simultaneously. If it is to succeed, the initiative will require careful planning and close management attention. IRS also proposes to use private collection agencies to assist in collecting certain delinquent tax debt. IRS is seeking authority to retain some tax receipts in a revolving fund to pay the private collectors. A pilot effort to use private collectors in 1996 was unsuccessful, in part because IRS was unable to identify and channel appropriate collection cases to the private collectors. Key implementation details for this proposal must be worked out and it too will require careful planning and close management attention.

The FBI was founded in 1908 to serve as the primary investigative bureau of the Department of Justice. Its mission includes upholding the law by investigating serious federal crimes; protecting the nation from foreign intelligence and terrorist threats; providing leadership and assistance to federal, state, local, and international law enforcement agencies; and being responsive to the public in the performance of these duties. Approximately 11,000 special agents and 16,000 professional support personnel are located at the bureau's Washington, D.C., headquarters and at more than 400 offices throughout the United States and 44 offices in foreign countries. Mission responsibilities at the bureau are divided among five major organizational components: Criminal Investigations, Law Enforcement Services, Counterterrorism and Counterintelligence, Intelligence, and Administration. Criminal Investigations, for example, investigates serious federal crimes, including those associated with organized crime, violent offenses, white-collar crime, government and business corruption, and civil rights infractions. It also probes federal statutory violations involving exploitation of the Internet and computer systems for criminal, foreign intelligence, and terrorism purposes. (The major components and their associated mission responsibilities are shown in table 1.) Each component is headed by an Executive Assistant Director who reports to the Deputy Director, who in turn reports to the Director. To execute its mission responsibilities, the FBI relies on the use of IT. For example, it develops and maintains computerized IT systems such as the Combined DNA Index System to support forensic examinations, the Digital Collection System to electronically collect information on known and suspected terrorists and criminals, and the National Crime Information Center and the Integrated Automated Fingerprint Identification System to help state and local law enforcement agencies identify criminals. According to FBI estimates, the bureau manages hundreds of systems, networks, databases, applications, and associated tools such as these at an average annual cost of about $800 million. Several prior reviews of the FBI's existing IT environment have revealed that it is antiquated and not integrated. Specifically, the Department of Justice Inspector General reported that as of September 2000, the FBI had over 13,000 desktop computers that were 4 to 8 years old and could not run basic software packages. Moreover, it reported that some communications networks were 12 years old and obsolete, and that many end-user applications existed that were neither Web-enabled nor user-friendly. In addition, a December 2001 review initiated by the Department of Justice found that FBI's IT environment was disparate. In particular, it identified 234 nonintegrated ("stove-piped") applications, residing on 187 different servers, each of which had its own unique databases and did not share information with other applications or with other government agencies. Moreover, in June 2002, we reported that IT has been a long-standing problem for the bureau, involving outdated hardware, outdated software, and the lack of a fully functional E-mail system. We also reported that these deficiencies served to significantly hamper the FBI's ability to share important and time-sensitive information internally and externally with other intelligence and law enforcement agencies. Following the terrorist attacks of September 11, 2001, the FBI refocused its efforts to investigate the events and to detect and prevent possible future attacks. To do this, the bureau changed its priorities and accelerated modernization of its IT systems. Collectively, the FBI's many modernization efforts involve 51 initiatives that the FBI reported will cost about $1.5 billion between fiscal years 2002 and 2004. For example, the Trilogy project, which is to introduce new systems infrastructure and applications, includes establishing an enterprisewide network to enable communications between hundreds of FBI locations domestically and abroad, upgrading 20,000 desktop computers, and providing 2,400 printers and 1,200 scanners. In addition, a new investigative data warehousing initiative called Secure Counterterrorism Operational Prototype Environment is to (1) aggregate voluminous counterterrorism files obtained from both internal and external sources and (2) acquire analytical capabilities to improve the FBI's ability to analyze these files. Another initiative, called the FBI Administrative Support System, is to integrate the bureau's financial management and administrative systems with the Department of Justice's new financial management system. Beyond the scope and size of the FBI's modernization effort is the need to ensure that the modernized systems effectively support information sharing within the bureau and among its law enforcement and intelligence community partners. This means that the modernized FBI systems will, in many cases, have to interface with existing (legacy) systems to obtain data to accomplish their functions, which bureau officials said will be challenging, given the nonstandard and disparate nature of the existing IT environment. Moreover, bureau staff will have to be trained on the new systems and business processes modified to accommodate their use. The development, maintenance, and implementation of enterprise architectures (EA) are recognized hallmarks of successful public and private organizations and as such are an IT management best practice. EAs are essential to effectively managing large and complex system modernization programs, such as the FBI's. Our experience with federal agencies has shown that attempting a major modernization effort without a well-defined and enforceable EA results in systems that are duplicative, are not well integrated, are unnecessarily costly to maintain and interface, and do not effectively optimize mission performance. The Congress and the Office of Management and Budget have recognized the importance of agency EAs. The Clinger-Cohen Act, for example, requires that agency Chief Information Officers (CIO) develop, maintain, and facilitate the implementation of architectures as a means of integrating business processes and agency goals with IT. In response to the act, the Office of Management and Budget, in collaboration with us and others, has issued guidance on the development and implementation of these architectures. It has also issued guidance that requires agency investments in information systems to be consistent with agency architectures. An EA is a systematically derived snapshot--in useful models, diagrams, and narrative--of a given entity's operations (business and systems), including how its operations are performed, what information and technology are used to perform the operations, where the operations are performed, who performs them, and when and why they are performed. The architecture describes the entity in both logical terms (e.g., interrelated functions, information needs and flows, work locations, systems, and applications) and technical terms (e.g., hardware, software, data, communications, and security). EAs provide these perspectives for both the entity's current (or "as-is") environment and for its target (or "to- be") environment; they also provide a high-level capital investment roadmap for moving from one environment to the other. Among others, the Office of Management and Budget, the National Institute of Standards and Technology, and the federal CIO Council have issued frameworks that define the scope and content of architectures. For example, the federal CIO Council issued a framework, known as the Federal Enterprise Architecture Framework, in 1999. While the various frameworks differ in their nomenclatures and modeling approaches, they consistently provide for defining an enterprise architecture's operations in both logical terms and technical terms and providing these perspectives both for the "as-is" and "to-be" environments, as well as the investment roadmap. Managed properly, an enterprise architecture can clarify and help optimize the interdependencies and relationships among a given entity's business operations and the underlying systems and technical infrastructure that support these operations. Over the past few years, several reviews related to the FBI's management of its IT have focused on enterprise architecture efforts and needs. For example, in July 2001, the Department of Justice hired a consulting firm to review the FBI's IT management. Among other things, the consultant recommended that the bureau develop a comprehensive EA to help reduce the proliferation of disparate, noncommunicating applications. The next year, in February 2002, we reported as part of a governmentwide survey of the state of EA maturity that the FBI was one of a number of federal agencies that were not effectively managing their architecture efforts, and we made recommendations to the Office of Management and Budget for advancing the state of architecture maturity across the federal government. In this report, we noted that while the FBI was attempting to lay the management foundation for developing an architecture, the bureau had not yet established certain basic management structures and controls, such as establishing a steering committee or group that had responsibility for directing and overseeing the development of the architecture. Later, our June 2002 testimony recommended that the FBI significantly upgrade its IT management capabilities, including developing an architecture, in order to successfully change its mission and effectively transform itself. Subsequently, in December 2002, the Department of Justice Inspector General reported that the FBI needed to complete an architecture to complement its IT investment management processes. According to guidance published by the federal CIO Council,effective architecture management consists of a number of key practices and conditions (e.g., establishing a governance structure, developing policy, defining management plans, and developing and issuing an architecture). In April 2003, we published a maturity framework that arranges these key practices and conditions (i.e., core elements) of the council's guide into five hierarchical stages, with Stage 1 representing the least mature and Stage 5 being the most mature. The framework provides an explicit benchmark for gauging the effectiveness of EA management and provides a roadmap for making improvements. Each of the five stages is described below. 1. Creating EA awareness. The 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 EA activity, these agencies' efforts are ad hoc and unstructured, lack institutional leadership and direction, and do not provide the management foundation necessary for successful EA development. 2. Building the EA management foundation. The organization recognizes that the EA is a corporate asset by vesting accountability for it in an executive body that represents the entire enterprise. At this stage, an organization assigns EA management roles and responsibilities and establishes plans for developing EA products and for measuring program progress and product quality; it also commits the resources necessary for developing an architecture--people, processes, and tools. 3. Developing the EA. The organization 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 EA products. The scope of the architecture has been defined to encompass the entire enterprise, whether organization-based or function-based. 4. Completing the EA. The organization has completed its EA products, meaning that the products have been approved by the EA steering committee or an investment review board, and by the CIO. Further, an independent agent has assessed the quality (i.e., completeness and accuracy) of the EA products. Additionally, evolution of the approved products is governed by a written EA maintenance policy approved by the head of the organization. 5. Leveraging the EA to manage change. The organization has secured senior leadership approval of the EA products and has 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. Also, the organization tracks and measures EA benefits or return on investment, and adjustments are continuously made to both the EA management process and the EA products. The FBI has yet to develop an EA, and it does not have the requisite means in place to effectively develop, maintain, and implement one. The state of the bureau's architecture efforts is attributable to the level of management priority and commitment that the bureau has assigned to this effort. Unless this changes, it is unlikely the FBI will produce a complete and useful architecture, and without the architecture, the bureau will be severely challenged in its ability to implement a set of modernized systems that optimally support critical mission needs. An EA is an essential tool for effectively and efficiently engineering business operations (e.g., processes, work locations, and information needs and flows) and defining, implementing, and evolving IT systems in a way that best supports these operations. As mentioned earlier, an EA provides systematically derived and captured structural descriptions--in useful models, diagrams, tables, and narrative--of how a given entity operates today and how it plans to operate in the future, and it includes a roadmap for transitioning from today to tomorrow. The nature and content of these descriptions vary among organizations depending on the EA framework selected. The FBI has selected the federal CIO Council's Federal Enterprise Architecture Framework as the basis for defining its EA. At the highest level of component content description, the Federal Enterprise Architecture Framework requires an "as-is" architectural description, a "to- be" architectural description, and a transition plan. For the "as-is" and "to- be" descriptions, this framework also requires the following major architecture products: business, information/data, applications, and technical components. The FBI has yet to develop any of these architectural components. In response to our requests for all EA products, FBI officials, including the chief architect and the deputy chief information officer, told us that they do not yet exist. They added that they are currently in the process of developing an inventory of the FBI's existing (legacy) systems, which is a first step toward creating "as-is" architectural descriptions. They also stated that their goal is to develop and issue an initial bureau EA by the fall of 2003. The FBI lacks an architecture largely because it is not treating development and use of one as a management priority. According to the FBI's chief architect, although the FBI launched its architecture effort 32 months ago, resources allocated to this effort have been limited to about $1 million annually and four staff. In contrast, our research of successful architecture efforts in other federal agencies shows that their resource needs are considerably greater than those that the FBI has committed. Similarly, the Justice Inspector General reported in December 2002 that limited funding and resources contributed to the immature state of the bureau's EA efforts. Additionally, assignment of responsibility and accountability for developing the architecture has not been stable over the last 32 months. For example, the chief architect has changed three times in the past 12 months. As our prior reviews of federal agencies and research of architecture best practices show, attempts to modernize systems without an architecture, which is what the FBI is doing, increases the risk that large sums of money and much time and effort will be invested in technology solutions that are duplicative, are not well integrated, are unnecessarily costly to maintain and interface, and do not effectively optimize mission performance. In the FBI's case, there are indications that this is occurring. For example, the director of the modernization program management office told us that the office recently assumed responsibility for managing three system modernization initiatives and found that they will require rework in order for them to be integrated. Such integration--which an EA would have provided for--was not previously factored into their development. To allow for a more coordinated and integrated approach to pursuing its other 48 modernization initiatives, the FBI has started holding informal meetings among top managers to discuss related systems. However, such meetings are not a sufficient surrogate for an explicitly defined architectural blueprint that provides a commonly understood, accepted frame of reference against which to effectively and efficiently acquire and implement well-integrated systems. Because the task of developing, maintaining, and implementing an EA is an important, complex, and difficult endeavor, doing so effectively and efficiently requires that rigorous, disciplined management practices be adopted. Such practices form the basis of our EA management maturity framework, which specifies by stages the key architecture management structures, processes, and controls that are embodied in federal guidance and best practices. For example, Stage 2 specifies nine key practices or core elements that are necessary to provide the management foundation for successfully launching and sustaining an architecture effort. Five of the nine Stage 2 core elements are described below. Establish an architecture steering committee representing the enterprise and make the committee responsible for directing, overseeing, or approving the EA. This committee should include executive-level representatives from each line of business, and these representatives should have the authority to commit resources and enforce decisions within their respective organizational units. By establishing this enterprisewide responsibility and accountability, the agency demonstrates its commitment to building the management foundation and obtaining buy-in from across the organization. Appoint a chief architect who is responsible and accountable for the EA, and who is supported by the EA program office and overseen by the architecture steering committee. The chief architect, in collaboration with the Chief Information Officer, the architecture steering committee, and the organizational head, is instrumental in obtaining organizational buy-in for the EA, including support from the business units, as well as in securing resources to support architecture management functions, such as risk management, configuration management, quality assurance, and security management. Use an architecture development framework, methodology, and automated tool to develop and maintain the EA. These are important because they provide the means for developing the architecture in a consistent and efficient manner. The framework provides a formal structure for representing the EA, while the methodology is the common set of procedures that the enterprise is to follow in developing the EA products. The automated tool serves as a repository where architectural products are captured, stored, and maintained. Develop an architecture program management plan. This plan specifies how and when the architecture is to be developed. It includes a detailed work breakdown structure, resource estimates (e.g., funding, staffing, and training), performance measures, and management controls for developing and maintaining the architecture. The plan demonstrates the organization's commitment to managing EA development and maintenance as a formal program. Allocate adequate resources to the EA effort. An organization needs to have the resources (funding, people, tools, and technology) to establish and effectively manage its architecture. This includes, among other things, identifying and securing adequate funding to support EA activities, hiring and retaining the right people, and selecting and acquiring the right tools and technology to support activities. Our framework similarly identifies key architecture management practices associated with later stages of EA management maturity. For example, at Stage 3, the stage at which organizations focus on architecture development activities, organizations need to satisfy six core elements. Two of the six are discussed below. Issue a documented architecture policy, approved by the organization's head, governing the development of the EA. The policy defines the scope of the architecture, including the requirement for a description of the baseline and target architecture, as well as an investment roadmap or sequencing plan specifying the move between the two. This policy is an important means for ensuring enterprisewide commitment to developing an EA and for clearly assigning responsibility for doing so. Ensure that EA products are under configuration management. This involves ensuring that changes to products are identified, tracked, monitored, documented, reported, and audited. Configuration management maintains the integrity and consistency of products, which is key to enabling effective integration among related products and for ensuring alignment between architecture artifacts. At Stage 4, during which organizations focus on architecture completion activities, organizations need to satisfy eight core elements. Two of the eight are described below. Ensure that EA products and management processes undergo independent verification and validation. This core element involves having an independent third party--such as an internal audit function or contractor that is not involved with any of the architecture development activities--verify and validate that the products were developed in accordance with EA processes and product standards. Doing so provides organizations with needed assurance of the quality of the architecture. Ensure that business, performance, information/data, application/service, and technology descriptions address security. An organization should explicitly and consistently address security in its business, performance, information/data, application/service, and technology EA products. Because security permeates every aspect of an organization's operations, the nature and substance of institutionalized security requirements, controls, and standards should be captured in EA products. At Stage 5, during which the focus is on architecture maintenance and implementation activities, organizations need to satisfy eight core elements. Two of the eight are described below. Make EA an integral component of IT investment decision-making processes. Because the roadmap defines the IT systems that an organization plans to invest in as it transitions from the "as-is" to the "to- be" environment, the EA is a critical frame of reference for making IT investment decisions. Using the EA when making such decisions is important because organizations should approve only those investments that move the organization toward the "to-be" environment, as specified in the roadmap. Measure and report return on EA investment. Like any investment, the EA should produce a return on investment (i.e., a set of benefits), and this return should be measured and reported in relation to costs. Measuring return on investment is important to ensure that expected benefits from the EA are realized and to share this information with executive decision makers, who can then take corrective action to address deviations from expectations. Effective EA management is generally not achieved until an organization has a completed and approved architecture that is being effectively maintained and implemented, which is equivalent to having satisfied many Stage 4 and 5 core elements. Table 2 summarizes our framework's five stages and the associated core elements for each. The FBI is currently at Stage 1 of our maturity framework. Of the nine foundational stage core elements (Stage 2), the FBI has fully satisfied one element by designating a chief architect. Additionally, the bureau has partially satisfied two other elements. First, it has established an architecture governance board as its steering committee. However, the bureau has not included all relevant FBI stakeholders on the board, such as representatives from its counterterrorism and counterintelligence organizational component. Second, the bureau has selected the Federal Enterprise Architecture Framework as the framework to guide its architecture development. However, it has not yet selected a development methodology or automated tool (a repository for architectural products). The FBI has not satisfied the six remaining Stage 2 core elements. For example, the bureau has not established a program office. In addition, it has not developed a program management plan that provides for describing (1) the bureau's "as-is" and "to-be" environments, as well as a sequencing plan for transitioning from the "as-is" to the "to-be" and (2) the enterprise in terms of business, data, applications and technology, including how security will be addressed in each. With respect to Stages 3, 4, and 5, the FBI has not satisfied any of the associated core elements. (The detailed results of our assessment of the FBI's satisfaction of each of the stages and associated core elements is provided in app. II.) The state of the FBI's EA management maturity is attributable to a lack of management commitment to having and using an architecture and to giving it priority. Indeed, several of the core elements cited above as not being satisfied, such as having EA policies and allocating adequate resources, are indicators of an organization's architectural commitment. According to FBI officials, including the chief architect, EA management has not been an agency priority, and thus has not received needed attention and resources. Without effective EA management structures, processes, and controls, it is unlikely that the bureau will be able to produce a complete and enforceable enterprise architecture and thus be able to implement modernized systems in a way that minimizes overlap and duplication and maximizes integration and mission support. The bureau's ongoing and planned system modernization efforts are at risk of not being defined and implemented in a way that best supports institutional mission needs and operations. Effectively mitigating this risk will require swift development and use of a modernization blueprint, or enterprise architecture; up to now, the FBI has not adequately demonstrated a commitment to developing such an architecture. In reversing this pattern, it is important that the architecture development and use be made an agency priority, and that it be managed in a way that satisfies the practices embodied in our architecture management maturity framework. To do less will continue to expose the bureau's system modernization efforts, and ultimately the effectiveness and efficiency of its mission performance, to unnecessary risk. We recommend that the FBI Director immediately designate EA development, maintenance, and implementation as an agency priority and manage it as such. To this end, we recommend that the Director ensure that appropriate steps are taken to develop, maintain, and implement an EA in a manner consistent with our architecture management framework. This includes first laying an effective EA management foundation by (1) ensuring that all business partners are represented on the architecture governance board; (2) adopting an architecture development methodology and automated tool; (3) establishing an EA program office that is accountable for developing the EA; (4) tasking the program office with developing a management plan that specifies how and when the EA is to be developed and issued; (5) ensuring that the management plan provides for the bureau's "as-is" and "to-be" environments, as well as a sequencing plan for transitioning from the "as-is" to the "to-be"; (6) ensuring that the management plan also describes the enterprise in terms of business, data, applications, and technology; (7) ensuring that the plan also calls for describing the security related to the business, data, and technology; (8) ensuring that the plan establishes metrics for measuring EA progress, quality, compliance, and return on investment; and (9) allocating the necessary funding and personnel to EA activities. Next, we recommend that the Director ensure that steps to develop the architecture products include (1) establishing a written and approved policy for EA development; (2) placing EA products under configuration management; (3) ensuring that EA products describe the enterprise's business, as well as the data, applications, and technology that support it; (4) ensuring that EA products describe the "as-is" environment, the "to-be" environment, and a sequencing plan; (5) ensuring that business, performance, data, application, and technology descriptions address security; and (6) ensuring that progress against EA plans is measured and reported. In addition, we recommend that the Director ensure that steps to complete architecture products include (1) establishing a written and approved policy for EA maintenance; (2) ensuring that EA products and management processes undergo independent verification and validation; (3) ensuring that EA products describe the enterprise's business and the data, application, and technology that supports it; (4) ensuring that EA products describe the "as-is" environment, the "to-be" environment, and a sequencing plan; (5) ensuring that business, performance, data, application, and technology descriptions address security; (6) ensuring that the Chief Information Officer approves the EA; (7) ensuring that the steering committee and/or the investment review board has approved the current version of the EA; and (8) measuring and reporting on the quality of EA products. Further, we recommend that the Director ensure that steps taken to use the EA to manage modernization efforts include (1) establishing a written and approved policy for IT investment compliance with EA, (2) establishing processes to formally manage EA changes, (3) ensuring that EA is an integral component of IT investment management processes, (4) ensuring that EA products are periodically updated, (5) ensuring that IT investments comply with the EA, (6) obtaining Director approval of the current EA version, (7) measuring and reporting EA return on investment, and (8) measuring and reporting on EA compliance. Finally, we recommend that the Director ensure that the bureau develops and implements an agency strategy for mitigating the risks associated with continued investment in modernized systems before it has an EA and controls for implementing it. We discussed our findings with the FBI's Chief Architect and later transmitted a draft of this report to the bureau on August 22, 2003, for its review and comment, requesting that any comments be provided by September 18, 2003. However, none were provided in time to be included in this printed report. We are sending copies of this report to the Chairman and Vice Chairman of the Senate Select Committee on Intelligence and the Ranking Minority Member of the House Permanent Select Committee on Intelligence. We are also sending copies to the Attorney General; the Director, FBI; the Director, Office of Management and Budget; and other interested parties. In addition, the report will also be available without charge on GAO's Web site at http://www.gao.gov. Should you have any questions about matters discussed in this report, please contact me at (202) 512-3439 or by E-mail at [email protected]. Key contributors to this report are listed in appendix III. To evaluate whether Federal Bureau of Investigation (FBI) has a modernization blueprint, commonly called an enterprise architecture (EA), to guide and constrain its modernization efforts, we requested that the bureau provide us with all of its EA products. We also interviewed FBI officials, including the chief architect, to verify the status and plans for developing bureau EA products, the causes for why none had been completed to date, and the effects of proceeding with modernization initiatives without an EA. To assess whether the FBI was effectively managing its architecture activities, we compared bureau EA management practices to our EA management maturity framework. This framework is based on A Practical Guide to Federal Enterprise Architecture, published by the federal Chief Information Officers (CIO) Council. To do this, we first reviewed bureau EA plans and products, and we interviewed FBI officials to verify and clarify our understanding of bureau EA efforts. Next, we compared the information that we had collected against our EA management maturity framework practices to determine the extent to which the FBI was employing such effective management practices. In addition, we interviewed FBI's chief architect and other bureau officials to determine, among other things, the cause of differences between what is specified in the framework and the condition at the FBI. We also reviewed past FBI information technology (IT) management studies and Department of Justice Inspector General reports, to understand the state of FBI management practices, including their strengths and weaknesses, underlying causes for improvements, and open recommendations. Further, we interviewed FBI division officials to understand the extent of their participation in the bureau's architecture efforts. Finally, to verify our findings and validate our assessment, we discussed with the chief architect our analysis of the state of FBI's EA practices against our maturity framework. We performed our work at FBI headquarters in Washington, D.C., from September 2002 until August 2003, in accordance with generally accepted government auditing standards. Agency is aware of EA. The FBI has acknowledged the need for an EA. Adequate resources exist. The FBI has allocated four architects and approximately $1 million annually for the development, implementation, and maintenance of its EA. Committee or group representing the enterprise is responsible for directing, overseeing, or approving EA. The FBI has established the architecture governance board to direct, oversee, and approve the EA. However, not all FBI components are represented on the board. Program office responsible for EA development and maintenance exists. The FBI does not have a program office responsible for the development, maintenance, or implementation of its EA. Chief architect exists. The FBI has designated a chief architect. EA is being developed using a framework, methodology, and an automated tool. The FBI plans to use the Federal Enterprise Architecture Framework. However, FBI officials reported that they are not using a methodology or automated tool. EA plans call for describing "as-is" environment, "to-be" environment, and sequencing plan. No EA plans exist. EA plans call for describing the enterprise in terms of business, data, applications, and technology. No plans exist. EA plans call for business, performance, data, application, and technology descriptions to address security. No plans exist. EA plans call for developing metrics for measuring EA progress, quality, compliance, and return on investment. No plans exist. Written/approved policy exists for EA development. The FBI does not have a written and approved policy for EA development. EA products are under configuration management. The FBI has not developed its EA products; thus no products are under configuration management. EA products describe or will describe the enterprise's business and the data, applications, and technology that support it. The FBI plans to describe its enterprise's business and the data, applications, and technology that support it. However, no completion date has been established. EA products describe or will describe the "as-is" environment, the "to-be" environment, and a sequencing plan. The FBI plans to describe its "as-is" and "to-be" environments, as well as a sequencing plan. However, no completion date has been established. Business, performance, data, application, and technology address or will address security. No plans exist. Progress against EA plans is measured and reported. No plans exist. Written/approved policy exists for EA maintenance. According to FBI officials, there is no written and approved policy for EA maintenance. EA products and management processes undergo independent verification and validation. The FBI has not developed EA products, and management processes do not undergo independent verification and validation. EA products describe the enterprise's business and the data, applications, and technology that support it. The FBI has not developed these products. EA products describe the "as-is" environment, the "to-be" environment, and a transitioning plan. The FBI has not developed these products. Business, performance, data, application, and technology descriptions address security. No plans exist. Organization chief information officer has approved EA. There is no approved version of the FBI's EA. Committee or group representing the enterprise or the investment review board has approved current version of EA. The FBI has not developed an EA. Quality of EA products is measured and reported. The FBI has not developed an EA. Written/approved policy exists for IT investment compliance with EA. The FBI has no written and approved policy addressing IT investment compliance with EA. Process exists to formally manage EA change. No management plans exist. EA is integral component of IT investment management process. The FBI has not developed an EA. EA products are periodically updated. The FBI has not developed an EA. IT investments comply with EA. The FBI has not developed an EA. Organization head has approved current version of EA. The organization head has not approved the EA. Return on EA investment is measured and reported. The FBI does not have an EA to determine return on investment. Compliance with EA is measured and reported. The FBI does not have an EA to measure and report compliance. In addition to the individual named above, key contributors to this report included Nabajyoti Barkakati, Katherine I. Chu-Hickman, Barbara Collier, Michael Fruitman, David Hinchman, Mary Beth McClanahan, Paula Moore, and Megan Secrest. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO's Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. 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The Federal Bureau of Investigation (FBI) is in the process of modernizing its information technology (IT) systems. Replacing much of its 1980s-based technology with modern system applications and a robust technical infrastructure, this modernization is intended to enable the FBI to take an integrated approach--coordinated agencywide--to performing its critical missions, such as federal crime investigation and terrorism prevention. GAO was requested to conduct a series of reviews of the FBI's modernization management. The objective of this first review was to determine whether the FBI has an enterprise architecture to guide and constrain modernization investments. About 2 years into its ongoing systems modernization efforts, the FBI does not yet have an enterprise architecture. An enterprise architecture is an organizational blueprint that defines--in logical or business terms and in technology terms--how an organization operates today, intends to operate in the future, and intends to invest in technology to transition to this future state. GAO's research has shown that attempting to modernize an IT environment without a well-defined and enforceable enterprise architecture risks, among other things, building systems that do not effectively and efficiently support mission operations and performance. The FBI acknowledges the need for an enterprise architecture and has committed to developing one by the fall of 2003. However, it currently lacks the means for effectively reaching this end. For example, while the bureau did recently designate a chief architect and select an architecture framework to use, it does not yet have an agency architecture policy, an architecture program management plan, or an architecture development methodology, all of which are necessary components of effective architecture management. Given the state of the FBI's enterprise architecture management efforts, the bureau is at Stage 1 of GAO's enterprise architecture management maturity framework. Organizations at Stage 1 are characterized by architecture efforts that are ad hoc and unstructured, lack institutional leadership and direction, and do not provide the management foundation necessary for successful architecture development and use as a tool for informed IT investment decision making. A key for an organization to advance beyond this stage is to treat architecture development, maintenance, and implementation as an institutional management priority, which the FBI has yet to do. To do less will expose the bureau's ongoing and planned modernization efforts to unnecessary risk.

The IQA directed OMB to issue guidelines to federal agencies covered by the Paperwork Reduction Act designed to ensure the "quality, objectivity, utility, and integrity" of information disseminated to the public. The IQA also directed OMB to include in its guidelines requirements for agencies to (1) develop their own information quality guidelines, (2) establish administrative mechanisms for affected persons to seek correction of information that does not comply with OMB's guidelines, and (3) annually report to OMB the number and nature of complaints they receive regarding the accuracy of the information they disseminate. Prior to the IQA, there were several governmentwide actions aimed at improving agency data. For example, Statistical Policy Directive No. 2, first issued in 1952, required statistical agencies to inform users of conceptual or other limitations of the data, including how the data compare with similar statistics. In 1996, the Federal Committee on Statistical Methodology--an OMB-sponsored interagency committee dedicated to improving the quality of federal statistics--established a subcommittee to review the measurement and reporting of data quality in federal data collection programs. The results of the subcommittee's work were published in a 2001 report that addressed such issues as what information on sources of error federal data collection programs should provide, and how they should provide it. For all federal government information collections, the 1995 amendments to the Paperwork Reduction Act called on federal agencies to manage information resources with the goal of improving "the integrity, quality, and utility of information to all users within and outside the agency." OMB's IQA guidelines were issued in final form in February 2002. They required agencies subject to the IQA to take such steps as issue information quality guidelines designed to ensure the quality, objectivity, utility, and integrity of information disseminated to the public; establish administrative mechanisms for affected persons to seek correction of information they believe is not in compliance with the guidelines; report annually to the Director of OMB on the number and nature of complaints received regarding compliance with the guidelines and how the agencies handled those complaints; and designate an official responsible for ensuring compliance with OMB's guidelines. The OMB guidelines defined quality as an encompassing term comprising utility, which is the usefulness of the information to its intended users; integrity, which refers to the security of information and its protection from unauthorized access or revision; and objectivity, which addresses both presentation (i.e., whether the information is being presented in an accurate, clear, complete, and unbiased manner) and substance (i.e., whether the information is accurate, reliable, and unbiased). In addition, OMB addresses transparency within the definition of objectivity and utility. As recognized in OMB's guidelines, agencies that disseminate influential scientific, financial, or statistical information must demonstrate a high degree of transparency about data and methods. These measures are in place to facilitate the information's reproducibility by an outside party or reanalysis of an agency's results. The National Research Council of the National Academies considers transparency a key principle for federal statistical agencies, and stated in a recent report that transparency, which it defines as "an openness about the sources and limitations of the data," is particularly important for instilling credibility and trust among data users and providers. As an agency within USDA, NASS is required to comply with the IQA. One statistical program administered by NASS is the quinquennial Census of Agriculture. According to NASS, the census provides a detailed picture of U.S. farms and ranches every 5 years and is the only source of uniform, comprehensive agricultural data at the county level. The results are published in 18 reports divided among three categories: Geographic Area Series, Census Quick Stats, and Specialty Products and Special Studies. Users of this information include federal agencies (for program and statistical purposes), farm organizations, businesses, universities, state departments of agriculture, elected representatives, legislative bodies at all levels of government, and academia. The next Census of Agriculture is scheduled for 2007. Our objectives were to (1) review how NASS met OMB's guidelines covering the IQA and (2) examine the transparency of the documentation behind the Census of Agriculture's processes and products, including the recently completed work on the 2002 Census, and the efforts currently underway for the 2007 Census. To achieve both of these objectives, we reviewed OMB's and NASS's information quality guidelines, Census of Agriculture reports, submissions to OMB, and other relevant documents. We also interviewed NASS officials about how NASS conducted the 2002 Census and how it is planning for the 2007 Census. The officials included the NASS Administrator, Associate Administrator, and Deputy Administrator for Programs and Products. In addition, to evaluate the transparency of Census of Agriculture products, we reviewed eight census reports and the Frequently Asked Questions area of the 2002 Census Web site, to determine the extent to which NASS followed its own procedures for ensuring the transparency of its information products. NASS's IQA guidelines define transparency as, "a clear description of the methods, data sources, assumptions, outcomes, and related information that allows a data user to understand how an information product was designed and produced." NASS's guidelines state that its survey activities include such activities as sample design, questionnaire design, pre-testing, analysis of sampling, and imputation of missing data. However, the guidelines were not clear as to the specific activities to be documented. Consequently, we reviewed the practices employed by such statistical agencies as the National Academies of Sciences, International Monetary Fund, and U.S. Census Bureau, and developed a set of 20 practices associated with transparent documentation that encompassed the items NASS laid out in its own guidelines. The practices include such actions as defining data items, discussing sample design, and describing how the content of the survey differs from past iterations (see app. II). We looked for the presence or absence of these practices in 9 out of the 18 census reports and related forms of data that NASS disseminates, and verified the results with a second, independent analysis. In instances where a report did not include a particular documentation practice, we reviewed whether the report instead informed data users where to obtain this information. We chose these 9 reports because they all stem from the original census data collection, represent different product categories, and were available on the census Web site as of February 1, 2005. To obtain an external perspective of how NASS processes and products address the IQA guidelines, we interviewed six data users from different types of agricultural and research organizations. We selected these data users from lists of registrants for USDA and NASS outreach meetings within the past 5 years. We selected these six data users because they use information from the census on a regular basis. Moreover, these data users attended the most recent NASS outreach meeting, which specifically addressed the 2002 and 2007 Censuses. Some data users had also provided NASS with feedback on the content of the agricultural census. Their views cannot be projected to the larger population of census data users. We requested comments on a draft of this report from the Secretary of Agriculture. On September 8, 2005, we received the NASS Administrator's written comments and have reprinted them in appendix I. They are addressed in the Agency Comments and Our Evaluation section of this report. NASS fulfilled the various procedural responsibilities and reporting requirements under OMB's guidelines. For example, NASS released its own IQA guidelines for public comment on March 27, 2002. NASS officials stated they received no substantive comments on them and OMB approved the guidelines with only minimal changes. The officials also noted that no revisions have been made since then. Table 1 shows in greater detail how NASS addressed OMB's guidelines. NASS's IQA guidelines define transparency as, "a clear description of the methods, data sources, assumptions, outcomes, and related information that allows a data user to understand how an information product was designed and produced." NASS's guidelines also note that "NASS will make the methods used to produce information as transparent as possible" and that its "internal guidelines call for clear documentation of data and methods used in producing estimates and forecasts. . . ." To assess the extent to which NASS processes help ensure the transparency of the information it publishes, we examined key publications from the 2002 Census of Agriculture. Census reports vary in terms of scope and intended audience (see table 2). On the one hand, the United States Summary and State Data report contains over 100 data tables, an introduction, and four appendices. On the other hand, County Profile reports summarize each county's agricultural situation on two pages. Overall, we assessed eight census reports within three product categories, as well as the Frequently Asked Questions (FAQ) section of the 2002 Census Web site, to determine the extent to which NASS followed its own guidelines for ensuring the transparency of its products. As shown in table 2, the transparency of the data documentation in the reports we reviewed varied between the Geographic Area Series reports--which are the most comprehensive of NASS's products and addressed 15 of the 20 data documentation practices--and the Specialty Products and Special Studies which, depending on the specific product, addressed no more than 1 of the practices. All eight reports and the FAQ Web site lacked a discussion of four documentation practices, including the following: 1. Questionnaire testing. NASS produced a separate, internal report that discusses questionnaire testing in detail; however, publicly available census publications do not address this topic. 2. Limitations of the data. NASS does not discuss data limitations in the census reports we reviewed. 3. Impact of imputations, by item. When a statistical agency receives a report form with missing values, it normally estimates or "imputes" those values based on comparable data sources such as a similar farm operation. Although NASS uses a complex editing and imputation process to estimate missing values, and describes this process in the United States Summary and State Data report appendix, it does not quantify the impact of imputations by item in reports. 4. Whether any of the collected data have been suppressed for data quality reasons. Without information on whether any of the data had been suppressed because the quality was lacking, data users must assume that reports include all data items collected in the census had met agency publication standards. Although NASS appropriately recognizes the variation in data user needs by publishing several types of specialized reports, none of the reports we reviewed direct data users where to find either a complete set of documentation or additional documentation. For example, given the short length and summary format of the County Profile reports, it is not surprising that they lack documentation. However, in order for users to assess the quality of the data contained in the reports, it is important for NASS to at least provide links on its Web site or to other publications where users can access definitions, response rates, and other relevant information. NASS has two methods for handling data correction requests, depending on how they are submitted: a formal approach prescribed by OMB for correction requests filed under IQA, and an informal approach that NASS uses to address correction requests that are not filed under IQA. NASS's informal correction procedures lack transparency because they are not documented and individual cases are not tracked. As a result, we could not determine the nature of these correction requests or whether or how they were addressed. Consistent with OMB's guidelines, NASS detailed its procedures to request corrections under IQA on its Web site, and posted appropriate Federal Register notices. For example, NASS's Web site explains that to seek a correction under IQA, petitioners must, among other steps: (1) state that their request for correction is being submitted under IQA, (2) clearly identify the information they believe to be in error, and (3) describe which aspects of NASS's IQA guidelines were not followed or were insufficient. According to the instructions posted on its Web site, NASS's IQA procedures are triggered only when petitioners explicitly state they are submitting a correction request under IQA. To date, none have done so. NASS addresses all other correction requests using informal, undocumented procedures that were in place before IQA was enacted. NASS officials explained that such requests are forwarded to the agency official responsible for preparing the report containing the information in question. That official, in turn, determines if the request can be resolved by clarifying the data, or whether a correction is needed. If a data item needs to be corrected, NASS has a set of procedures for documenting errors and issuing errata reports that are detailed in its Policy and Standards Memorandum No. 38. The memorandum describes the circumstances under which errata reports will be printed, and provides a mechanism for NASS staff to describe the nature of the error, its cause, and the action taken to resolve it. According to the Administrator, Associate Administrator, and other senior NASS officials we interviewed, the requests it has handled from the 2002 Census have so far been resolved to the petitioners' satisfaction, and none resulted in any corrections to the data from the 2002 Census. However, because NASS does not document its informal procedures for handling inquiries and data correction requests, and lacks a recordkeeping system to log and track them, NASS could not provide us with firm information on the number of inquiries it has handled, the nature of those inquiries, and whether and how they were addressed. This is not to say that all complaints should follow the same procedures required by the IQA mechanism. For efficiency's sake, it is important for agencies to respond to complaints in accordance with the magnitude of the problem. However, to provide a more complete picture of the questions NASS receives about its data and how those questions were handled, it will be important for NASS to better document its approach for handling correction requests not filed under IQA, and track their disposition. The 2002 Census of Agriculture was the first in which NASS developed the questionnaire (the 1997 Census of Agriculture was moved from the Census Bureau to NASS after the content had been determined). In doing so, NASS went to great lengths to obtain input from data users on what questions to ask, and evaluated their suggestions using a documented set of criteria. In preparing for the 2007 Census, NASS sought feedback on the questionnaire content from a broader spectrum of data users, in part because NASS solicited suggestions via the Internet. However, unlike the 2002 cycle, the criteria NASS used to assess the feedback were not initially documented, which is contrary to NASS's IQA guidelines. However, as a result of our review, NASS has developed documented criteria similar to that used during the previous census. Under the Paperwork Reduction Act, agencies must obtain OMB's approval prior to collecting information from the public. As part of this process, agencies must certify to OMB that, among other things, the effort is necessary for the proper performance of agency functions, avoids unnecessary duplication, and reduces burden on small entities. Agencies must also provide an estimate of the burden the information collection would place on respondents. For the 2002 Census, NASS submitted its request for approval--a form called "OMB 83-I"--in August 2001, and OMB approved it in October 2001. NASS estimated that the census would require a cumulative total of more than 1.3 million hours for respondents to complete and would cost them, in terms of their time, in excess of $21 million. OMB's approval process also requires agencies to solicit input from external sources. NASS obtained input on the 2002 Agricultural Census content through a Federal Register notice, meetings with data users, and by contacting federal and state agencies that use census statistics to discuss data needs. Likewise, NASS is obtaining input on the content of the 2007 Census through a variety of channels. According to an agency official, the process began around June 2004, when NASS began releasing publications from the 2002 Census. NASS sent an evaluation form to its state offices requesting feedback on the census, including their suggestions for changing the content. NASS also asked the state offices to identify users from whom it could obtain additional feedback. NASS solicited further input by reaching out to data users within USDA and other federal agencies, querying organizations included in a list of "typical" data users maintained by NASS's Marketing and Information Services Office, and holding periodic regional meetings with data users. NASS also has a "hot button" on its Web site where visitors are asked what items, if any, should be added or deleted from the census. In all, NASS obtained input on the 2007 Census through 10 distinct conduits. Moreover, compared to the process used to develop the content of the 2002 Census, its 2007 efforts were open to a wider spectrum of customers, and involved more direct contact with data users during the planning phase. Indeed, as shown in table 3, NASS's outreach via the Internet, regional meetings, and queries to data users was over and above the steps it took when developing the 2002 Census. This openness was reflected in the comments of the six data users we interviewed. Five of the six users said NASS's approach to eliciting input was adequate, while three of the six had requested new content items for the 2007 Census to better meet the needs of their organizations. The content evaluation process began in December 2004, and NASS is currently testing the questionnaire content. Following any refinements, mail-out of the actual census is scheduled for December 2007. For both the 2002 and 2007 Census cycles, the solicitation, review, and ultimate determination of the questionnaire content was led by the Census Content Team, a group consisting of experienced NASS statisticians representing different segments of the agency such as livestock, crops, and marketing. The 2002 Content Team used specific, documented criteria to inform its decisions. Specifically, suggestions were assessed according to the following factors, which were also made available to data users: items directly mandated by Congress or items that had strong items proposed by other federal agencies where legislation called for that agency to provide data for Congress; items needed for evaluation of existing federal programs; items which, if omitted, would result in additional respondent burden and cost for a new survey for other agencies or users; items required for classification of farms by historical groupings; items needed for improving coverage in the census; and items that would provide data on current agricultural issues. However, the criteria the 2007 Team used to assess input on the questionnaire content were not initially documented. According to agency officials we interviewed, NASS largely relied on professional judgment to evaluate the feedback it received, considering such factors as the need to keep the data comparable to past censuses and not increase the length of the questionnaire. Although a certain amount of professional judgment will invariably be used in making determinations on questionnaire content, the absence of documented assessment criteria is inconsistent with NASS's guidelines. Indeed, these guidelines note that transparent documentation "allows a data user to understand how an information product was designed and produced." Moreover, without documented criteria, it is not clear whether members of the Content Team are considering the same set of factors, or even if they are weighing those factors in the same manner. According to NASS, the shift in approach stemmed from staff turnover and reassignments of members of the 2002 Team and, as a result, the 2007 Team was not aware of the criteria used in 2002. Our review made the 2007 Team aware of the earlier set of criteria, and the Team has since developed similar documentation. NASS noted that all future content teams will use and update these criteria when developing the content of subsequent censuses. It will be important for NASS to continue with this approach because it is more consistent with its own IQA guidelines, and will also help NASS to do the following: Ensure the utility and relevance of information. A key principle for federal statistical agencies is to provide information relevant to issues of public policy. However, the nation's information needs are constantly evolving, and it is important for statistical agencies to adapt accordingly. This is particularly true with agriculture, where a variety of factors such as changing technology and agricultural trends can affect what information should be collected. Rigorous content selection criteria could help NASS methodically evaluate the needs of different users, establish priorities, and keep the census synchronized with changing public policy requirements. Maximize cost-effectiveness and reduce public burden. As with all federal surveys, there are financial and nonfinancial costs to conducting the Census of Agriculture. These costs include the direct expenditures related to planning, implementing, and analyzing the census, as well as disseminating the information. There is also a cost to respondents in terms of the time they take to complete the questionnaire. Additionally, there are opportunity costs in that for every question that is included in the census, another question might need to be excluded so as not to increase the length of the census. Rigorous, consistently applied criteria can help promote cost-effectiveness because they can ensure that only those questions that meet a particular, previously identified need are included in the census. Applying such criteria also help inform decisions on the appropriate role of the federal government in collecting the data, and whether a particular question might be more appropriately addressed by a different survey, government organization, or the by the private sector. Maintain credibility. Content selection criteria provide a basis for consistent decision making on what to include in the census and what gets left off. This is especially important for maintaining NASS's credibility given the input it receives from various sources. Without documented criteria, NASS's actions could be perceived as arbitrary or disproportionately swayed by one particular interest or another; thus, NASS's decisions would be more defensible. Further, documented criteria will guard against the loss of institutional memory to the extent there is further turnover in Content Team membership. NASS satisfied the procedural responsibilities and reporting requirements under OMB's IQA guidelines. Moreover, to the extent that NASS continues to use the documented criteria it developed to inform future decisions on the content of the Census of Agriculture, it could help establish a closer alignment between the questions included in the census and evolving agricultural policy requirements, resulting in a more cost-effective data collection program. Building on these efforts, the transparency of census data products could be improved with more robust documentation. NASS's procedures for addressing correction requests not filed under IQA could be more transparent as well. More than just a paperwork issue, greater transparency will help enhance NASS's accountability to public data users and increase the credibility of census information. To help enhance the transparency of the Census of Agriculture's processes and products, we recommend that the Secretary of Agriculture direct NASS to take the following two steps: 1. Ensure that census products fully address NASS's own guidelines for data documentation or at least contain links to such information. The list of 20 documentation practices that we developed, while not necessarily exhaustive, represents sound actions used by other statistical agencies and could form a starting point for NASS. 2. Document and post on NASS's Web site its procedures for handling data correction requests not filed under IQA, and track the disposition of those requests. The NASS Administrator provided written comments on a draft of this report on September 8, 2005, which are reprinted in appendix I. NASS noted that our "report and recommendations are insightful and will be used to further strengthen the transparency of NASS methods and procedures." In particular, NASS concurred with our finding that the methods and procedures in its specialized reports should be better documented and, consistent with our recommendation, stated that these products "will now provide links to this information." NASS's efforts, if fully implemented, should make it easier for data users to understand how these products were designed and produced, and NASS should be commended for its actions to continually improve its products and better meet the needs of its customers. While NASS's more comprehensive products were better documented, our analysis found that they could also benefit from more robust documentation. Thus, in keeping with our recommendation, it will be important for NASS to ensure that all of its census products--its larger reports and more focused studies--fully address NASS's own guidelines for data documentation. In commenting on our recommendation for NASS to document and post on its Web site its procedures for handling data correction requests not filed under IQA, NASS concurred with our view that this information would provide it with a better sense of the questions it receives about its data, but added that "a detailed recordkeeping system to log and track every inquiry" would not be the best use of its resources. Instead, NASS plans to "compile a listing of the more common issues" and make them available on its Web site in the form of frequently asked questions. NASS believes this approach would be useful for future planning, as well as provide answers to questions most likely to arise among other data users. As noted in our report, our recommendation stemmed from our finding that NASS could not provide us with information on the number of inquiries not filed under IQA, the characteristics of those inquiries, and how they were addressed. Although the details remain to be seen, NASS's proposed approach could provide this information and, consistent with the intended outcome our recommendation, address the need for greater transparency. NASS's efforts will be further strengthened if, consistent with our recommendation, it posts on its Web site its procedures for handling correction requests not filed under IQA. We will send copies of this report to other interested congressional parties, the Secretary of Agriculture, and the NASS Administrator. Copies will be made available to others on request. This report will also be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-6806 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. State and County Reports (Alabama) State and County Reports (Alabama) In addition to the contact named above, Robert Goldenkoff, Assistant Director; David Bobruff; Jennifer Cook; Richard Donaldson; Andrea Levine; Robert Parker; John Smale; and Michael Volpe made key contributions to this report.

The Information Quality Act (IQA) required the Office of Management and Budget to issue guidelines for ensuring the quality, objectivity, utility, and integrity of information disseminated by federal agencies. As part of our long-term examination of the quality of federal information, under the Comptroller General's authority, we reviewed how the act was implemented by the National Agricultural Statistics Service (NASS), and assessed the transparency of the documentation supporting its Census of Agriculture. NASS is part of the U.S. Department of Agriculture (USDA). NASS fulfilled its various procedural responsibilities and reporting requirements under the Office of Management and Budget's (OMB) guidelines for implementing the act. For example, NASS drafted its own implementation guidance, and developed a mechanism allowing affected parties to request the correction of information they believe is of poor quality. As a result of our review, NASS has also taken steps to better document the criteria it uses to evaluate data users' input on the content of the Census of Agriculture. Building on these efforts, better documentation could improve the transparency of census data products. For example, the nine key products from the 2002 Census we examined lacked, among other things, discussions of any data limitations. This is contrary to NASS's own guidelines for ensuring transparency, which stress the importance of describing the methods, data sources, and other items to help users understand how the information was designed and produced. Although NASS complied with OMB's requirement to establish a mechanism under IQA to address requests to correct information, NASS has not documented its approach for handling correction requests not filed under IQA (NASS handles these correction requests using an existing, informal method). Agency officials told us that data users have been satisfied with the way NASS had responded to these requests. However, because NASS does not document its informal procedures for handling correction requests and lacks a recordkeeping system to log and track them, NASS could not provide us with specific data on the number of such requests it has handled, the nature of those requests, and whether and how they were addressed.

In December 2012, we reported on Border Patrol's evolving approach for deploying agents along the southwest border. In that report we found that Border Patrol's 2004 Strategy provided for increasing resources and deploying these resources using an approach that provided for several layers of Border Patrol agents at the immediate border and in other areas 100 miles or more away from the border (referred to as defense in depth). According to the CBP officials we interviewed for our report, as resources increased, Border Patrol sought to move enforcement closer to the border over time to better position the agency to ensure the arrest of those trying to enter the country illegally. Additionally, headquarters and field officials said station supervisors determined (1) whether to deploy agents in border zones or interior zones, and (2) the types of enforcement or nonenforcement activities agents were to perform. Similarly, Border Patrol officials from the five sectors we visited stated that they used similar factors in making deployment decisions, such as intelligence showing the presence of threat across locations, the nature of the threat, and environmental factors including terrain and weather. We reported in December 2012 on Border Patrol data from fiscal year 2011 that showed how agent workdays were scheduled and found differences across sectors in the percentage of agent workdays scheduled for border zones and interior zones and across enforcement and nonenforcement activities. Specifically, we found that while Tucson sector scheduled 43 percent of agent workdays to border zones in fiscal year 2011, agent workdays scheduled for border zones by other southwest border sectors ranged from 26 percent in the Yuma sector to 53 percent in the El Centro sector. Our analysis of agents deployed for enforcement compared to nonenforcement activities ranged from 66 percent for Yuma sector to 81 percent in Big Bend sector. Border Patrol officials we interviewed attributed the variation in scheduling border zone deployment in fiscal year 2011 to differences in geographical factors among the southwest border sectors--such as varying topography, ingress and egress routes, and land access issues, and structural factors such as technology and infrastructure deployments-- and stated that these factors affect how sectors operate and may preclude closer deployment to the border. Additionally, we found that many southwest border sectors have interior stations that are responsible for operations at some distance from the border, such as at interior checkpoints generally located 25 miles or more from the border, which could have affected their percentage of agent workdays scheduled for border zones. We have planned work to assess Border Patrol deployment and management of agents across the southwest border beginning later this year. We also reported in December 2012 that Border Patrol sector management used changes in various data over time to help inform assessment of its efforts to secure the border against the threats of illegal migration, smuggling of drugs and other contraband, and terrorism. These data showed changes in the (1) percentage of estimated known illegal entrants who are apprehended, (2) number of seizures of drugs and other contraband, and (3) number of apprehensions of persons from countries at an increased risk of sponsoring terrorism. In addition, apprehension and seizure data could be analyzed in terms of where they occurred relative to distance from the border as an indicator of progress in Border Patrol enforcement efforts. Border Patrol officials at sectors we visited, and our review of fiscal years 2010 and 2012 sector operational assessments, indicated that sectors historically used these types of data to inform tactical deployment of personnel and technology to address cross-border threats. Our analysis showed that in most southwest border sectors less than half of Border Patrol's apprehensions and seizures were made within five miles of the border in fiscal year 2011. In Tucson sector, for example, 47 percent of Border Patrol's apprehensions of illegal entrants, 38 percent of the drugs and contraband seizures, and 8 percent of the apprehensions of aliens from special interest countries were within five miles of the border. However, our analysis also showed that Border Patrol had moved overall enforcement efforts closer to the border since the prior fiscal year. Further, we reported that Border Patrol sectors and stations tracked changes in their overall effectiveness as a tool to determine if the appropriate mix and placement of personnel and assets were being deployed and used effectively and efficiently, according to officials from Border Patrol headquarters. Border Patrol calculated an overall effectiveness rate using a formula in which it added the number of apprehensions and "turn backs" in a specific sector and divided this total by the total estimated known illegal entries--determined by adding the number of apprehensions, turn backs, and "got aways" for the sector. Border Patrol views its border security efforts as increasing in effectiveness if the number of turn backs as a percentage of estimated known illegal entries has increased and the number of got aways as a percentage of estimated known illegal entries has decreased. In our December 2012 report, we analyzed apprehension, turn back, and got away data from fiscal years 2006 through 2011 for the Tucson sector and found that while apprehensions remained fairly constant at about 60 percent of estimated known illegal entries, the percentage of reported turn backs increased from about 5 percent to about 23 percent, while the percentage of reported got aways decreased from about 33 percent to about 13 percent. As a result of these changes in the mix of turn backs and got aways, our analysis of Border Patrol data using Border Patrol methodology for our report showed that the enforcement effort, or the overall effectiveness rate for Tucson sector, improved 20 percentage points from fiscal year 2006 to fiscal year 2011, from 67 percent to 87 percent. Border Patrol data showed that the effectiveness rate for eight of the nine sectors on the southwest border also improved from fiscal years 2006 through 2011, using Border Patrol methodology. At the time of our review in 2012, Border Patrol headquarters officials said that differences in how sectors defined, collected, and reported turn back and got away data used to calculate the overall effectiveness rate precluded comparing performance results across sectors. They stated that each Border Patrol sector decided how it would collect and report turn back and got away data, and as a result, practices for collecting and reporting the data varied across sectors and stations based on differences in agent experience and judgment, resources, and terrain. The ability to obtain accurate or consistent data using these identification sources depends on various factors, such as terrain and weather, according to Border Patrol officials. As a result of these data limitations, Border Patrol headquarters officials said that while they considered turn back and got away data sufficiently reliable to assess each sector's progress toward border security and to inform sector decisions regarding resource deployment, they did not consider the data sufficiently reliable to compare--or externally report--results across sectors at the time we issued our report in December 2012. Border Patrol headquarters officials issued guidance in September 2012 to provide a more consistent, standardized approach for the collection and reporting of turn back and got away data by Border Patrol sectors. As we reported in 2012, Border Patrol officials expected that once the guidance was implemented, data reliability would improve. Since that time, DHS has reported the effectiveness rate in its Fiscal Year 2015- 2017 Annual Performance Report as a performance measure and method to publicly report results of its border security efforts on the southwest border. In March 2014 and April 2015, we reported that CBP had made progress in deploying programs under the Arizona Border Surveillance Technology Plan, but that CBP could take additional action to strengthen its management of the Plan and its various programs. The Plan's acquisition programs include fixed and mobile surveillance systems, agent portable devices, and ground sensors. Specifically, we reported in March 2014 that CBP had identified the mission benefits of its surveillance technologies, as we recommended in November 2011. CBP had identified mission benefits of surveillance technologies to be deployed under the Plan, such as improved situational awareness and agent safety. However, we also reported that the agency had not developed key attributes for performance metrics for all surveillance technology to be deployed as part of the Plan, as we recommended in November 2011. As of May 2015, CBP had identified a set of potential key attributes for performance metrics for all technologies to be deployed under the Plan; however, CBP officials stated that this set of measures was under review as the agency continued to refine the measures to better inform the nature of the contributions and impacts of surveillance technology on its border security mission. While CBP had yet to apply these measures, CBP had established a time line for developing performance measures for each technology. In November 2014, CBP officials stated that baselines for each performance measure were to be developed, at which time the agency was to begin using the data to evaluate the individual and collective contributions of specific technology assets deployed under the Plan. Moreover, CBP plans to establish a tool by the end of fiscal year 2016 that explains the qualitative and quantitative impacts of technology and tactical infrastructure on situational awareness in specific areas of the border environment. While these are positive steps, until CBP completes its efforts to address our recommendation and fully develop and apply key attributes for performance metrics for all technologies to be deployed under the Plan, it will not be able to fully assess its progress in implementing the Plan and determine when mission benefits have been fully realized. Further, in March 2014, we found that CBP did not capture complete data on the contributions of these technologies, which in combination with other relevant performance metrics or indicators could be used to better determine the contributions of CBP's surveillance technologies and inform resource allocation decisions. Although CBP had a field within its Enforcement Integrated Database for data on whether technological assets, such as SBInet surveillance towers, and nontechnological assets, such as canine teams, assisted or contributed to the apprehension of illegal entrants and seizure of drugs and other contraband, according to CBP officials, Border Patrol agents were not required to record these data. This limited CBP's ability to collect, track, and analyze available data on asset assists to help monitor the contribution of surveillance technologies, including its SBInet system, to Border Patrol apprehensions and seizures and inform resource allocation decisions. We made two recommendations that (1) CBP require data on asset assists to be recorded and tracked within its database; and that once these data were required to be recorded and tracked, (2) analyze available data on apprehensions and technological assists, in combination with other relevant performance metrics or indicators, as appropriate, to determine the contribution of surveillance technologies to CBP's border security efforts. CBP concurred with our recommendations and has implemented one of them. In June 2014, in response to our recommendation, CBP issued guidance informing Border Patrol agents that the asset assist data field within its database was now a mandatory data field. Agents are required to enter any assisting surveillance technology or other equipment before proceeding. As we testified in May 2015, to fully address our second recommendation, CBP needs to analyze data on apprehensions and seizures, in combination with other relevant performance metrics, to determine the contribution of surveillance technologies to its border security mission. In addition, with regard to fencing and other tactical infrastructure, CBP reported that from fiscal year 2005 through May 2015, the total miles of vehicle and pedestrian fencing along the nearly 2,000-mile U.S.-Mexico border increased from approximately 120 miles to 652 miles. With the completion of the new fencing and other tactical infrastructure, DHS is now responsible for maintaining this infrastructure including repairing breached sections of fencing. We have previously reported on CBP's efforts to assess the impact of tactical infrastructure on border security. Specifically, in our May 2010 and September 2009 reports, we found that CBP had not accounted for the impact of its investment in border fencing and infrastructure on border security. CBP had reported an increase in control of southwest border miles, but could not account separately for the impact of the border fencing and other infrastructure. In September 2009, we recommended that CBP determine the contribution of border fencing and other infrastructure to border security. DHS concurred with our recommendation, and in response, CBP contracted with the Homeland Security Studies and Analysis Institute to conduct an analysis of the impact of tactical infrastructure on border security. We have ongoing work for this subcommittee and others assessing CBP's deployment and management of tactical infrastructure, and we plan to report on the results of this work later this year. Our March 2012 report on AMO assets highlighted several areas the agency could address to better ensure the mix and placement of assets is effective and efficient. These areas included: (1) documentation clearly linking deployment decisions to mission needs and threats, (2) documentation on the assessments and analysis used to support decisions on the mix and placement of assets, and (3) consideration of how deployment of border technology will affect customer requirements for air and marine assets across locations. Specifically, we found that AMO had not documented significant events, such as its analyses to support its asset mix and placement across locations, and as a result, lacked a record to help demonstrate that its decisions to allocate assets were the most effective ones in fulfilling customer needs and addressing threats, among other things. While AMO's Fiscal Year 2010 Aircraft Deployment Plan stated that AMO deployed aircraft and maritime vessels to ensure its forces were positioned to best meet the needs of CBP field commanders and respond to the latest intelligence on emerging threats, AMO did not have documentation that clearly linked the deployment decisions in the plan to mission needs or threats. We also found that AMO did not provide higher rates of support to locations Border Patrol identified as high priority, a fact that indicated that a reassessment of AMO's resource mix and placement could help ensure that it meets mission needs, addresses threats, and mitigates risk. AMO officials stated that while they deployed a majority of assets to high- priority sectors, budgetary constraints, other national priorities, and the need to maintain presence across border locations limited overall increases in assets or the amount of assets they could redeploy from lower-priority sectors. While we recognized AMO's resource constraints, the agency did not have documentation of analyses assessing the impact of these constraints and whether actions could be taken to improve the mix and placement of assets within them. Thus, the extent to which the deployment of AMO assets and personnel, including those assigned to the southwest border, most effectively utilized AMO's constrained assets to meet mission needs and address threats was unclear. We further found in March 2012 that AMO did not document assessments and analyses to support the agency's decisions on the mix and placement of assets. DHS's 2005 aviation management directive requires operating entities to use their aircraft in the most cost-effective way to meet requirements. Although AMO officials stated that it factored in cost- effectiveness considerations, AMO did not have documentation of analyses it performed to make these decisions. AMO headquarters officials stated that they made deployment decisions during formal discussions and ongoing meetings in close collaboration with Border Patrol, and considered a range of factors such as operational capability, mission priorities, and threats. AMO officials said that while they generally documented final decisions affecting the mix and placement of assets, they did not document assessments and analyses to support these decisions. Finally, we reported that CBP and DHS had ongoing interagency efforts under way to increase air and marine domain awareness across U.S. borders through deployment of technology that may decrease Border Patrol's use of AMO assets for air and marine domain awareness. However, at the time of our review, AMO was not planning to assess how technology capabilities could affect the mix and placement of air and marine assets until the technology has been deployed. Specifically, we concluded that Border Patrol, CBP, and DHS had strategic and technological initiatives under way that would likely affect customer requirements for air and marine support and the mix and placement of assets across locations--CBP and DHS also had ongoing interagency efforts under way to increase air and marine domain awareness across U.S. borders through deployment of technology that may decrease Border Patrol's use of AMO assets for air and marine domain awareness. AMO officials stated that they would consider how technology capabilities affect the mix and placement of air and marine assets once such technology has been deployed. To address the findings of our March 2012 report, we recommended that CBP, to the extent that benefits outweigh the costs, reassess the mix and placement of AMO's air and marine assets to include mission requirements, performance results, and anticipated CBP strategic and technological changes. DHS concurred with this recommendation and responded that it planned to address some of these actions as part of the Fiscal Year 2012-2013 Aircraft Deployment Plan. In September 2014, CBP provided us this Plan, which was approved in May 2012, and updated information on its subsequent efforts to address this recommendation, including a description of actions taken to reassess the mix and placement of AMO's assets. According to AMO, after consulting with DHS and CBP officials and approval from the Secretary of Homeland Security in May 2013, the office began a realignment of personnel, aircraft, and vessels from the northern border to the southern border based on its evaluation of the utilization and efficiency of current assets and available funding to accomplish the transfers. In September 2015, AMO officials provided GAO with data and analysis documenting that personnel, aircraft, and vessels were in the process of being moved to support the realignment of assets, which addressed the intent of our recommendation. In December 2012, we reported on Border Patrol's efforts to develop performance goals and measures for assessing the progress of its efforts to secure the border between ports of entry and for informing the identification and allocation of resources needed to secure the border. We found that until fiscal year end 2010, DHS used Border Patrol's goal and performance measure of operational control as the publicly reported DHS goal and outcome measure for border security and to assess resource needs to accomplish this goal. We had previously testified in February 2011 that at the time this goal and measure was discontinued at the end of fiscal year 2010, Border Patrol reported achieving varying levels of operational control of 873 (44 percent) of the nearly 2,000 southwest border miles. Border Patrol officials attributed the uneven progress across sectors to multiple factors, including terrain, transportation infrastructure on both sides of the border, and a need to prioritize resource deployment to sectors deemed to have greater risk of illegal activity. DHS transitioned from using operational control as its goal and outcome measure for border security in its Fiscal Year 2010-2012 Annual Performance Report. Specifically, citing a need to establish a new border security goal and measure that reflected a more quantitative methodology as well as the department's evolving vision for border control, DHS established the interim performance goal and measure of the number of apprehensions between the land border ports of entry until a new border control goal and measure could be developed. We testified in May 2012 that the interim goal and measure provided information on activity levels, but did not inform program results or resource identification and allocation decisions, and therefore, until new goals and measures could be developed, DHS and Congress could experience reduced oversight and DHS accountability. Further, studies commissioned by CBP documented that the number of apprehensions bore little relationship to effectiveness because agency officials did not compare these numbers with the amount of cross-border illegal activity. In our December 2012 report, we found that Border Patrol was in the process of developing performance goals and measures for assessing the progress of its efforts to secure the border between ports of entry and for informing the identification and allocation of resources needed to secure the border, but had not identified milestones and time frames for developing and implementing them. According to Border Patrol officials, establishing milestones and time frames for the development of performance goals and measures was contingent on the development of key elements of the 2012-2016 Strategic Plan, such as a risk assessment tool, and the agency's time frames for implementing these key elements--targeted for fiscal years 2013 and 2014--were subject to change. Specifically, under the 2012-2016 Strategic Plan, the Border Patrol planned to continuously evaluate border security--and resource needs--by comparing changes in risk levels against available resources across border locations. Border Patrol officials stated that the agency was in the process of identifying performance goals and measures that could be linked to the new risk assessment tools that would show progress and status in securing the border between ports of entry, and determine needed resources, but had not established milestones and time frames for developing and implementing goals and measures because the agency's time frames for implementing key elements of the plan were subject to change. We recommended in our December 2012 report that Border Patrol establish milestones and time frames for developing a (1) performance goal, or goals, for border security between the ports of entry that defines how border security is to be measured and (2) performance measure, or measures--linked to a performance goal or goals--for assessing progress made in securing the border between ports of entry and informing resource identification and allocation efforts. DHS agreed with these recommendations and since our December 2012 report, has added performance measures for border security to its Annual Performance Report. In its Fiscal Year 2015-2017 Annual Performance Report, these measures included the percent of people apprehended multiple times on the southwest border and the rate of effectiveness in responding to illegal activity. Further, as part of its efforts to revise the Border Patrol strategic plan, Border Patrol has developed outcome measures for each of 14 objectives, and according to officials, Border Patrol continues to work toward the development of goals and measures to support its overarching performance goal of low-risk borders. Until these new goals and measures are in place, it is unknown the extent to which they will address our past findings and would provide DHS and Congress with information on the results of CBP efforts to secure the border between ports of entry and the extent to which existing resources and capabilities are appropriate and sufficient. Chairman McSally, Ranking Member Vela, and members of the subcommittee, this completes my prepared statement. I would be happy to respond to any questions you or members of the committee may have. For questions about this statement, please contact Rebecca Gambler 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 included David Alexander; Cindy Ayers; Tom Lombardi; Krista Mantsch; Jon Najmi; and Edith Sohna. Border Security: Progress and Challenges in DHS's Efforts to Implement and Assess Infrastructure and Technology, GAO-15-595T (Washington, D.C.: May 13, 2015). Homeland Security Acquisitions: Major Program Assessments Reveal Actions Needed to Improve Accountability, GAO-15-171SP (Washington, D.C.: April 22, 2015). Arizona Border Surveillance Technology Plan: Additional Actions Needed to Strengthen Management and Assess Effectiveness, GAO-14-411T. (Washington, D.C.: March 12, 2014). Arizona Border Surveillance Technology Plan: Additional Actions Needed to Strengthen Management and Assess Effectiveness, GAO-14-368 (Washington, D.C.: March 4, 2014) Border Security: Progress and Challenges in DHS Implementation and Assessment Efforts, GAO-13-653T. (Washington, D.C.: June 27, 2013). Border Security: DHS's Progress and Challenges in Securing U.S. Borders, GAO-13-414T. (Washington, D.C.: March 14, 2013). Border Patrol: Goals and Measures Not Yet in Place to Inform Border Security Status and Resource Needs, GAO-13-330T (Washington, D.C.: Feb. 26, 2013). Border Patrol: Key Elements of New Strategic Plan Not Yet in Place to Inform Border Security Status and Resource Needs, GAO-13-25 (Washington, D.C.: Dec. 10, 2012). Border Patrol Strategy: Progress and Challenges in Implementation and Assessment Efforts, GAO-12-688T (Washington D.C.: May 8, 2012). Border Security: Opportunities Exist to Ensure More Effective Use of DHS's Air and Marine Assets, GAO-12-518, (Washington, D.C. March 30, 2012). U.S. Customs and Border Protection's Border Security Fencing, Infrastructure and Technology Fiscal Year 2011 Expenditure Plan, GAO-12-106R. (Washington, D.C.: Nov. 17, 2011). Arizona Border Surveillance Technology: More Information on Plans and Costs Is Needed before Proceeding, GAO-12-22 (Washington, D.C.: Nov. 4, 2011). Border Security: Preliminary Observations on the Status of Key Southwest Border Technology Programs, GAO-11-448T (Washington, D.C.: March 15, 2011). Border Security: Preliminary Observations on Border Control Measures for the Southwest Border, GAO-11-374T (Washington, D.C.: Feb. 15, 2011). Secure Border Initiative: DHS Has Faced Challenges Deploying Technology and Fencing Along the Southwest Border, GAO-10-651T (Washington, D.C.: May 4, 2010). Secure Border Initiative: Technology Deployment Delays Persist and the Impact of Border Fencing Has Not Been Assessed, GAO-09-896 (Washington, D.C.: Sept. 9, 2009). 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 southwest border continues to be vulnerable to cross-border illegal activity, with DHS apprehending over 331,000 illegal entrants, and making over 14,000 seizures of drugs in fiscal year 2015. DHS has employed a variety of resources to help secure the border, including personnel, technology--such as cameras and sensors, tactical infrastructure--such as fencing and roads, and air and marine assets. This statement discusses (1) DHS efforts to deploy resources on the southwest border and measure the effectiveness of these resources in securing the border, and (2) DHS efforts to develop performance goals and measures for achieving situational awareness and border security. This statement is based on GAO reports and testimonies issued from September 2009 through May 2015, with selected updates through February 2016 on DHS enforcement efforts and actions to address prior GAO recommendations. To conduct the updates, GAO interviewed agency officials and reviewed related documentation. U.S. Customs and Border Protection (CBP), within the Department of Homeland Security (DHS), has taken action to deploy various resources--including agents and technology--along the southwest border and assess those resources' contributions to border security. For example, in December 2012, GAO reported that CBP's Border Patrol scheduled agents for deployment differently across southwest border locations, and although in most locations less than half of Border Patrol apprehensions were made within five miles of the border in fiscal year 2011, Border Patrol had moved overall enforcement efforts closer to the border since the prior fiscal year. GAO also reported in December 2012, that Border Patrol tracked changes in the effectiveness rate for response to illegal activity across border locations to determine if the appropriate mix and placement of personnel and assets were deployed and used effectively, and took steps to improve the data quality issues that had precluded comparing performance results across locations at the time of GAO's review. For example, Border Patrol issued guidance in September 2012 for collecting and reporting data with a more standardized and consistent approach. DHS has reported the effectiveness rate as a performance measure in its Fiscal Year 2015-2017 Annual Performance Report. Further, in March 2014, GAO reported that CBP had made progress in deploying programs under the Arizona Border Surveillance Technology Plan, but that CBP could strengthen its management and assessment of the plan's programs. GAO reported that while CBP had identified mission benefits of technologies to be deployed under the plan, the agency had not developed key attributes for performance metrics to identify the technologies' individual and collective contribution, as GAO had recommended in 2011. GAO also reported in 2014 that CBP officials stated that baselines for each performance measure would be developed and that by the end of fiscal year 2016, CBP would establish a tool to explain the impact of technology and infrastructure on situational awareness in the border environment. CBP should complete these actions in order to fully assess its progress in implementing the plan and determine when mission benefits have been fully realized. In December 2012, GAO reported on Border Patrol's efforts to develop performance goals and measures for assessing the progress of efforts to secure the border between ports of entry and informing the identification and allocation of border security resources. GAO reported that DHS had transitioned from a goal and measure related to the capability to detect, respond to, and address cross-border illegal activity to an interim performance goal and measure of apprehensions between the land border ports of entry beginning fiscal year 2011. GAO reported that this interim goal and measure did not inform program results or resource identification and allocation decisions, limiting DHS and congressional oversight and accountability. DHS concurred with GAO's recommendation that CBP develop milestones and time frames for the development of border security goals and measures and Border Patrol works to define a new overarching performance goal for achieving a low-risk border and develop associated performance measures. CBP should complete these actions in order to fully assess its capabilities and progress to secure the border. GAO previously made recommendations for DHS to, among other things, (1) strengthen its management of technology plans and programs and (2) establish milestones and time frames for the development of border security goals and measures. DHS generally agreed and has actions underway to address the recommendations.

We plan to issue a report with the results from this work in the fall of 2013. AIT systems equipped with ATR software display anomalies that could pose a threat using a generic figure for all passengers. management challenges--into one department.effectively address DHS's management and mission risks could have serious consequences for U.S. national and economic security. Given the significant effort required to build and integrate a department as large and complex as DHS, our initial high-risk designation addressed the department's initial transformation and subsequent implementation efforts, to include associated management and programmatic challenges. At that time, we reported that the creation of DHS was an enormous undertaking that would take time to achieve, and that the successful transformation of large organizations, even those undertaking less strenuous reorganizations, could take years to implement. As DHS continued to mature, and as we reported in our assessment of DHS's progress and challenges 10 years after the terrorist attacks of September 11, 2001, we found that the department implemented key homeland security operations and achieved important goals in many areas to create and strengthen a foundation to reach its potential. result, we narrowed the scope of the high-risk area and changed the name from Implementing and Transforming the Department of Homeland Security to Strengthening the Department of Homeland Security Management Functions. Recognizing DHS's progress in transformation and mission implementation, our 2011 high-risk update focused on the continued need to strengthen DHS's management functions (acquisition, information technology, financial management, and human capital) and integrate those functions within and across the department, as well as the impact of these challenges on the department's ability to effectively and efficiently carry out its missions. GAO, Department of Homeland Security: Progress Made and Work Remaining in Implementing Homeland Security Missions 10 Years after 9/11, GAO-11-881 (Washington, D.C.: Sept. 7, 2011). passenger aircraft. In response to the December 25, 2009, attempted terrorist attack on Northwest Airlines Flight 253, TSA revised its procurement and deployment strategy for AIT, commonly referred to as full-body scanners, increasing the number of AIT units it planned to procure and deploy. TSA stated that AIT provides enhanced security benefits compared with walk-through metal detectors, such as enhanced detection capabilities for identifying nonmetallic threat objects and liquids. In July 2011, TSA began installing ATR software on deployed AIT systems designed to address privacy concerns by eliminating passenger- specific images. As of May 2013, TSA had deployed about 750 AIT systems to more than 200 airports, most of which were equipped with ATR software. In January 2012, we issued a classified report on TSA's procurement and deployment of AIT that addressed the extent to which (1) TSA followed DHS acquisition guidance when procuring AIT and (2) deployed AIT units are effective at detecting threats. Pursuant to the FAA Modernization and Reform Act of 2012, TSA was mandated to ensure that all AIT systems used to screen passengers are equipped with and employ ATR software by June 1, 2012. Consistent with provisions of the law, TSA subsequently extended this deadline to June 1, 2013. While TSA has taken some steps and is taking additional steps to address challenges related to developing, testing, and delivering screening technologies for selected aviation security programs, additional challenges remain. In January 2012, we issued a classified report on TSA's procurement and deployment of AIT at airport checkpoints. (ARB) if AIT could not meet any of TSA's five key performance parameters or if TSA changed a key performance parameter during qualification testing. Senior TSA officials acknowledged that TSA did not comply with the directive's requirements, but stated that TSA still reached a "good decision" in procuring AIT and that the ARB was fully informed of the program's changes to its key performance parameters. Further, TSA officials stated that the program was not bound by AD 102 because it was a new acquisition process and they believed that the ARB was not fully functioning at the time. DHS officials stated that the ARB discussed the changed key performance parameter but did not see the documents related to the change and determined that TSA must update the program's key acquisition document, the Acquisition Program Baseline, before TSA could deploy AIT systems. However, we concluded that, according to a February 2010 acquisition decision memorandum from DHS, the ARB gave approval to TSA for full-scale production without reviewing the changed key performance parameter. DHS officials stated that the ARB should have formally reviewed changes made to the key performance parameter to ensure that TSA did not change it arbitrarily. According to TSA, it should have submitted its revised requirements for approval, but it did not because there was confusion as to whether DHS should be informed of all changes. Acquisition best practices state that programs procuring new technologies with fluctuating requirements pose challenges to agencies ensuring that the acquisition fully meets program needs.requirements is not a best practice for system acquisitions already under way. As a result, we found that TSA procured and deployed a technology that met evolving requirements, but not the initial requirements included in its key acquisition requirements document that the agency initially determined were necessary to enhance aviation security. We recommended that TSA develop a road map that specifies development milestones for AIT and have DHS acquisition officials approve the road map. DHS agreed with our recommendation and has taken actions to address it, which we discuss below. DHS acquisition oversight officials agreed that changing key EDS. In July 2011, we found that TSA revised its EDS requirements to better address current threats, and had plans to implement these However, we found that some requirements in a phased approach. number of EDS machines in TSA's checked baggage screening fleet were configured to detect explosives at the levels established in 2005 and that the remaining EDS machines are configured to detect explosives at levels established in 1998.requirements, it did not have a plan with the appropriate time frames needed to deploy EDS machines that meet the requirements. To help ensure that TSA's checked baggage-screening machines are operating most effectively, we recommended that TSA develop a plan to deploy EDSs that meet the most recent explosive detection requirements established in 2010 and ensure that new machines, as well as machines already deployed in airports, will be operated at the levels established in those requirements. DHS concurred with our recommendation and has begun taking action to address it. Specifically, in April 2012, TSA reported that it had awarded contracts to vendors to implement detection upgrades across the currently deployed EDS fleet to meet the 2010 requirements. In March 2013, TSA reported that it plans to complete upgrading the currently deployed fleet by the end of fiscal year 2013. However, our When TSA established the 2005 recommendation is intended to ensure that EDS machines in use at airports meet the most recent detection requirements--both previously deployed units as well as newly procured machines. Until TSA develops such a plan, it will be difficult for the agency to provide reasonable assurance that its upgrade approach is feasible or cost-effective. As we have reported in the past few years, TSA has not always resolved problems discovered during testing, which has led to costly redesign and rework at a later date, as shown in the following examples. We concluded that addressing such problems before moving to the acquisition phase can help agencies better manage costs. Specifically: Canines. In January 2013, we found that TSA began deploying passenger screening canine teams to airport terminals in April 2011 prior to determining the teams' operational effectiveness. According to TSA officials, operational assessments did not need to be conducted prior to deployment because canines were being used to screen passengers by other entities, such as airports in the United Kingdom. In June 2012, the DHS Science and Technology Directorate (S&T) and TSA began conducting operational assessments to help demonstrate the effectiveness of passenger screening canine teams. We recommended that on the basis of the results of DHS's assessments, TSA expand and complete operational assessments of passenger screening canine teams, including a comparison with conventional explosives detection canine teams before deploying passenger screening canine teams on a nationwide basis to determine whether they are an effective method of screening passengers in the U.S. airport environment, particularly since they cost the federal government more than TSA's conventional canine teams.screening canine teams before it had completed an assessment to Additionally, we found that TSA began deploying passenger determine where within the airport (i.e., the public, checkpoint, or sterile areas) the teams would be most effectively utilized. TSA leadership focused on initially deploying passenger screening canine teams to a single location within the airport--the sterile area--because it thought it would be the best way to foster stakeholders' acceptance of the teams. However, aviation stakeholders we interviewed at the time raised concerns about this deployment strategy, stating that passenger screening canine teams would be more effectively utilized in nonsterile areas of the airport, such as curbside or in the lobby areas. DHS concurred with our recommendation to expand and complete testing to assess the effectiveness of the teams in areas of the airport deemed appropriate. As of April 2013, TSA concluded testing with DHS S&T of passenger screening canine teams in the sterile areas of airports, and TSA is still in the process of conducting its own testing of the teams in the sterile and public areas of the airports. GAO-11-740. List for its acquisition of EDS, which would separate the need for explosives data from future procurements, and would require that EDS be certified to meet detection requirements prior to beginning acquisitions of EDS to meet those requirements. According to best practices established in prior work on major acquisitions, realistic program baselines with stable requirements for cost, schedule, and performance are important to delivering capabilities within schedule and cost estimates. Our prior work has found that program performance metrics for cost and schedule can provide useful indicators of program health and can be valuable tools for improving oversight of individual programs. According to DHS's acquisition guidance, the program baseline is the contract between the program and departmental oversight officials and must be established at program start to document the program's expected cost, deployment schedule, and technical performance. Best practices guidance states that reliable and realistic cost, schedule, and performance estimates help ensure that a program will deliver capabilities on time and within budget.reported in the past few years and on the basis of our preliminary observations from our ongoing work, TSA has not always developed accurate baselines for establishing cost, schedule, and performance estimates. However, as we have AIT. In January 2012, we found that TSA did not have clear plans to require AIT vendors to meet milestones used during the AIT acquisition. On the basis of our findings, we recommended that TSA develop a road map that outlines vendors' progress in meeting all key performance parameters because it is important that TSA convey vendors' progress in meeting those requirements and full costs of the technology to decision makers when making deployment and funding decisions. While TSA reported that it hoped vendors would be able to gradually improve meeting key performance parameters for AIT over time, we concluded that TSA would have more assurance that limited taxpayer resources are used effectively by developing a road map that specifies development milestones for the technology and having DHS acquisition officials approve this road map. DHS agreed with our recommendation and has taken actions to address it. For example, in February 2012, TSA developed a road map that specifies development and deployment milestones, including the addition of ATR to existing deployed systems, continued development of enhanced detection capabilities, and acquisition plans for the next generation of AIT systems (AIT-2). In July 2012, DHS acquisition officials reviewed the AIT road map. However, on the basis of our preliminary observations from our ongoing work conducted in March 2013, we found that TSA has fallen behind schedule as outlined in the AIT road map to install ATR software upgrades to existing deployed AIT systems because of one of the vendors' inability to develop this software in time for the installation of ATR software on all units by June 2013. TSA subsequently decided to terminate its contract with this vendor and remove all deployed units from airports. TSA has also fallen behind schedule as outlined in the AIT road map to acquire and test AIT-2 systems because of vendors' inability to provide required documentation verifying that contractual requirements have been met and the units are ready to begin testing. Although TSA updated the AIT road map in October 2012, it subsequently missed some of the key deadlines specified in the updated version as well. We currently have ongoing work related to this area and we plan to report the results in the fall of 2013. EDS. In July 2011, we found that TSA had established a schedule for the acquisition of EDS machines but it did not fully comply with leading practices, and TSA had not developed a plan to upgrade its EDS fleet to meet the current explosives detection requirements. These leading practices state that the success of a large-scale system acquisition, such as TSA's EDS acquisition, depends in part on having a reliable schedule that identifies when the program's set of work activities and milestone events will occur, amongst other things. However, we reported that the schedule for the EDS acquisition is not reliable because it does not reflect all planned program activities and does not include a timeline to deploy EDSs or plans to procure EDSs to meet subsequent phases of explosive detection requirements. On the basis of our findings, we concluded that developing a reliable schedule would help TSA better monitor and oversee the progress of the EDS acquisition. DHS concurred with our recommendation to develop and maintain a schedule for the entire Electronic Baggage Screening Program in accordance with the leading practices we identified for preparing a schedule. In July 2011, DHS commented that TSA had already begun working with key stakeholders to develop and define requirements for a schedule and to ensure that the schedule aligns with the best practices we outlined. TSA reported in March 2013 that it plans to have an updated integrated master schedule by September 2013. GAO, Checked Baggage Screening: TSA Has Deployed Optimal Systems at the Majority of TSA-Regulated Airports, but Could Strengthen Cost Estimates, GAO-12-266 (Washington D.C.: Apr. 27, 2012). can be used to support DHS funding and budget decisions. In April 2013, TSA reported it plans to have an updated integrated master schedule and revised life cycle cost estimate by September 2013, which, when completed, will allow it to update its cost estimate for the Electronic Baggage Screening Program. In part because of the challenges we have highlighted in DHS's acquisition process, strengthening DHS's management functions remains on our high-risk list. However, DHS has efforts under way to strengthen its oversight of component acquisition processes. We found in September 2012 that while DHS has initiated efforts to address the department's acquisition management challenges, most of the department's major acquisition programs continue to cost more than expected, take longer to deploy than planned, or deliver less capability than promised. We identified 42 programs that experienced cost growth, schedule slips, or both, with 16 of the programs' costs increasing from a total of $19.7 billion in 2008 to $52.2 billion in 2011--an aggregate increase of 166 percent. Moreover, we reported that DHS leadership has authorized and continued to invest in major acquisition programs even though the vast majority of those programs lack foundational documents demonstrating the knowledge needed to help manage risks and measure performance. For example, we found that DHS leadership--through the Investment Review Board or its predecessor body, the ARB--has formally reviewed 49 of the 71 major programs. We found that DHS permitted 43 of those programs to proceed with acquisition activities without verifying the programs had developed the knowledge in key acquisition documents as required by AD 102. DHS officials reported that DHS's culture has emphasized the need to rapidly execute missions more than sound acquisition management practice and that DHS could not approve the documents in a timely manner. On the basis of our findings, we concluded that DHS recognized the need to implement its acquisition policy more consistently, but that significant work remains. We recommended that DHS modify acquisition policy to better reflect key program and portfolio management practices and ensure acquisition programs fully comply with DHS acquisition policy. DHS concurred with our recommendations and reported taking actions to address some of them. For example, in September 2012, DHS stated that it was in the process of revising its policy to more fully reflect key program management practices to enable DHS to more rapidly respond to programs' needs by facilitating the development, approval, and delivery of more specific guidance for programs. In March 2012, we found that to enhance the department's ability to oversee major acquisition programs, DHS realigned the acquisition management functions previously performed by two divisions within the Office of Chief Procurement Officer to establish the Office of Program Accountability and Risk Management (PARM) in October 2011. PARM, which is responsible for program governance and acquisition policy, serves as the Management Directorate's executive office for program execution and works with DHS leadership to assess the health of major acquisitions and investments. To help with this effort, PARM is developing a database, known as the Decision Support Tool, intended to improve the flow of information from component program offices to the Management Directorate to support its oversight and management efforts. However, we reported in March 2012 that DHS executives were not confident enough in the data to use the Decision Support Tool to help make acquisition decisions. On the basis of our findings, we concluded that DHS had limited plans to improve the quality of the data because PARM planned to check the data quality only in preparation for key milestone meetings in the acquisition process. We reported that this could significantly diminish the Decision Support Tool's value because users cannot confidently identify and take action to address problems meeting cost or schedule goals prior to program review meetings. In February 2013, we reported that DHS updated its Integrated Strategy for High Risk Management in June 2012, which includes management initiatives and corrective actions to address acquisition management challenges, among other management areas. In the June 2012 update, DHS included, for the first time, performance measures and progress ratings for all of the management initiatives. The June 2012 update also identified the resources needed to implement most of its corrective actions, although we found that DHS needs to further identify its resource needs and communicate and mitigate critical gaps. On the basis of our findings, we concluded that the strategy, if implemented and sustained, will provide a path for DHS to be removed from our high risk list. Going forward, DHS needs to continue implementing its Integrated Strategy for High Risk Management and show measurable, sustainable progress in implementing its key management initiatives and corrective actions and achieving outcomes including those related to acquisition management. We will continue to monitor DHS's efforts to determine if the actions and outcomes are achieved. Chairman Hudson, Ranking Member Richmond, and members of the committee, this concludes my prepared statement. I look forward to responding to any questions that you may have. For questions about this statement, please contact Steve Lord at (202) 512-4379 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 Dave Bruno, Assistant Director; Carissa Bryant; Susan Czachor; Emily Gunn; and Tom Lombardi. Key contributors for the previous work that this testimony is based on are listed within each individual product. High-Risk Series: Government-wide 2013 Update and Progress Made by the Department of Homeland Security. GAO-13-444T. Washington, D.C.: March 21, 2013. High-Risk Series: An Update. GAO-13-283. Washington, D.C.: February 14, 2013. TSA Explosives Detection Canine Program: Actions Needed to Analyze Data and Ensure Canine Teams Are Effectively Utilized. GAO-13-239. Washington, D.C.: January 31, 2013. Homeland Security: DHS Requires More Disciplined Investment Management to Help Meet Mission Needs. GAO-12-833. Washington, D.C.: September 18, 2012. Homeland Security: DHS and TSA Face Challenges Overseeing Acquisition of Screening Technologies. GAO-12-644T. Washington, D.C.: May 9, 2012. Checked Baggage Screening: TSA Has Deployed Optimal Systems at the Majority of TSA-Regulated Airports, but Could Strengthen Cost Estimates. GAO-12-266. Washington, D.C.: April 27, 2012. Transportation Security Administration: Progress and Challenges Faced in Strengthening Three Key Security Programs. GAO-12-541T. Washington, D.C.: March 26, 2012 Aviation Security: TSA Has Made Progress, but Additional Efforts Are Needed to Improve Security. GAO-11-938T. Washington, D.C.: September 16, 2011. Department of Homeland Security: Progress Made and Work Remaining in Implementing Homeland Security Missions 10 Years after 9/11. GAO-11-881. Washington, D.C.: September 7, 2011. Homeland Security: DHS Could Strengthen Acquisitions and Development of New Technologies. GAO-11-829T. Washington, D.C.: July 15, 2011. Aviation Security: TSA Has Taken Actions to Improve Security, but Additional Efforts Remain. GAO-11-807T. Washington, D.C.: July 13, 2011. Aviation Security: TSA Has Enhanced Its Explosives Detection Requirements for Checked Baggage, but Additional Screening Actions Are Needed. GAO-11-740. Washington, D.C.: July 11, 2011. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 16, 2011. Department of Homeland Security: Assessments of Selected Complex Acquisitions. GAO-10-588SP. Washington, D.C.: June 30, 2010. Defense Acquisitions: Managing Risk to Achieve Better Outcomes. GAO-10-374T. Washington, D.C.: January 20, 2010. 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.

TSA acquisition programs represent billions of dollars in life cycle costs and support a range of aviation security programs, including technologies used to screen passengers and checked baggage. Within DHS, TSA is responsible for establishing requirements for testing and deploying transportation system technologies. Since 2010, GAO has reported that DHS and TSA faced challenges in managing acquisition efforts, including deploying technologies that did not meet requirements and were not appropriately tested and evaluated. As requested, this testimony discusses (1) the extent to which TSA addressed challenges relating to developing and meeting program requirements, testing new screening technologies, and delivering capabilities within cost and schedule estimates for selected programs, and (2) DHS efforts to strengthen oversight of component acquisition processes. This testimony is based on GAO products issued from January 2010 through January 2013, including selected updates conducted in March 2013 on TSA's efforts to implement GAO's prior recommendations and preliminary observations from ongoing work. To conduct the updates and ongoing work, GAO analyzed documents, such as the AIT road map, and interviewed TSA officials. The Transportation Security Administration (TSA) has taken and is taking steps to address challenges related to developing, testing, and delivering screening technologies for selected aviation security programs, but challenges remain. For example, in January 2012, GAO reported that TSA faced challenges developing and meeting key performance requirements for the acquisition of advanced imaging technology (AIT)--i.e., full-body scanners. Specifically, GAO found that TSA did not fully follow Department of Homeland Security (DHS) acquisition policies when acquiring AIT, which resulted in DHS approving nationwide AIT deployment without full knowledge of TSA's revised specifications. DHS required TSA to notify DHS's Acquisition Review Board (ARB) if AIT could not meet any of TSA's five key performance parameters or if TSA changed a key performance parameter during testing. However, GAO found that the ARB approved TSA for full-scale production without reviewing the changed parameter. DHS officials said that the ARB should have formally reviewed this change to ensure that TSA did not change it arbitrarily. GAO recommended that TSA develop a road map that outlines vendors' progress in meeting all key performance parameters. DHS agreed, and developed a road map to address the recommendation, but faces challenges implementing it--e.g., due to vendor delays. Additionally, in January 2013, GAO reported that TSA faced challenges related to testing and deploying passenger screening canine teams. Specifically, GAO concluded that TSA began deploying these canine teams to airport terminals in April 2011 prior to determining the canine teams' operational effectiveness. In June 2012, DHS and TSA began conducting operational assessments to help demonstrate canine teams' effectiveness. Also, TSA began deploying teams before it had completed an assessment to determine where within the airport the canine teams would be most effectively utilized. GAO recommended that on the basis of DHS assessment results, TSA expand and complete testing to assess the effectiveness of canine teams in areas of the airport deemed appropriate. DHS agreed and officials said that as of April 2013, TSA had concluded testing in collaboration with DHS of canine teams in airport sterile areas--in general, areas of an airport for which access is controlled through screening of persons and property--and is testing teams on its own in airport sterile and public areas. DHS has some efforts under way to strengthen its oversight of component investment and acquisition processes, but additional actions are needed. In September 2012, GAO reported that while DHS had initiated efforts to address the department's acquisition management challenges, most of DHS's major acquisition programs continue to cost more than expected, take longer to deploy than planned, or deliver less capability than promised. GAO identified 42 DHS programs that experienced cost growth, schedule slips, or both, with 16 of the programs' costs increasing from a total of $19.7 billion in 2008 to $52.2 billion in 2011--an aggregate increase of 166 percent. GAO concluded that DHS recognized the need to implement its acquisition policy more consistently, but that significant work remained. GAO recommended that DHS modify acquisition policy to better reflect key program and portfolio management practices and ensure acquisition programs fully comply with DHS acquisition policy. DHS agreed, and in September 2012 officials stated that it was in the process of revising its policy to more fully reflect key program management practices. GAO has made recommendations to DHS and TSA in prior reports to help strengthen its acquisition processes and oversight. DHS and TSA generally concurred and are taking actions to address them.

This report presents the results of our survey of the background and training of key financial management personnel at 34 of the largest private corporations and 19 of the largest state governments in the United States. We asked surveyed organizations for information on the education, work experience, training, and professional certifications of their key financial management personnel--chief financial officers (CFO), controllers, and managers and supervisors--working in financial reporting, financial analysis, and accounting operations positions. In addition, we asked for information on training and qualification requirements for these personnel. Overall, our survey results provide information on about 4,900 private sector and state government financial management personnel. Qualified personnel can play a variety of important roles in establishing and maintaining a strong, successful financial management organization. Specifically, qualified personnel can provide leadership in the efficient use of an organization's financial resources by promoting effective general and financial management practices; serve as an integral part of an organization's decision-making by providing timely and reliable financial and performance information and by analyzing the implications of this information for the organization's goals and objectives; and help ensure that the organization's assets are safeguarded from fraud, waste, and abuse by improving its accounting systems and internal controls. While the accounting profession has focused on the first and last roles for many years, a number of studies indicate that financial personnel are increasingly being asked to take on the second of their potential roles, that of a "business partner" in organizational decision-making. In the past, the accounting function was paper-driven, human resource intensive, and clerical in nature. In many organizations today, recent advances in information technology, as well as competitive pressures and corporate restructuring, have combined to dramatically change the accounting function from a clerical to an analytical and consultative focus. According to a 1996 report by the Institute of Management Accountants (IMA), the management accounting profession has been in transition for the past 5 to 10 years. The study found that management accountants are increasingly being asked to supplement their traditional accounting role with more financial analysis and management consulting. Specifically, the IMA study reported that accountant work activities most critical to company success now include not only traditional financial management skills--those associated with accounting systems and financial reporting--but also strategic planning, internal consulting, and short-term budgeting processes. The IMA study characterized this change as a ". . . shift from number cruncher and corporate cop to decision-support specialist." A recent study by a major public accounting firm also underscored the need for financial management personnel to have financial expertise, augmented by interpersonal and communication skills, an enterprise perspective, initiative, and overall organizational savvy. These evolving expectations for accountants parallel a similar movement in the auditing profession. As a result of technological innovations, coupled with complex business structures and other economic forces, auditors are being asked to provide a wide range of services that go beyond the traditional audit of historical financial statements, such as management consulting services. Auditors are increasingly being asked to be substantially more involved with the functioning of business systems than just attesting to the reliability of reported financial data. Major change is also underway in the federal financial management arena. The Congress has taken various steps to help ensure that federal agencies improve their financial management. One of the key pieces of legislation was the Chief Financial Officers Act of 1990. The CFO Act spelled out an ambitious agenda for financial management reform, including expectations for the (1) deployment of modern systems to replace existing antiquated, often manual, processes, (2) development of better performance and cost measures, and (3) design of results-oriented reports on the government's financial condition and operating performance by integrating budget, accounting, and program information. The Government Management Reform Act of 1994 expanded and made permanent the requirement in the CFO Act for audited financial statements to the 24 largest federal departments and agencies and mandated annual audited governmentwide financial statements. The CFO Act also established chief financial officers throughout government to provide needed leadership. One of the key responsibilities assigned to agency CFOs is overseeing the recruitment, selection, and training of personnel to carry out agency financial management functions. The development of highly qualified financial managers will be crucial to successfully implementing the CFO Act. We have reported many instances in which the federal government's ability to produce accurate financial data was undermined simply because personnel with financial management responsibilities did not follow rudimentary policies and procedures, such as accurate transaction processing and routine account reconciliations. Further, the requirements of the Government Performance and Results Act of 1993 call for federal managers to fundamentally shift their focus from a preoccupation with rigid adherence to prescribed processes to assessing the extent to which federal programs have achieved desired outcomes and results. Accordingly, agency financial personnel are increasingly being asked to draw on new sets of skills to produce cost and other performance-based financial data. Such data are essential if congressional and executive branch decisionmakers are to make well-informed decisions on the relative efficiency and effectiveness of federal programs. While these financial management improvement efforts may be new to many financial personnel in the federal government, similar requirements have been in place for personnel in the private sector and in state governments for many years. The disciplined process required to generate reliable, accurate financial data has been in place in the private sector for over 60 years following the 1929 stock market crash, and in state governments since the early 1980s. The financial personnel in these organizations have also had extensive experience in developing and implementing meaningful financial performance measures. The objectives for this report were to identify (1) the background and training profiles of key financial management personnel working at large private sector corporations and state governments and (2) the qualification requirements applicable to personnel in these positions. To accomplish these objectives, we surveyed the organizations closest in size and complexity to federal agencies. Accordingly, we requested information on the qualifications of key financial management personnel in the 100 largest private corporations in the United States, commonly referred to as the "Fortune 100," and the 25 largest state governments. To collect profile information on key corporate and state financial management personnel, we designed a questionnaire which was sent to Fortune 100 and selected state CFO/controller offices and their five largest divisions or departments. The design of the questionnaire used in our study was based on a framework for measuring the quality of the federal workforce presented in a previous GAO report. That framework identified education, work experience, training, and professional certifications as quantifiable factors for assessing the qualifications of federal government personnel. In using this framework, we asked surveyed organizations for information on the education, work experience, and professional certifications of their key financial management personnel: chief financial officers, controllers, and managers and supervisors working in financial reporting, financial analysis, and accounting operations positions. We also asked for information on training and qualification requirements for the above mentioned managers and supervisors. To help ensure that the questionnaire was clear and that the respondents' information would be most relevant to the federal CFO community, we obtained comments from a variety of interested parties and pretested the questionnaire. Specifically, we requested and incorporated, as appropriate, comments on our questionnaire received from representatives of the Private Sector Council; the National Association of State Auditors, Comptrollers, and Treasurers; and the federal CFO Council Human Resources Committee. In addition, an academic consultant from the University of Denver School of Accountancy with expertise in this area reviewed the questionnaire and provided comments. The survey instrument was also pretested at one Fortune 100 company and two state governments. The pretests were conducted through interviews to observe respondents as they completed the questionnaire and to debrief them immediately afterward. On the basis of the advisors' comments and pretesting results, the questionnaire was revised. Appendix III provides a copy of the final survey instrument. Responses were received from 34 Fortune 100 companies and from 19 of the 25 largest state governments. The 34 Fortune 100 companies from which we received responses represent all major industry groupings except agriculture. Ten of the companies were finance, insurance, or real estate companies, such as BankAmerica Corporation, Citibank, and the Metropolitan Life Insurance Company. Fifteen manufacturing and mining companies responded to our survey, including the Lockheed Martin Corporation, the Hewlett-Packard Company, AlliedSignal, and the Mobil Corporation. We also received responses from nine transportation, communication, and wholesale/retail trade companies, including AT&T, MCI Communications, United Airlines, and SuperValu. The 1995 revenues of the Fortune 100 respondents ranged from $12.7 billion to $79.6 billion.Appendix I lists the Fortune 100 companies, divisions, and subsidiaries responding to our survey. State government comptroller offices and operational departments responding to our survey were located throughout the country and included responses from an average of over four of the major organizations within each of the states responding, ranging from one to six per state, and also included the largest states. For example, we received responses from California, Florida, Illinois, Michigan, New York, Virginia, and Washington. The revenues of the state government respondents ranged from $10.8 billion to $108.2 billion. The state government comptroller offices and other departments that responded to our survey are listed in appendix II. We did not verify the accuracy of the information provided by the Fortune 100 and state government respondents. However, we provided a draft of this report to the parties commenting on the initial survey instrument and have incorporated their comments as appropriate. We conducted our work from June 1996 through December 1997 in accordance with generally accepted government auditing standards. Overall, the survey respondents provided information on 4,930 financial management personnel: 3,621 (73 percent) in Fortune 100 companies and 1,309 (27 percent) in state governments. Table 1 shows the positions held by the financial management personnel about whom information was provided. The Fortune 100 personnel about whom information was provided worked in 1 of 34 corporate offices or 54 corporate divisions or subsidiaries, as listed in appendix I. The state government personnel about whom information was provided worked in 1 of 18 state comptroller offices (or the equivalent) or 67 operational departments, as listed in appendix II. The following sections present information on the educational backgrounds and related education requirements for key financial management personnel at the Fortune 100 companies and state governments responding to our survey. In the Fortune 100 companies, more than 90 percent of financial management personnel held undergraduate degrees, with about 75 percent holding either accounting or other business degrees. Accounting degrees were more commonly held by managers and supervisors of financial reporting and accounting operations. CFOs, controllers, and managers and supervisors of financial analysis commonly held either accounting or other business degrees. Senior executives were more likely than managers and supervisors to hold nonbusiness degrees. Figure 1 shows, by position, the undergraduate degrees attained by Fortune 100 financial management personnel. Overall, about 40 percent of the Fortune 100 personnel held advanced degrees. The percentage of personnel with advanced degrees ranged from over 60 percent of CFOs and controllers to about 24 percent of supervisors of accounting operations. For example, about 39 percent of the Fortune 100 managers of accounting operations held advanced degrees. In addition, managers and supervisors of financial analysis were more likely to hold an advanced degree than were other managers and supervisors. In the Fortune 100 companies, the majority of advanced degrees held were MBAs. Figure 2 shows, by position, the advanced degrees attained by Fortune 100 financial management personnel. Almost 60 percent of Fortune 100 respondents required bachelor's degrees--in either accounting or another business field--for manager and supervisor positions in financial reporting, financial analysis, and accounting operations. For example, about 45 percent of the respondents required their managers of financial reporting to have accounting degrees and another 23 percent required such managers to have either accounting or other business degrees. About 34 percent of the respondents required their managers of accounting operations to have accounting degrees, and another 20 percent required such managers to have either accounting or other business degrees. In addition, several of the organizations without any formal bachelor's degree requirements for their financial management personnel said that they preferred hiring personnel with bachelor's degrees for these positions. In some cases, Fortune 100 organizations required advanced degrees for their managerial and supervisory financial management positions. Overall, about 12 percent of the respondents required advanced degrees, most commonly MBAs, for the financial management positions examined. For example, 11 percent of respondents required managers of financial reporting and accounting operations to have advanced degrees, while about 19 percent of respondents required their managers of financial analysis to have advanced degrees. Further, 18 respondents added that advanced degrees, while not formally required, were preferred for these positions. Also, 43 Fortune 100 respondents said that they had recently upgraded or planned to upgrade their education requirements. For example, one Fortune 100 respondent had established a new requirement that all its financial management personnel have CPAs and MBAs or other advanced financial degrees. Another respondent told us that it recently had established a policy encouraging its financial management personnel to obtain advanced degrees and professional certifications because of the increased knowledge they had to possess to report the organization's financial results in accordance with generally accepted accounting principles and because of the sophisticated nature of its business, including diverse products and markets. Yet another respondent indicated that its vision for upgrading the qualifications of its financial personnel focused on building broader business awareness and related analytic skills. On average, about 78 percent of the state government financial management personnel held bachelor's degrees. The percentage of personnel holding bachelor's degrees varied by position, ranging from about 96 percent of CFOs and controllers to 58 percent of supervisors of accounting operations. Depending on the position, from 50 to 80 percent of personnel held either accounting or other business degrees. CFOs were more likely than controllers, managers, and supervisors to hold nonbusiness degrees. About one-third of the CFOs held nonbusiness degrees. Figure 3 shows, by position, the undergraduate degrees attained by state government personnel. About 16 percent of the financial management personnel working for state government respondents held advanced degrees. The percentage of personnel with advanced degrees ranged from about 41 percent of CFOs to about 6 percent of supervisors of accounting operations. For instance, about 11 percent of managers of accounting operations held advanced degrees. In addition, CFOs, controllers, and managers and supervisors of financial analysis were more likely to hold advanced degrees other than MBAs or master's degrees in accounting. For other positions, MBAs were the most commonly held advanced degrees. Figure 4 shows, by position, the advanced degrees attained by state government personnel. About 44 percent of the state government respondents required either accounting or other business degrees for manager and supervisor positions in financial reporting, financial analysis, and accounting operations. For example, about 27 percent of respondents required their managers of financial analysis to have accounting degrees, and another 18 percent of respondents required these managers to have either accounting degrees or other business degrees. About 35 percent of respondents required their managers of accounting operations to have accounting degrees, and another 9 percent of the respondents required such managers to have either accounting or other business degrees. "The evolution of accounting functions has resulted in increased need for personnel with four year accounting degrees. The typical make-up of office staff over the past 15 years has changed mostly from clerical individuals to individuals with accounting degrees. The increased use of computers requires a high degree of computer skills and analytical capabilities." Further, several of the state organizations that said they did not have formal bachelor's degree requirements for their financial management personnel said they preferred that these personnel have bachelor's degrees. One state department informed us that it had raised the number of college accounting hours needed for all its professional level accounting positions from 12 to 24 approximately 2 years ago. In only a few cases did state government organizations require advanced degrees for their manager and supervisor positions in financial management. On average, less than 3 percent of state government respondents required advanced degrees--either MBAs or other master's degrees--for these positions. For example, while 4 percent of respondents required their managers of financial reporting to have advanced degrees, none of the respondents to our study required their supervisors of financial reporting or accounting operations to have advanced degrees. Financial management personnel in the Fortune 100 companies responding to the survey had, on average, about 14 years of total experience in corporate accounting, public accounting, internal auditing, or accounting systems design and maintenance. This overall experience included an average of 2.5 years combined experience in public accounting, internal auditing, or accounting systems design and maintenance. These three areas of experience are particularly noteworthy because they often provide exposure to a wide variety of accounting issues and decision-making processes throughout an organization. The years of work experience in corporate accounting and the other three areas varied by position. Controllers and CFOs averaged about 19 and 17 years of work experience, respectively, while managers and supervisors averaged from 12 to 16 years of experience, depending on position. Figure 5 shows, by position, the average years of work experience in these four areas for financial management personnel in the Fortune 100 companies surveyed. Overall, state government personnel had about 20 years of work experience in government accounting, public accounting, internal auditing, and accounting systems design and maintenance. The state governments' CFOs and controllers averaged 20 and 21 years of work experience, respectively, in these areas. Managers and supervisors averaged 16 to 24 years, depending on the position. This total experience included an average of 4 years combined experience in public accounting, internal auditing, or systems design and maintenance, fields which often provide exposure to a broad base of accounting issues throughout an organization. Figure 6 shows, by position, the average years of work experience in these four areas for financial management personnel in the state governments surveyed. The following sections present information on the training attained and required for financial management personnel for those Fortune 100 and state government organizations responding to our survey. Overall, Fortune 100 financial management personnel completed an average of 26 hours of training in 1996. The number of training hours ranged from about 20 to 40, depending on financial management position. Most of the hours completed were in technical accounting subjects. For example, one respondent told us that over the past few years the company had strongly encouraged managers throughout the organization to increase their technical skills by taking classes, becoming certified, and working toward advanced degrees. Another respondent stressed the importance of employee development programs to not only emphasize both customer and market knowledge but also broaden and upgrade financial skills. In addition, a number of Fortune 100 respondents cited the need to tailor their CPE programs so that their financial management personnel could maintain their professional certifications, such as CPAs. For example, one company subsidiary stated that its CPE requirements are tailored toward the requirements of the professional certifications that its financial management personnel possess. The subsidiary also indicated that it planned to greatly increase its training curriculum and requirements for all its financial management personnel in the near future. Figure 7 shows, by position, the average number of continuing professional education hours completed in 1996 by financial management personnel in the Fortune 100 companies surveyed. About 70 percent of Fortune 100 respondents set aside between 1 and 2 percent of their budget for financial management salaries and benefits for training financial management personnel. In addition, another 15 percent of the Fortune 100 respondents set aside more than 2 percent. However, while all Fortune 100 respondents set aside some portion of their budgets for training, 15 percent set aside less than 1 percent. Few of the Fortune 100 respondents had any financial management training requirements. However, those respondents with such requirements had, on average, 31 total hours of required training in 1996, including 18 hours in technical accounting. The total average number of hours of training required of financial management personnel in these corporations ranged from 15 to 45 hours, depending on position. In addition, 36 respondents commented that they encouraged their employees to obtain additional training. Also, they commented that employees tend to seek out training on their own, particularly those with professional certifications. In order to maintain their CPA certifications, employees are generally required to complete at least 80 hours of continuing professional education every 2 years. State government financial management personnel completed, on average, about 31 hours of training in 1996. (The number of hours ranged from about 25 to 35, depending on position.) Most of the hours completed were in technical accounting subjects. Several state government respondents also stressed that their CPE training programs were, in part, driven by the CPE requirements needed to maintain the various professional certifications held by their financial management personnel. One respondent noted that its policy for financial management personnel at the manager and supervisor level who are not certified was to develop individual training plans tailored to the individual's area of expertise, with a goal of 24 hours of training a year. Another state indicated that it provided training to its financial management personnel on an as-needed basis in order for personnel to successfully perform job requirements. It further informed us that it encourages its financial personnel to attend CPE training courses by allowing administrative time off and, to the extent that funds are available, paying for the cost of such training. Figure 8 shows, by position, the average number of continuing professional education hours completed in 1996 by financial management personnel in state governments surveyed. In addition, over half of the state government organizations set aside 1 percent or more of their financial management salaries and benefits budget for training. Forty-five percent of respondents set aside from 1 to 2 percent of their budgets for training, with another 8 percent setting aside more than 2 percent. However, 47 percent of the state government respondents set aside less than 1 percent of their budgets for training, including 15 respondents (21 percent) who said that they did not set aside any funds. Few state government respondents had any financial management training requirements. However, those states with such requirements had, on average, 36 hours of required training in 1996, including 26 hours in technical accounting. Total required training for financial management personnel in these state organizations ranged from 31 to 40 hours, depending on position. In addition, similar to many Fortune 100 respondents, 24 state government respondents commented that they encouraged their employees to obtain training, even though it was not required. In order to maintain their CPA and CGFM certifications, employees are generally required to complete at least 80 hours of continuing professional education every 2 years. The following sections describe the certifications attained and required for Fortune 100 and state government financial management personnel. Among Fortune 100 respondents, the CPA was the most commonly held professional certification. Overall, about 25 percent of Fortune 100 financial managers were CPAs. Specifically, this included about 42 percent of the controllers, 43 percent of managers of financial reporting, and 41 percent of supervisors of financial reporting. For other positions, the percentage of CPAs ranged from 32 percent of the CFOs to 16 percent of the supervisors of financial analysis. Few financial management personnel were certified management accountants (CMA) or certified internal auditors (CIA). Figure 9 shows, by position, the professional certifications held by financial management personnel in the Fortune 100 companies surveyed. Fortune 100 organizations generally did not require professional certifications for the financial management positions examined in our study, although 13 respondents said that they preferred that their managers and supervisors be CPAs. On average, about 18 percent of respondents required a CPA for the manager and supervisor positions examined in our survey. For example, about 31 percent of Fortune 100 respondents required a CPA for their managers of financial reporting, and 11 percent to 21 percent required a CPA for other positions. Requirements for other certifications (CMA and CIA) were rare. Two types of certifications were common among state government financial managers--CPA and certified government financial manager (CGFM). On average, about 21 percent of state government financial management personnel were CPAs. About 30 percent of CFOs, controllers, and managers and supervisors of financial reporting held CPAs. The percentage of personnel in other positions holding CPAs ranged from 21 percent of managers of accounting operations to 10 percent of supervisors of accounting operations. For example, one state informed us that certifications, such as CPA or CGFM, have replaced a bachelor's degree as preference items in its hiring and promotion programs. In addition, the percentage of personnel across all positions that held CGFM certificates ranged from 3 percent to 18 percent. Figure 10 shows, by position, the professional certifications held by financial management personnel in the state governments surveyed. Few state organizations required professional certifications for the financial management positions examined in the study. For example, about 13 percent of state government respondents required a CPA for their managers of financial reporting. For other positions, a lower percentage of respondents required CPAs, although five respondents said that they preferred that their managers and supervisors be CPAs. One state department told us that for the past 8 years, it has required all its financial management personnel to be CPAs. Another indicated that it now required all financial reporting and accounting operations managers to be CPAs and that, because of a perceived increase in personnel with CPAs available in recruitment pools, it has established a CPA as a desired credential for all professional positions in the accounting, financial analysis, and financial reporting areas. Requirements for other certifications--CGFM and CMA--were rare. Like Fortune 100 companies and large state governments, federal agencies must respond creatively to the challenges posed by new technologies, downsizing and restructuring, and increased reporting requirements. Consequently, the experiences of the nonfederal organizations in our review may provide important lessons learned for future federal efforts to improve the qualifications and professionalism of its financial management workforce in response to the challenge of moving from a strict accounting role to that of a "business partner." These lessons learned include upgrading requirements for hiring personnel and ensuring that personnel on board acquire the appropriate training needed to effectively carry out their evolving responsibilities. We are sending copies of this report to the Ranking Minority Member of the House Committee on Government Reform and Oversight, CFOs and inspectors general for the 24 largest federal agencies and departments, the Directors of the Office of Management and Budget and the Office of Personnel Management, and the Human Resource Committee of the Chief Financial Officers' Council. We will make copies available to others on request. Please contact me at (202) 512-9095 if you or your staffs have any questions. Major contributors to this report are listed in appendix IV. We received survey responses from the corporate-level CFO office of 34 Fortune 100 companies and from 54 divisions or subsidiaries of these companies. While no corporate offices requested anonymity, one subsidiary did request not to be listed and we honored their request. Respondents agreeing to be listed as participants in our study are the following: AlliedSignal Corporate-level CFO Office Engineered Materials Division American Airlines Corporate-level CFO Office The SABRE Group Holdings, Inc. American Express Company Corporate-level CFO Office AMOCO Corporation Corporate-level CFO Office Petroleum Products Energy Group North America International Operations Group AT&T Corporate-level CFO Office BankAmerica Corporation Financial Accounting Shared Services Retail Business Finance Support Groups Business Finance Wholesale Business Finance Commercial Wealth Management Business Finance BellSouth Corporation Corporate-level CFO Office Telecommunications Advertising and Publishing Corporation Cellular Corporation International The Boeing Company Corporate-level CFO Office Commercial Airplane Group Defense and Space Group Information Support Services Group Bristol-Myers Squibb Corporation Financial Shared Services Worldwide Medicines Group Clairol, Inc. ConvaTec Zimmer, Inc. Mead Johnson Nutritionals Chase Manhattan Corporate-level CFO Office Chevron Corporation Corporate-level CFO Office Chrysler Corporation Corporate-level CFO Office Citibank, N.A. Corporate-level CFO Office E.I. du Pont de Nemours Corporate-level CFO Office Federal National Mortgage Association Corporate-level CFO Office General Electric Company Corporate-level CFO Office Hewlett-Packard Company Corporate-level CFO Office Test and Measurement Measurement Systems Organization Consumer Products Group International Business Machines Corporate-level CFO Office J.C. Penney Company Corporate-level CFO Office Eckerd Corporation Insurance Group Catalog Division J.P. Morgan Corporate-level CFO Office Johnson & Johnson Corporate-level CFO Office Lehman Brothers Holdings, Inc. Corporate-level CFO Office Lockheed Martin Corporation Corporate-level CFO Office Tactical Aircraft Systems Astronautics Missiles and Space Aeronautical Systems Electronics and Missiles MCI Communications Corporate-level CFO Office Telecommunications Business Services Division Mass Markets Division MCI International, Inc. Metropolitan Life Insurance Corporate-level CFO Office Institutional Financial Management Division Individual Business Division Capital Corporation Canadian Operations Division Property and Casualty Division Mobil Corporation Corporate-level CFO Office NationsBank Corporation Finance Group New York Life Insurance Company Corporate-level CFO Office SBC Communications, Inc. Corporate-level CFO Office Southwestern Bell Telephone Southwestern Bell Yellow Pages Southwestern Bell Wireless Southwestern Bell Mobile Systems Sprint Corporate-level CFO Office Long Distance Division Local Service Division SuperValu, Inc. Corporate-level CFO Office Cub Foods Midwest Region Northern Region Save-A-Lot, Ltd. In addition to the above individuals, the contributions of the following individuals and organizations are acknowledged: Thomas Fritz, President, Private Sector Council, Washington, D.C.; Relmond Van Daniker, Executive Director, and Patricia O'Connor, Program Manager, National Association of State Auditors, Comptrollers, and Treasurers, Lexington, Kentucky; and James Sorensen, Professor of Accounting, School of Accountancy, University of Denver. These individuals reviewed and commented on drafts of the survey instrument and the report, organized pretests, and/or assisted with the survey distribution. In addition, the Colorado State Auditor's Office implemented an early version of the survey with State of Colorado agencies and departments and provided valuable input to us on the results. Association of Government Accountants. A Blueprint for Attracting and Retaining Financial Management Personnel. A Report by a Blue Ribbon Task Force of the Association of Government Accountants. Gary Siegel and James E. Sorensen. What Corporate America Wants in Entry-Level Accountants. A joint research project of the Institute of Management Accountants and the Financial Executives Institute. Montvale, New Jersey: August 1994. Gary Siegel Organization, Incorporated. The Practice Analysis of Management Accounting. A research project of the Institute of Management Accountants. Montvale, New Jersey: 1996. Holdman, John B., Jeffrey M. Aldridge, and David Jackson. "How to Hire Ms./Mr. Right." Journal of Accountancy, August 1996, pp. 55-57. Jablonsky, Stephen F., and Patrick J. Keating. "Financial Managers: Business Advocates or Corporate Cops?" Management Accounting, Vol. 76, No. 8 (February 1995), p. 21. Joint Financial Management Improvement Program. Continuing Professional Education: Federal GS-510 Accountants' Report. Washington, D.C.: December 1990. __________. Framework for Core Competencies for Financial Management Personnel in the Federal Government. A joint project of the Human Resources Committee of the Chief Financial Officers Council and the Joint Financial Management Improvement Program. Washington, D.C.: November 1995. Siegel, Gary, C.S. Kulesza, and James E. Sorensen. "Are You Ready for the New Accounting?", Journal of Accountancy, August 1997, pp. 42-46. U.S. General Accounting Office. Developing and Using Questionnaires. GAO/PEMD-10.1.7, October 1993. __________. Federal Workforce: A Framework for Studying Its Quality Over Time. GAO/PEMD-88-27, August 1988. __________. Financial Management: Challenges Facing DOD in Meeting the Goals of the Chief Financial Officers Act. GAO/T-AIMD-96-1, November 14, 1995. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO reviewed the background and training of key financial personnel at 34 of the largest private corporations and 19 of the largest state governments in the United States, focusing on: (1) education, work experience, training, and professional certifications of their key management personnel; and (2) training and qualification requirements for these personnel. GAO noted that: (1) while a majority of Fortune 100 and state government financial management personnel held undergraduate degrees in accounting or other business fields, personnel in chief financial officer (CFO) and controller positions were more likely to also hold advanced degrees; (2) in both sectors, managers and supervisors of financial analysis were more likely to hold advanced degrees than their counterparts in financial reporting and accounting operations; (3) in the Fortune 100 companies, the most common advanced degree was a Master of Business Administration (MBA); (4) in state governments, MBAs and other master's degrees were both prevalent; (5) accounting, auditing, and systems experience of financial management personnel averaged about 14 years for Fortune 100 companies and about 20 years for state government organizations; (6) for each sector, the majority of the work experience was in corporate or governmental accounting and finance, respectively; (7) combined experience in public accounting, internal auditing, and accounting systems design and maintenance averaged 2.5 years for the Fortune 100 respondents and about 4 years for the state government respondents; (8) these fields often provide personnel with a broad base of experience with accounting, and other organizationwide issues; (9) continuing professional education training was encouraged in Fortune 100 and state government organizations responding to GAO's survey; (10) on average, Fortune 100 and state government financial management personnel completed about 26 to 31 hours of training, respectively, in 1996; (11) respondents from both groups received the majority of their training in technical accounting subjects; (12) about 70 percent of Fortune 100 respondents and 45 percent of state government respondents set aside from 1 to 2 percent of their budgets for financial management staff salaries and benefits to train these staff each year; (13) as for professional certifications, over 40 percent of the Fortune 100 and about 30 percent of the state controllers and managers and supervisors of financial reporting were certified public accountants; and (14) in addition, about 10 percent of state government personnel, across positions, were certified government financial managers.

Nonappropriated fund instrumentalities (NAFI) are federal government entities whose funding does not come from congressional appropriations but rather from their own activities, such as the sales of goods and services. Their receipts and expenditures are not reflected in the federal budget. NAFIs were established to provide services and items for the morale, welfare, and recreational needs of government employees. Some NAFIs, for example the exchange system run by the Department of Defense, are created by statute. Others are created and regulated by government agencies. Some NAFIs, for example the Department of Agriculture's Graduate School, after being established by an agency, may subsequently receive congressional approval. No single federal statute establishes the overall authority to create NAFIs or defines how they are to operate. The Department of Defense military exchange system--which includes general retail stores, specialty stores, and consumer services at military installations--is the largest NAFI program. Some other agencies that use NAFIs are the Department of Veterans Affairs, the Coast Guard, and the State Department. Procurement laws and regulations applicable to federal government agencies generally do not apply to NAFIs. For example, the Federal Acquisition Regulation, the governmentwide regulation prescribing procedures for federal procurements and acquisitions with appropriated funds, does not include NAFI procurements with nonappropriated funds. Even though NAFIs generally are not covered under federal procurement regulations, the government agency that establishes a NAFI generally has financial oversight or control of its operations. For example, the Department of Defense established financial oversight procedures for its NAFI activities. The Secretary of Defense is required by statute to prescribe regulations governing (1) the purposes for which nonappropriated funds of a NAFI may be expended and (2) the financial management of such funds to prevent waste, loss, or unauthorized use (10 U.S.C. SS2783). The Graduate School was established by the Secretary of Agriculture on September 2, 1921, to provide continuing education for research scientists within the department. Over the years the Graduate School has expanded as a center for professional training of government employees at the federal, state, and local levels. A major expansion in its training curriculum occurred on May 16, 1995, when the Office of Personnel Management transferred eight of its training centers to the Graduate School. The Graduate School currently provides more than 1,500 courses annually and is open to all adults regardless of their place of employment or educational background. Training is offered in a variety of subject areas including computer science, leadership development, and government auditing. Courses are available during the daytime, evening, and on weekends. In addition, the Graduate School offers a distance learning program in which courses can be taken by correspondence and online. The Graduate School also provides training services such as conference and meeting management. The Graduate School's stated purpose is, through education, training, and related services, to improve the performance of government and to provide opportunities for individual life-long learning. Certificates of accomplishment to encourage participants to complete planned programs in their fields of study are awarded by the Graduate School. Some courses receive college credit recommendations from the American Council on Education's College Credit Recommendation Service. The credit recommendations guide colleges and universities when they consider awarding credit to participants whom have successfully completed courses at the Graduate School. The Graduate School is under the general direction of the Secretary of Agriculture. Regulations issued by the Secretary require the Graduate School to be governed by a General Administration Board that sets the school's policies, employs its director, and oversees its operations. These regulations also require that the board and most of the board's leadership positions be filled by employees of the department. The Graduate School employs more than 1,200 part-time faculty who are drawn from government, academia, and the private sector. Graduate School employees are not part of the civil service system. The Graduate School receives no appropriated funds but operates on revenue derived from providing training services. The school's revenue comes primarily from three sources: (1) training services provided through interagency agreements with federal agencies, (2) training services provided on a contractual basis, and (3) individual tuition, otherwise known as "open enrollment." The school uses three categories to define and report its revenue each year: (1) interagency agreement revenue, (2) contractual revenue, and (3) open enrollment revenue. An annual financial audit conducted by a private sector accounting firm is reviewed by the school's board. In 1984, the Comptroller General ruled that the Graduate School, because it was not a federal agency, could not enter into interagency agreements with federal agencies under the Economy Act (31 U.S.C. SS1535). After this ruling, the Graduate School's revenue decreased about one-third, according to officials. In 1990, Congress authorized federal agencies to enter into interagency agreements with the Graduate School for training and other related services (7 U.S.C. SS5922). That authority permits federal agencies to enter into such agreements without regard to competition requirements mandated in the Federal Property and Administrative Services Act of 1949 (40 U.S.C. 471, et seq.) or other procurement laws. The statute also gives the Comptroller General authority to conduct audits of the Graduate School's financial records relating to interagency agreements entered into under this provision. In 1996, Congress passed legislation that made it clear that as of April 4, 1996, the Graduate School would continue to operate as a NAFI (7 U.S.C. SS2279b). Any fees collected by the Graduate School are not considered federal funds and are not required to be deposited in the United States Treasury. That statute also provides that the Graduate School is exempt from various other federal provisions generally applicable to federal agencies, including the Freedom of Information Act, the Privacy Act, and the Federal Tort Claims Act. Consequently, the Graduate School does not have to respond to Freedom of Information Act requests, nor does it have any legal obligation to release any of its training materials, such as specific curriculum outlines, to the general public. The law authorizes the Graduate School's use of the Department of Agriculture facilities and resources on a cost-reimbursable basis. According to financial reports for fiscal year 1999, the Graduate School reimbursed the department approximately $1.5 million for use of office space and other facilities. To get information regarding the extent to which agencies use the Graduate School, we reviewed seven executive branch agencies. Collectively, the seven federal agencies we surveyed used private companies more frequently in fiscal year 1999 than the Graduate School.As table 1 indicates, these agencies had far more contracts with the private sector than interagency agreements with the Graduate School (531 vs. 20, respectively) for training. In examining the funding received by the Graduate School, we found a similar result: the agencies surveyed spent more on contracts with private companies--about $29 million--than on interagency agreements with the Graduate School--about $5.7 million. The selected agencies accounted for approximately one-third of the total interagency agreement revenue earned by the Graduate School in fiscal year 1999. We also surveyed these agencies regarding their total level of training supported by the Graduate School (rather than training only acquired through interagency agreements). Officials at the agencies reported that the Graduate School's share of their overall training budgets was minimal, ranging from 0 percent to 11 percent of their total annual training budgets. Agency officials we surveyed told us they followed specific internally established policies, practices, and procedures for making decisions on vendors and procurement methods. While only two of the seven agencies had documented these policies, officials from all seven told us their policies were consistently applied and required that at least two other vendors be considered for any procurement. For example, the U.S. Customs Service has written policies governing the acquisition of training that are published in a directive and a Memorandum from the Assistant Commissioner. All Customs external training purchases require the advance approval of the appropriate management officials with delegated authority to approve training. NASA officials said they follow the external training guidelines in the Federal Acquisition Regulation. However, NASA officials at its Goddard Space Flight Center told us that when potential vendors were considered for each training requirement, a "Request for Training Quote Information" form is required for each potential vendor. This form is used to collect information regarding each potential vendor and to assess its ability to provide the training services required. All of the agency officials said they consider a number of factors before deciding which vendor and contracting approach to use. The most commonly cited factors were cost and the ability of the vendor to provide the requested training. Additional factors agencies consider include customer needs, timeliness, past experience with the vendor, and quality of the product. Some agencies, such as the Internal Revenue Service and the Census Bureau, indicated that they conduct "market analysis" studies to identify all potential vendors. In addition, some agencies identified potential vendors using the General Services Administration's Federal Supply Schedule and the Government Wide Awarded Contracts. If the USDA Graduate School is selected as the vendor to provide training to an agency, that training can be acquired through a variety of procurement methods including interagency agreements and contracts. In general, agencies indicated that an interagency agreement can be easier to use because it is faster to put into place. Several of the agencies we surveyed also had formal written guidance addressing the use of interagency agreements that also applies to those established with the Graduate School. For example, Census Bureau guidance specifically mentions that interagency agreements are entered into under the authority of the Economy Act, including agreements with the Graduate School. Even though the Customs Service had no interagency agreements with the Graduate School in fiscal year 1999, its 1998 Interagency Agreement Guide makes direct reference to the Economy Act and its provisions and is applicable to agreements established with the Graduate School. The interagency agreement line item in the Graduate School's fiscal year 1999 financial statements did not include all of the revenue received from interagency agreements. The Graduate School's fiscal year 1999 financial statements reported interagency agreement revenue of about $7.1 million. Graduate School officials acknowledged that its reported revenue by type was imprecise. We independently estimated interagency agreement revenue as $14.9 million using a stratified random sample of revenue billings made in fiscal year 1999. The $7.8 million difference between the reported interagency agreement revenue and our estimate occurred because the Graduate School included certain revenue under contract training that should have been reported as interagency agreement revenue. According to Graduate School officials, only revenue earned under cost- reimbursable arrangements is reported as interagency agreement revenue. All fixed-price revenue is recorded as contract training, even though a significant amount of this revenue was provided through interagency agreements. Had management labeled these two line items as cost- reimbursable and fixed-price, rather than contract training and interagency agreements, the financial statements would have correctly disclosed the sources of revenue. However, mislabeling these line items caused the fiscal year 1999 financial statements to be misleading with regard to the procurement method used to generate revenue. Graduate School officials said they chose their method of accumulating revenue as fixed-price because it provides the information needed to support certain management decisions. For example, the school has a goal of avoiding heavy reliance on cost-reimbursable interagency agreement revenue. Further, the Graduate School Board of Directors monitors the composition of the fixed-price revenue versus cost-reimbursable revenue. In the course of our work, we noted two other matters regarding transaction processing and records retention. First, based on our sample results, we estimated that the Graduate School misclassified $563,416 in fiscal year 1999 revenue that was generated under contracts as interagency agreement revenue. These misclassification errors resulted from inaccurate manual coding of revenue transactions. Second, the Graduate School could not locate five billing invoices and documentation supporting one cash receipt in our sample. We considered the six items as complete errors and classified them as interagency agreements. The USDA Graduate School is a nonappropriated fund instrumentality whose purpose is to improve the performance of government through training of its employees. The operating structure of the Graduate School includes oversight by the Secretary of Agriculture and a governing board. Employees of the Graduate School are not part of the civil service. In examining the extent of training received by selected federal agencies in fiscal year 1999, the majority of this training was provided by sources other than the Graduate School. The Graduate School's revenue line items need to be consistent with the revenue sources for the school's financial statements to be meaningful. The interagency agreement line item in the school's fiscal year 1999 financial statements was not clearly and accurately reported because it did not reflect approximately half of the interagency agreement revenue that was classified as contract revenue. As a result, a reader could not determine the actual amount of total revenue derived from interagency agreements. We recommend that the Executive Director of the USDA Graduate School revise the Graduate School's current financial reporting policy to ensure that the revenue line items are properly presented in the school's financial statements. We requested comments on a draft of this report from the Executive Director of the USDA Graduate School. In its written comments, the Graduate School agreed with the report's content, conclusions, and recommendation. The Graduate School comments are reprinted in appendix I. Our work was done at the USDA Graduate School headquarters and at selected federal agencies: the Department of Labor, the Internal Revenue Service, the Department of Agriculture's Rural Development, the Federal Deposit Insurance Corporation, the U.S. Customs Service, the Census Bureau, and the National Aeronautics and Space Administration. To provide information on the purpose and operating framework of the Graduate School we interviewed Graduate School officials and reviewed documentation including legislation, policies, and strategic plans governing the Graduate School. We determined the extent of training services that selected federal agencies obtained from the Graduate School and private contractors and--by interviewing agency officials and reviewing appropriate documents, including agency procurement regulations and listings of agreements and contracts--we learned how such decisions were made. Six agencies covered by our work were nonstatistically selected based on their having interagency agreements and contracts with the Graduate School during fiscal year 1999. The seventh agency in our sample, the Department of Labor had no interagency agreements with the Graduate School during this period. Our work was performed using fiscal year 1999 data because this was the last year for which a complete data set was available when we initiated our evaluation. The seven nonstatistical selected agencies accounted for approximately one-third of the total interagency agreement revenue earned by the Graduate School in fiscal year 1999. To assess the reasonableness of interagency agreement revenue reported in the Graduate School's fiscal year 1999 financial statements, we met with Graduate School officials and external auditors for the school; read their audited financial statements for fiscal years 1999 and 1998; and read the school policies and procedures governing the classification of revenue and contracting. Further, we independently estimated interagency agreement revenue by selecting a stratified random probability sample of 145 transactions from 2,439 interagency agreement revenue billings made during fiscal year 1999. We stratified the population into four strata on the basis of the total of revenue billings for fiscal year 1999. In addition, we independently estimated contract revenue by selecting a stratified random probability sample of 185 transactions from 3,523 contract revenue billings made during fiscal year 1999. We stratified the population into five strata on the basis of the total amount of revenue billings for fiscal year 1999. Each sample element was subsequently weighted in the analysis to account statistically for all members of the respective populations, including those that were not selected. Transactions selected in the sample were tested for accuracy and to determine whether or not they were classified correctly. The confidence level used for estimating the value of misclassified amounts was 95 percent and the expected tolerable amount in error (test materiality) was $545,950. We also tested the reliability of the $6.1 million in fixed-price interagency agreement revenue identified by Graduate School officials that was reported as contract training revenue. We did not audit the Graduate School's financial statements or review the other auditor's workpapers. Furthermore, we are not expressing an opinion on the Graduate School's financial statements or on whether their auditors followed professional standards. We conducted our review in the Washington, D.C., metropolitan area from November 2000 to June 2001 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Executive Director of the Graduate School. We are sending copies of this report to the Chairman of the House Committee on Agriculture; the Director of the USDA Graduate School; the Secretaries of the Departments of Agriculture, Labor, Treasury, and Commerce; the Directors of the Federal Deposit Insurance Corporation and U.S. Census Bureau; the Administrator of the National Aeronautics and Space Administration; the Commissioners of the Internal Revenue Service and U.S. Customs Service; and the Deputy Undersecretary of the Rural Development and other interested parties. We will also make copies available to others on request. Major contributors to this report are listed in appendix II. If you have any questions please call me at (202) 512-9490. George H. Stalcup, (202) 512-9490. Key contributors to this report were Charlesetta Bailey, Jeffrey Bass, Sharon Byrd, Brandon Haller, Jeffrey Isaacs, Casandra Joseph, Boris Kachura, Carla Lewis, Delois Richardson, Sylvia Shanks, Alana Stanfield, Michael Volpe, McCoy Williams, and Gregory Wilmoth.

The U.S. Department of Agriculture's Graduate School provides extensive training opportunities to government employees and others. As a nonappropriated fund instrumentality, the Graduate School relies solely on income from the training it offers. During fiscal year 1999, the federal agencies GAO reviewed had 20 interagency agreements with the Graduate School totaling about $5.7 million. The agencies also had 531 contracts, totaling $29 million, with private companies for training and related services. The Graduate School's financial statements for fiscal year 1999 incorrectly identified the portion of revenue that was earned through interagency agreements. This misclassification occurred primarily because of the Graduate School's reporting policies.

The principal source of federal funding for CTE, Perkins IV authorizes federal grant funds for the enhancement of CTE for secondary and postsecondary students. In fiscal year 2008, Congress appropriated $1.2 billion for the improvement of local CTE programs. Education's Office of Vocational and Adult Education allocates the funds to states, which retain up to 15 percent of the funds for administration and state leadership of CTE programs, before passing at least 85 percent of the funds on to local recipients of funds, such as local school districts and community colleges. States determine the percentage of funds that will be allocated to the secondary and postsecondary levels. The majority of funds allocated to the secondary level are passed on to local recipients based on the school district's share of students from families below the poverty level for the preceding fiscal year. Postsecondary funds are primarily allocated based on the institution's share of Pell Grant recipients. Perkins IV established six student performance measures at the secondary level and five performance measures at the postsecondary level. These measures represent a range of student outcomes, such as attainment of technical skills and placement in employment or further education following the completion of CTE programs. In addition, the measures include the nontraditional participation and completion of students from an underrepresented gender in programs with significant gender disparities (such as women participating in auto repair), among others (see tables 1 and 2 for a description of the Perkins IV performance measures). To ease states' transition to the new provisions in Perkins IV, Education permitted states to submit a 1-year transition plan that covered only the first program year of Perkins IV implementation, 2007-2008. Accordingly, states were required only to implement and report performance on two secondary performance measures for the 2007-2008 program year: academic attainment and student graduation rates. These two measures are based on the same academic attainment and student graduation rate measures required by Title I of the Elementary and Secondary Education Act. Beginning in the 2008-2009 program year, states are required to report on student outcomes for all of the performance measures. States will report these outcomes to Education in December 2009. Perkins IV requires states to negotiate specific performance targets with Education and to annually report their performance to Education. It also requires local recipients to negotiate performance targets with the states and to annually report to the state their progress toward meeting these targets. Perkins IV established additional accountability requirements for states and local recipients, including actions to address states that do not meet all of their performance targets. Under Perkins IV, if a state does not meet at least 90 percent of its targets for one or more of the performance measures, it is required to develop and implement a program improvement plan that describes how it will address its failing performance targets. Prior to Perkins IV, states were only required to develop and implement a program improvement plan if they failed to meet their targets in all of their performance measures, not just one measure. States can also face financial sanctions. For example, Education can withhold all or a portion of funds if a state does not implement a program improvement plan, show improvement in meeting its failing performance measure, or meet the target for the same performance measure for 3 consecutive years. Local recipients that do not meet at least 90 percent of their performance targets have the same program improvement requirements as the state and face similar sanctions from the state. In the event of financial sanctions, Education is required to use the withheld funds to provide technical assistance to the state for improving its performance on the measures and the state is to use funds withheld from local recipients to provide CTE services and activities to students. In order to implement the performance measurement requirements of Perkins IV, states must define which students will be included in the measures and collect data for each of the performance measures at the secondary and postsecondary levels. For example, states define the minimum requirements, such as a certain number of CTE credits that a student would need to obtain in order to be identified as a student concentrating in CTE. Education has taken a range of actions to help states with these activities. For example, in January 2007, Education began issuing nonregulatory guidance to states to help them develop their student definitions and data collection approaches for the performance measures. Education also issued guidance to states on the information states must include in their state Perkins plans and in the annual reports that they submit to Education. In the state plans, states must detail how they intend to implement the performance measures, and in the annual reports states must describe their progress in meeting the negotiated performance targets. In addition to implementing performance measures, states are required to evaluate programs, services, and activities supported with Perkins funds and to report to Education in their state plans how they intend to conduct these evaluations. To meet this requirement, states describe the approaches, such as the use of state-developed standards, they will use to evaluate local CTE programs. In addition, Education requires states to include a description of how they used Perkins funds to evaluate their local CTE programs in their annual reports. A key feature of Perkins IV--to enhance state and local flexibility in developing, implementing, and improving career and technical education--allows for considerable variation in how states implement some performance measures. While Perkins IV was designed to strengthen accountability for results at the state and local levels, it also allows states to establish their own accountability systems, including their own data collection methods for the performance measures. Of the 11 performance measures, the secondary and postsecondary levels have 3 measures in common: technical skill attainment, student placement, and participation in and completion of nontraditional programs (see fig. 1). States may also include additional, state-developed performance measures in their accountability systems. For example, Washington state added three performance measures--earnings, employer satisfaction, and CTE student satisfaction--to its accountability system. Consistent with Perkins IV, Education's guidance to states also allows for flexibility. Education issued nonregulatory guidance that proposed specific definitions that could be adopted by states to develop each of the secondary and postsecondary performance measures. It also identified preferred approaches for collecting data for certain measures such as student technical skill attainment. However, Education noted that in accordance with Perkins IV, states could propose other definitions and approaches to collect data for the required performance measures if they meet the requirements of the law. We found through our surveys of state CTE directors that states vary considerably in the extent to which they plan to follow Education's guidance--specifically with regard to the technical skill attainment and secondary school completion measures. As a result, Education will collect student outcome data that vary across states for the same measures. This can create challenges for Education to aggregate student outcomes at the national level. For example, a majority of states reported that they will use technical assessments--the approach recommended in Education's guidance--to measure student attainment of skills at the secondary and postsecondary levels. These include assessments leading to industry-ba certificates or state licenses. However, a number of states will rely on other approaches to collect data for the performance measure, including grade poi nt average (GPA), program completion, or other methods (see table 3). Officials in the states we visited provided a variety of reasons for their use of alternate methods to measure students' attainment of technical skills. For example, postsecondary state officials in California said that a CTE instructor's overall evaluation of a student's technical skill proficiency, in the form of a final grade, is a better measure of technical skill attainmentthan third-party technical assessments, and can more effectivel program improvement. They questioned the value of technical assessments, in part because assessments often cannot keep pace with technology and changing CTE program curricula, such as curricula for digital animation. A Washington state official told us that the state plans to use program completion to measure technical skills at the postsecondary level, noting that each postsecondary CTE program incorporates industry- recognized standards into the curriculum. He noted that a national system se it of third-party assessments may not be adequate or appropriate, becau would not necessarily incorporate the same standards. Local school officials in Minnesota said that they will report on CTE course complet view by for this measure. Because CTE courses undergo curriculum re teachers as well as industry advisors, and align with relevant postsecondary programs in the area, school officials told us cours completion i attainment. s sufficient to satisfy the definition of technical skill Education's guidance also allows for considerable variation in the types of technical assessments states can use and when they can administer them. Most states at the secondary level reported in our survey that they plan to use industry-developed certificates or credentials most often administere at the end of a program, such as a certificate awarded for an automotive at the end of a program, such as a certificate awarded for an automotive technician. At the postsecondary level, states plan to most often rely upon technician. At the postsecondary level, states plan to most often rely upon the results of assessments for state lice the results of assessments for state licenses, such as state nursing licenses, to measure technical skills (see fig. 2). nses, such as state nursing licenses, to measure technical skills (see fig. 2). However, we found that while a majority of states plan to use assessment to report to Education, the assessments are not currently in widespread use. For example, more than half of states at the secondary and postsecondary levels reported that they plan to use these assessments to report on few to none of their state-approved CTE programs in the 2008- s 2009 program year. Some states at the secondary level reported will use a combination of methods--including GPA o r program completion--to report on technical skill attainment. We also found that states differ in whether they plan to report student dat on GED credentials, part of the secondary school completion measure. Thirty states reported through our survey that they do not plan to report GED data to Education for the 2008-2009 program year, while 18 reported that they would. About one-third of all states cited their ability to access accurate GED data as a great or very great challenge. For example, state officials we interviewed said states face difficulty tracking the students that leave secondary education and return, sometimes several years lat to earn a GED credential. An Education official said that the agency is aware of the challenges and limitations states face in collecting GED data ed to provide technical assistance to states on and that the agency may ne ways to collect these data. States reported in our surveys that they face the most difficulty in collecting student data for two of the performance measures: technical skill attainment and student placement (see fig. 3 and fig. 4). Thirty-eight states at the secondary level reported that they face great or very great challenges in collecting data on student technical skill attainment, while, similarly, 14 said they face challenges collecting data on student placement. The results were similar at the postsecondary level: 39 states reported great or very great challenges with the technical skill attainment measure and 11 cited a similar level of difficulty with student placement. States reported that the technical skill attainment measure at the secondary and postsecondary levels was most challenging to implement because of costs and the states' ability to collect accurate and complete student data. Specifically, states reported that the costs of state-developed assessments and third-party technical assessments--such as those for industry certifications--are high and often too expensive for many districts, institutions, or students. Several state CTE directors commented in our surveys that their Perkins funds are inadequate to pay for these assessments and additional funds would be necessary to cover the costs. Another CTE director stated that economically disadvantaged students cannot afford the cost of assessments. In addition to challenges due to cost, states are limited in their ability to access accurate and complete data. For example, a state official said that Washington state does not have data-sharing agreements with assessment providers to receive the results of student assessments. As a result, the state will have to rely largely on students to self-report the results of their assessments, which raises concerns of data quality. Challenges such as these likely contribute to some states' use of other data--such as GPA or program completion--to collect and report information for this key student performance measure. Some states also reported difficulty collecting data on CTE students after they leave the school system. States at the secondary and postsecondary levels reported that their greatest challenge with the student placement measure is collecting data on students that are employed out of state. As we previously reported, state wage records, such as Unemployment Insurance data, track employment-related outcomes only within a state, not across states. A number of states commented in our surveys on challenges in tracking students because of the lack of data sharing across states. We found that states face challenges in tracking students employed out of state regardless of the method they most commonly use to collect student placement data. Thirty-eight states at the secondary level will use student survey data from the state, school district, or a third party to track student placement and report to Education, while 41 states at the postsecondary level will rely on state wage record data, despite potential gaps in student data (see fig. 5). g. 5). States also cited other challenges in obtaining data on student placement for CTE students. At the secondary level, states reported that their next greatest challenge is linking secondary and postsecondary data systems in order to track students that pursue higher education after graduation. To help overcome this challenge, Minnesota--one of the states we visited-- recently passed legislation to allow data sharing between the secondary and postsecondary levels. Our survey also found that states' next greatest challenge at the postsecondary level was collecting data on students who are self-employed after leaving postsecondary institutions. Community college officials in California said that while they rely on Unemployment Insurance wage record data, the data are incomplete and do not capture information on the self-employed, a group that is important for the measurement of CTE outcomes at the postsecondary level. States face similar challenges of cost and ability to access accurate data for the remaining performance measures. For example, states at the secondary level commented on data challenges for the academic attainment and student graduation rate measures. Specifically, several states cited problems in obtaining data from separate student data systems containing academic and CTE information. This can be particularly challenging for states that are trying to match student data from different systems in order to track required CTE student outcomes. In addition, at the postsecondary level, states cited challenges in tracking student retention in postsecondary education or student transfer to a baccalaureate degree program. In particular, accessing student data from out-of-state and private institutions and the high costs required to track these students were identified as the most challenging issues. States most often reported that they will track these students through their state postsecondary data systems. As we have previously reported, effective monitoring is a critical component of grant management. The Domestic Working Group's suggested grant practices state that financial and performance monitoring is important to ensure accountability and attainment of performance goals. Additionally, GAO recently reported on the importance of using a risk-based strategy to monitor grants and noted that it is important to identify, prioritize, and manage potential at-risk grant recipients, given the large number of grants awarded by federal agencies. Education's approach to monitoring Perkins is consistent with these suggested grant practices. According to its Perkins monitoring plan, Education selects which states to monitor based on a combination of risk factors and monitors states in two ways: through on-site visits and off-site reviews of state plans, budgets, and annual reports for those states not visited in a given year. To determine which states it will visit for on-site monitoring, Education uses a combination of risk factors, such as grant award size, issues identified through reviews of state Perkins plans, and time elapsed since Education's last monitoring visit. Education officials told us that their goal is to visit each state at least once every 5 years and reported that they have conducted on-site monitoring visits to 28 states since 2006. Education officials also told us that the same monitoring team performs both on-site and off-site reviews, which officials said helps to ensure continuity between the reviews. Furthermore, when conducting the off- site reviews, the monitoring team looks for trends in state data and for any problems with state data validity and reliability. The team uses a checklist to match performance data to the data states report in their required annual reports. According to Education's inventory of open monitoring findings, as of May 2009, 9 of the 28 open findings were related to accountability and states failing to submit complete or reliable data. For example, in a February 2008 monitoring visit, Education found that the monitored state's data system had design limitations that affected the state's ability to collect and assess data on career and technical education students. Specifically, Education found that the various data systems across the local secondary and postsecondary levels did not share data with the state-level CTE data system. This data-sharing issue raised doubts about the validity and reliability of the state's Perkins data. Education tracks the findings from each state's monitoring visit in a database and reviews the findings in an internal report that is updated monthly. Additionally, if a state has open findings, the state may be required to report corrective actions to Education in the state's annual report. Officials told us that the amount of time it takes for a state to close out a finding depends upon the nature of the finding. For example, a finding related to accountability may take up to a year to resolve because a state may have to undertake extensive actions to address the deficiency. Education officials reported that their monitoring process emphasizes program improvement rather than focusing solely on compliance issues and that they use monitoring findings to guide the technical assistance they provide to the states. To evaluate its monitoring process, Education sends a survey to the CTE directors of states that were monitored that year and asks them to rate the format and content of Education's Perkins monitoring process. For example, the survey asks states to report on whether they received sufficient notice that the site visit was going to take place, whether the monitoring team provided on-site technical assistance, and whether the state received a written report within a reasonable time frame following the visit. We reviewed Education's summaries of the state surveys and found that for 2004 and 2005, the results of these surveys were generally positive. For example, in a 2004 monitoring evaluation report, the 10 states that were surveyed all reported that they had received sufficient notice about the monitoring visit and that Education staff provided on-site technical assistance. According to our survey of secondary-level CTE directors, about half of states have had a monitoring visit within the last 3 years, and almost all of the states whose monitoring visit resulted in findings said that Education worked with them to ensure that the findings were addressed. Education provides states with guidance, technical assistance, and a variety of other resources and is taking actions to meet states' need for additional help. Since Perkins IV was enacted, Education has issued guidance to states on topics such as instructions for developing the state Perkins plans and annual reports, as well as guidance related to the performance measures. For example, Education's guidance provides clarification to states on what information each state has to submit to Education before it can receive its grant award for the next program year, such as any revisions a state wants to make to its definitions of student populations, measurement approaches, and proposed performance levels for each of the measures. Some of the guidance resulted from Education's collaborative efforts with states. For example, Education's guidance to states on student definitions and measurement approaches incorporated the input given by state CTE directors during national conference calls between states and Education. Other guidance addresses questions raised by states during national Perkins IV meetings, such as how a state should negotiate performance levels with its local recipients. In addition to guidance, Education offers states technical assistance from Education staff--called Regional Accountability Specialists--and through a private contractor. Education officials told us that each Regional Accountability Specialist works with a specific group of states to negotiate state data collection approaches for the performance measures. In addition, each specialist maintains regular contact with his or her states throughout the year and provides assistance on other issues, such as reporting requirements and program improvement plans. In addition to the Regional Accountability Specialists, Education also provides states with technical assistance by using MPR Associates, a private contractor. MPR Associates provides technical assistance that generally includes on-site visits and follow-up discussions to help states improve their CTE programs and facilitate data collection for the performance measures. For example, MPR Associates met with one state to assist with developing population definitions and measurement approaches that aligned with Education's guidance and helped another state with developing a plan for implementing secondary and postsecondary technical skill assessments. After providing technical assistance to a state, MPR Associates develops a summary report, which is then published on Education's information- sharing Web site, the Peer Collaborative Resource Network. Education also offers states a range of other resources, including data work groups and monthly conference calls. See table 4 for a description of the various ways in which Education provides assistance to states. Most states reported that the assistance provided by Education has helped them implement the performance measures, but that more assistance in the area of technical skill attainment would be helpful. In our survey, states responded positively about their Regional Accountability Specialist and all of Education's other forms of assistance, including the Data Quality Institute and the Next Steps Work Group. States also reported that more nonregulatory guidance and more individual technical assistance would improve their ability to implement the performance measures. Of the states that provided additional information on the areas in which they wanted assistance, 4 of 16 states at the secondary level and 9 of 20 states at the postsecondary level said that they wanted assistance on the technical skill attainment measure. Specifically, some of the states that provided additional information said they would like Education to clarify its expectations for this measure, to provide states with a library of technical assessments, and to provide state-specific assistance with developing low-cost, effective technical assessments. States also raised issues regarding the performance measures and their state's data collection challenges. For example, one state reported that it was unsure how a state should report technical skill attainment as a single measure for over 400 distinct CTE programs. We found that Education officials were aware of states' need for additional assistance and that Education has taken some actions to address these needs, particularly in the area of technical assessments. For example, through the Next Steps Work Group, Education facilitated a technical skills attainment subgroup that is led by state officials and a national research organization. The subgroup reviewed state Perkins plans and annual reports for technical skill assessment strategies that states reported to Education for consideration in upcoming guidance. Education also collaborated with MPR Associates to conduct a study on the feasibility of a national technical assessment clearinghouse and test item bank. The study, conducted with several CTE research organizations and state-level consortia, proposed national clearinghouse models for technical assessments. MPR Associates concluded that clarifying ownership, such as who is responsible for the development and management of the system, and securing start-up funding were the two most likely impediments to creating such a system. The report was presented to states at the October 2008 Data Quality Institute seminar, and Education officials reported that they are working with organizations such as the National Association for State Directors of Career and Technical Education Consortium and the Council of Chief State School Officers to implement next steps. In addition to helping states with the technical skill attainment measure, Education also has taken actions to improve its information-sharing Web site, the Peer Collaborative Resource Network. Specifically, a Next Steps Work Group subcommittee surveyed states for suggested ways to improve the Web site and reported that states wanted to see the information on the site kept more current. The subcommittee reported in December 2008 that Education would use the survey results to develop a work plan to update the Web site. In May 2009, Education officials reported that they had implemented the work plan and were piloting the revamped site with selected state CTE directors before the department finalizes and formally launches the site. State performance measures are the primary source of data available to Education for determining the effectiveness of CTE programs, and Education relies on student outcomes reported through these measures to gauge the success of states' programs. While Perkins IV requires states to evaluate their programs supported with Perkins funds, it only requires states to report to Education--through their state plans--how they intend to evaluate the effectiveness of their CTE programs. It does not require states to report on the findings of their evaluations and does not provide any specific guidance on how states should evaluate their programs. Because only 2 of 11 measures have been implemented and reported on thus far, Education has little information to date on program outcomes. In program year 2007-2008, Education required states to implement and report only the academic skill attainment and graduation rate measures. States are required to provide Education with outcome data for the remaining 9 secondary and postsecondary measures in December 2009. According to Education's annual report for program year 2007-2008, 43 states met their targets for the academic attainment in reading/language arts measure, 38 states met their targets for the academic attainment in mathematics measure, and 46 states met their targets for the graduation rate measure. We analyzed the state plans of all 50 states and the District of Columbia and found that, as required by Perkins IV, states provide a description to Education on how they are evaluating their CTE programs. The type of information that states provided varied. For example, some states described the databases they use to capture key data and others explained how they use state-developed performance measures to evaluate their programs. Perkins IV does not require that states include information on what their evaluations may have found in terms of the success of a program. In our surveys of state CTE directors, nearly half of states (23 states at the secondary level and 21 states at the postsecondary level) responded that they have conducted or sponsored a study, in the past 5 years, to examine the effectiveness of their CTE programs. In response to these survey results, we collected seven studies that states identified as evaluations of their program effectiveness. We developed an instrument for evaluating these studies and determined the type of evaluation and methodology used by states in these studies. We determined that four of the studies were outcome evaluations and the remaining three studies were not outcome, impact, or process evaluations. For example, one state found in its outcome evaluation that high school graduates who completed a CTE program of study entered postsecondary institutions directly after high school at the same rate as all graduates. Perkins IV provides states with considerable flexibility in how they implement the required performance measures and how they evaluate the effectiveness of their CTE programs. While this flexibility enables states to structure and evaluate their programs in ways that work best for them, it may hinder Education's ability to gain a broader perspective on the success of state CTE programs. Specifically, differences in how states collect data for some performance measures may challenge Education's ability to aggregate student outcomes at a national level and compare student outcomes on a state-by-state basis. Further, Education is limited in what it knows about the effectiveness of state CTE programs, beyond what states report through the performance measures. Perkins only requires that states report on how they are evaluating their programs, and does not provide any guidance on how states should evaluate their programs or require that states report on the outcomes of their evaluations. Education is working with states to help them overcome challenges they face in collecting and reporting student outcomes, and over time, states may collect more consistent data for measures such as technical skill attainment. As states become more adept at implementing the Perkins performance measures, they will be better positioned to conduct more rigorous evaluations of their CTE programs. However this information may not be reported to Education. If policymakers are interested in obtaining information on state evaluations, they will need to weigh the benefits of Education obtaining this information with the burden of additional reporting requirements. We provided a draft of this report and the electronic supplement to the Department of Education for review and comment. Education provided technical comments on the report, which we incorporated as appropriate. Education had no comments on the electronic supplement. We are sending copies of this report to appropriate congressional committees, the Secretary of Education, and other interested parties. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions about the report, please contact me at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff that made major contributions to this report are listed in appendix II. To obtain national-level information on states' implementation of Perkins IV, we designed and administered two Web-based surveys, at the secondary and postsecondary levels, to state directors of career and technical education (CTE) in the 50 states and the District of Columbia. The surveys were conducted between January and April 2009, with 100 percent of state CTE directors responding to each survey. The surveys included questions about the types of data states collect for the student performance measures and challenges they face; the various kinds of technical assistance, guidance, and monitoring states received from Education; and how states evaluate their CTE programs. The surveys and a more complete tabulation of the results can be viewed at GAO-09-737SP. Because this was not a sample survey, there are no sampling errors. However, the practical difficulties of conducting any survey may introduce nonsampling errors, such as variations in how respondents interpret questions and their willingness to offer accurate responses. We took steps to minimize nonsampling errors, including pretesting draft survey instruments and using a Web-based administration system. Specifically, during survey development, we pretested draft instruments with officials in Minnesota, Washington state, and Vermont in December 2008. We also conducted expert reviews with officials from the National Association of State Directors of Career and Technical Education Consortium and MPR Associates, who provided comments on the survey. In the pretests and expert reviews, we were generally interested in the clarity of the questions and the flow and layout of the survey. For example, we wanted to ensure that terms used in the surveys were clear and known to the respondents, categories provided in closed-ended questions were complete and exclusive, and the ordering of survey sections and the questions within each section were appropriate. On the basis of the pretests and expert reviews, the Web instruments underwent some revisions. A second step we took to minimize nonsampling errors was using Web-based surveys. By allowing respondents to enter their responses directly into an electronic instrument, this method automatically created a record for each respondent in a data file and eliminated the need for and the errors associated with a manual data entry process. When the survey data were analyzed, a second, independent analyst checked all computer programs to further minimize error. While we did not fully validate all of the information that state officials reported through our surveys, we reviewed the survey responses overall to determine that they were complete and reasonable. We also validated select pieces of information by corroborating the information with other sources. For example, we compared select state responses with information submitted to Education in state Perkins plans. On the basis of our checks, we believe our survey data are sufficiently reliable for the purposes of our work. To better understand Perkins IV implementation at the state and local levels, we conducted site visits to three states--California, Minnesota, and Washington state--between September 2008 and February 2009. In each state we spoke with secondary and postsecondary officials at the state level with CTE and Perkins responsibilities. We also interviewed officials from local recipients of Perkins funds--that is, school districts and postsecondary institutions. Through our interviews with state and local officials, we collected information on efforts to implement the Perkins performance measures and uses of Perkins funding, experiences with Education's monitoring and technical assistance, and methods for CTE program evaluation. The states we selected represent variation across characteristics such as the type of state agency (i.e., state educational agencies or state college and university systems) eligible to receive Perkins funds, the amount of Perkins IV funds received in fiscal year 2008, and type of approach used to measure student attainment of technical skills. The localities selected for site visits provided further variation in geographic location (urban versus rural), number of CTE students served, and amount of Perkins funding received. We conducted this performance audit from August 2008 to July 2009, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Elizabeth Morrison (Assistant Director), Avani Locke, Robin Nye, Charlotte Gamble, Stephen Steigleder, Jessica Orr, Jean McSween, Christine San, and Jessica Botsford made key contributions to this report.

The Carl D. Perkins Career and Technical Education Act of 2006 (Perkins IV) supports career and technical education (CTE) in high schools and postsecondary institutions, such as community colleges. Perkins IV established student performance measures at the secondary and postsecondary levels for state agencies, such as state educational agencies, and local recipients, such as school districts, eligible to receive funds. GAO examined (1) how states have implemented the Perkins IV performance measures and what, if any, challenges they have faced in implementing the measures; (2) to what extent the Department of Education (Education) has ensured that states are implementing the new performance measures and supported states in their efforts; and (3) what Education knows about the effectiveness of CTE programs. To collect national-level data, GAO surveyed state CTE directors in the 50 states and District of Columbia between January and April 2009, and received responses from all states and the District of Columbia. To view survey results, click on http://www.gao.gov/special.pubs/gao-09-737sp/index.html . We provided a draft copy of this report to Education for comment. We received technical comments, which we incorporated into the draft where appropriate. States are implementing some of the Perkins IV performance measures using different approaches and report that the greatest challenge is collecting data on technical skill attainment and student placement. Flexibility in Perkins IV and Education's guidance permits differences in how states implement the measures. According to our surveys, 34 states at the secondary level and 29 at the postsecondary level intend to adopt Education's recommended use of assessments--such as those for industry certifications--to measure technical skills. States reported that they face the most challenge collecting data on the technical skill attainment and student placement measures because of cost and concerns with their ability to access complete and accurate data. Education ensures states are implementing the Perkins IV accountability requirements through on-site monitoring and off-site document reviews, and supports states through technical assistance and guidance. Monitoring findings were most often related to states failing to submit complete or reliable data, and Education uses its findings to guide the technical assistance it provides to states. States reported that Education's assistance has helped them implement the performance measures, but that more assistance with technical skill attainment would be helpful. Education is aware of states' need for additional assistance and has taken actions to address this, including facilitating a state-led committee looking at technical assessment approaches. State performance measures are the primary source of data available to Education for determining the effectiveness of CTE programs, and Education relies on student outcomes reported through these measures to gauge the success of states' programs. Because only 2 of 11 measures (secondary and postsecondary have 3 measures in common) have been implemented and reported on thus far, Education has little information to date on program outcomes. In addition, Perkins IV does not require states to report to Education the findings of their program evaluations. In our surveys of state CTE directors, nearly half of states responded that they have conducted or sponsored a study to examine the effectiveness of their CTE programs. We reviewed 7 of these studies and found that only 4 were outcome evaluations.

Federal agencies are dependent on computerized (cyber) information systems and electronic data to carry out operations and to process, maintain, and report essential information. The security of these systems and data is vital to public confidence and the nation's safety, prosperity, and well-being. Virtually all federal operations are supported by computer systems and electronic data, and agencies would find it difficult, if not impossible, to carry out their missions and account for their resources without these information assets. Hence, ineffective security controls to protect these systems and data could have a significant impact on a broad array of government operations and assets. Computer networks and systems used by federal agencies are often riddled with security vulnerabilities--both known and unknown. These systems are often interconnected with other internal and external systems and networks, including the Internet, thereby increasing the number of avenues of attack and expanding their attack surface. In addition, cyber threats to systems supporting the federal government are evolving and becoming more sophisticated. These threats come from a variety of sources and vary in terms of the types and capabilities of the actors, their willingness to act, and their motives. For example, foreign nations--where adversaries possess sophisticated levels of expertise and significant resources to pursue their objectives--pose increasing risks. Safeguarding federal computer systems has been a long-standing concern. This year marks the 20th anniversary of when GAO first designated information security as a government-wide high-risk area in 1997. We expanded this high-risk area to include safeguarding the systems supporting our nation's critical infrastructure in 2003 and protecting the privacy of personally identifiable information in 2015. Over the last several years, GAO has made about 2,500 recommendations to agencies aimed at improving the security of federal systems and information. These recommendations identified actions for agencies to take to strengthen their information security programs and technical controls over their computer networks and systems. Many agencies continue to be challenged in safeguarding their information systems and information, in part because many of these recommendations have not been implemented. As of February 2017, about 1,000 of our information security-related recommendations had not been implemented. Our audits of the effectiveness of information security programs and controls at federal agencies have consistently shown that agencies are challenged in securing their information systems and information. In particular, agencies have been challenged in the following activities: Enhancing capabilities to effectively identify cyber threats to agency systems and information. A key activity for assessing cybersecurity risk and selecting appropriate mitigating controls is the identification of cyber threats to computer networks, systems, and information. In 2016, we reported on several factors that agencies identified as impairing their ability to identify these threats to a great or moderate extent. The impairments included an inability to recruit and retain personnel with the appropriate skills, rapidly changing threats, continuous changes in technology, and a lack of government-wide information sharing mechanisms. We believe that addressing these impairments will enhance the ability of agencies to identify the threats to their systems and information and be in a better position to select and implement appropriate countermeasures. Implementing sustainable processes for securely configuring operating systems, applications, workstations, servers, and network devices. In our reports, we routinely determine that agencies do not enable key information security capabilities of their operating systems, applications, workstations, servers, and network devices. Agencies were not always aware of the insecure settings that introduced risk to the computing environment. We believe that establishing strong configuration standards and implementing sustainable processes for monitoring and enabling configuration settings will strengthen the security posture of federal agencies. Patching vulnerable systems and replacing unsupported software. Federal agencies we have reviewed consistently fail to apply critical security patches on their systems in a timely manner, sometimes doing so years after the patch becomes available. We have consistently identified instances where agencies use software that is no longer supported by their vendors. These shortcomings place agency systems and information at significant risk of compromise, since many successful cyberattacks exploit known vulnerabilities associated with software products. We believe that using vendor- supported and patched software will help to reduce this risk. Developing comprehensive security test and evaluation procedures and conducting examinations on a regular and recurring basis. Federal agencies we have reviewed often do not test or evaluate their information security controls in a comprehensive manner. The agency evaluations we reviewed were sometimes based on interviews and document reviews (rather than in depth security evaluations), were limited in scope, and did not identify many of the security vulnerabilities that our examinations identified. We believe that conducting in-depth security evaluations that examine the effectiveness of security processes and technical controls is essential for effectively identifying system vulnerabilities that place agency systems and information at risk. The Federal Information Security Modernization Act of 2014 (FISMA) provides a comprehensive framework for ensuring the effectiveness of information security controls over information resources that support federal operations and assets and for ensuring the effective oversight of information security risks, including those throughout civilian, national security, and law enforcement agencies. The law requires each agency to develop, document, and implement an agency-wide information security program to provide risk-based protections for the information and information systems that support the operations and assets of the agency. FISMA also establishes key government-wide roles for DHS. Specifically, with certain exceptions, DHS is to administer the implementation of agency information security policies and practices for information systems including: monitoring agency implementation of information security policies and providing operational and technical guidance to agencies; operating a central federal information security incident center; and deploying technology upon request to assist the agency to continuously diagnose and mitigate cyber threats and vulnerabilities. In addition, the Cybersecurity Act of 2015 requires DHS to deploy, operate, and maintain for use by any federal agency, a capability to (1) detect cybersecurity risks in network traffic transiting to or from agency information systems and (2) prevent network traffic with such risks from traveling to or from an agency information system or modify the traffic to remove the cybersecurity risk. In implementing federal law for securing agencies' information and systems, DHS is spearheading several initiatives to assist federal agencies in protecting their computer networks and electronic information. These include NCPS, CDM, and other services. However, our work has highlighted the need for advances within these initiatives. Operated by DHS's United States Computer Emergency Readiness Team (US-CERT), NCPS is intended to detect and prevent cyber intrusions into agency networks, analyze network data for trends and anomalous data, and share information with agencies on cyber threats and incidents. Deployed in stages, NCPS, operationally known as EINSTEIN, has provided increasing capabilities to detect and prevent potential cyber-attacks involving the network traffic entering or exiting the networks of participating federal agencies. Table 1 provides an overview of the EINSTEIN deployment stages to date. The overarching objectives of NCPS are to provide functionality that supports intrusion detection, intrusion prevention, analytics, and information sharing. However, in January 2016, we reported that NCPS had partially, but not fully, met these objectives: Intrusion detection: NCPS provided DHS with a limited ability to detect potentially malicious activity entering and exiting computer networks at federal agencies. Specifically, NCPS compared network traffic to known patterns of malicious data, or "signatures," but did not detect deviations from predefined baselines of normal network behavior. In addition, NCPS did not monitor several types of network traffic and therefore would not have detected malicious traffic embedded in such traffic. NCPS also did not examine traffic for certain common vulnerabilities and exposures that cyber threat adversaries could have attempted to exploit during intrusion attempts. Intrusion prevention: The capability of NCPS to prevent intrusions was limited to the types of network traffic it monitored. For example, the intrusion prevention function monitored and blocked e-mail determined to be malicious. However, it did not monitor malicious content within web traffic, although DHS planned to deliver this capability in 2016. Analytics: NCPS supported a variety of data analytical tools, including a centralized platform for aggregating data and a capability for analyzing the characteristics of malicious code. However, DHS had not developed planned capabilities to facilitate near real-time analysis of various data streams, perform advanced malware behavioral analysis, and conduct forensic analysis in a more collaborative way. DHS planned to develop and implement these enhancements through 2018. Information sharing: DHS had yet to develop most of the planned functionality for NCPS's information-sharing capability, and requirements had only recently been approved at the time of our review. Agencies and DHS also did not always agree about whether notifications of potentially malicious activity had been sent or received, and agencies had mixed views about the usefulness of these notifications. Further, DHS did not always solicit--and agencies did not always provide--feedback on them. In addition, while DHS had developed metrics for measuring the performance of NCPS, the metrics did not gauge the quality, accuracy, or effectiveness of the system's intrusion detection and prevention capabilities. As a result, DHS was unable to describe the value provided by NCPS. To enhance the functionality of NCPS, we made six recommendations to DHS, which if implemented, could help the agency to expand the capability of NCPS to detect cyber intrusions, notify customers of potential incidents, and track the quality, efficiency, and accuracy of supporting actions related to detecting and preventing intrusions, providing analytic services, and sharing cyber-related information. DHS concurred with the recommendations. In February 2017 when we followed up on the status of the recommendations, DHS officials stated that they have implemented 2 of the recommendations and initiated actions to address the other 4 recommendations. We are in the process of evaluating DHS's actions for the two implemented recommendations. In January 2016, we also reported that federal agencies had adopted NCPS to varying degrees. Specifically, the 23 civilian agencies covered by the Chief Financial Officers (CFO) Act that were required to implement the intrusion detection capabilities had routed some traffic to NCPS intrusion detection sensors. However, as of January 2016, only 5 of the 23 agencies were receiving intrusion prevention services, due to certain policy and implementation challenges. For example, officials stated that the ability to meet DHS security requirements to use the intrusion prevention capabilities varied from agency to agency. Further, agencies had not taken all the technical steps needed to implement the system, such as ensuring that all network traffic was being routed through NCPS sensors. This occurred in part because DHS had not provided network routing guidance to agencies. As a result, it had limited assurance regarding the effectiveness of the system. We recommended that DHS work with federal agencies and the Internet service providers to document secure routing requirements in order to better ensure the complete, safe, and effective routing of information to NCPS sensors. DHS concurred with the recommendation. When we followed up with DHS on the status of the recommendations, DHS officials said that nearly all of the agencies covered by the CFO Act are receiving at least one of the intrusion prevention services, as of March 2017. Further, the officials stated that DHS has collaborated with the Office of Management and Budget (OMB) to develop new guidance for agencies on perimeter security capabilities as well as alternative routing strategies. We will evaluate the network routing guidance when DHS finalizes and implements it. The CDM program provides federal agencies with tools and services that are intended to provide them with the capability to automate network monitoring, correlate and analyze security-related information, and enhance risk-based decision making at agency and government-wide levels. These tools include sensors that perform automated scans or searches for known cyber vulnerabilities, the results of which can feed into a dashboard that alerts network managers and enables the agency to allocate resources based on the risk. DHS, in partnership with and through the General Services Administration, established a government-wide acquisition vehicle for acquiring continuous diagnostics and mitigation capabilities and tools. The CDM blanket purchase agreement is available to federal, state, local, and tribal government entities for acquiring these capabilities. There are three phases of CDM implementation: Phase 1: This phase involves deploying products to automate hardware and software asset management, configuration settings, and common vulnerability management capabilities. According to the Cybersecurity Strategy and Implementation Plan, DHS purchased Phase 1 tools and integration services for all participating agencies in fiscal year 2015. Phase 2: This phase intends to address privilege management and infrastructure integrity by allowing agencies to monitor users on their networks and to detect whether users are engaging in unauthorized activity. According to the Cybersecurity Strategy and Implementation Plan, DHS was to provide agencies with additional Phase 2 capabilities throughout fiscal year 2016, with the full suite of CDM phase 2 capabilities delivered by the end of that fiscal year. Phase 3: According to DHS, this phase is intended to address boundary protection and event management for managing the security life cycle. It focuses on detecting unusual activity inside agency networks and alerting security personnel. The agency planned to provide 97 percent of federal agencies the services they need for CDM Phase 3 in fiscal year 2017. As we reported in May 2016, most of the 18 agencies covered by the CFO Act that had high-impact systems were in the early stages of CDM implementation. All 17 of the civilian agencies that we surveyed indicated they had developed their own strategy for information security continuous monitoring. Additionally, according to survey responses, 14 of the 17 had deployed products to automate hardware and software asset configuration settings and common vulnerability management. Further, more than half of the agencies noted that they had leveraged products/tools provided through the General Services Administration's acquisition vehicle. However, only 2 of the 17 agencies reported that they had completed installation of agency and bureau/component-level dashboards and monitored attributes of authorized users operating in their agency's computing environment. Agencies also noted that expediting the implementation of CDM phases could be of benefit to them in further protecting their high-impact systems. The effective implementation of the CDM tools and capabilities can assist agencies in overcoming the challenges we have identified that they face when securing their information systems and information. As noted earlier, our audits often identify insecure configurations, unpatched or unsupported software, and other vulnerabilities in agency systems. We believe that the tools and capabilities available under the CDM program, when effectively used by agencies, can help them to diagnose and mitigate vulnerabilities to their systems. By continuing to make these tools and capabilities available to federal agencies, DHS can also have additional assurance that agencies are better positioned to protect their information systems and information. DHS provides other services that could help agencies protect their information systems. Such services include, but are not limited to: US-CERT monthly operational bulletins are intended to provide senior federal government information security officials and staff with actionable information to improve their organization's cybersecurity posture based on incidents observed, reported, or acted on by DHS and US-CERT. CyberStat reviews are in-depth sessions with National Security Staff, OMB, DHS, and an agency to discuss that agency's cybersecurity posture and opportunities for collaboration. According to OMB, these interviews are face-to-face, evidence-based meetings intended to ensure agencies are accountable for their cybersecurity posture. The sessions are to assist the agencies in developing focused strategies for improving their information security posture in areas where there are challenges. DHS Red and Blue Team exercises are intended to provide services to agencies for testing their systems with regard to potential attacks. A Red Team emulates a potential adversary's attack or exploitation capabilities against an agency's cybersecurity posture. The Blue Team defends an agency's information systems when the Red Team attacks, typically as part of an operational exercise conducted according to rules established and monitored by a neutral group. In May 2016, we reported that although participation varied among the 18 agencies we surveyed, most of those that chose to participate generally found these services to be useful in aiding the cybersecurity protection of their high-impact systems. Specifically, 15 of 18 agencies participated in US-CERT monthly operational bulletins, and most found the service very or somewhat useful. All 18 agencies participated in the CyberStat reviews, and most found the service very or somewhat useful. 9 of 18 agencies participated in DHS' Red/Blue team exercises, and most found the exercises to be very or somewhat useful. Half of the agencies in our survey reported that they wanted an expansion of federal initiatives and services to help protect their high-impact systems. For example, agencies noted that expediting the implementation of CDM phases, sharing threat intelligence information, and sharing attack vectors, could be of benefit to them in further protecting their high- impact systems. We believe that by continuing to make these services available to agencies, DHS will be better able to assist agencies in strengthening the security of their information systems. In conclusion, DHS is leading several programs that can benefit federal efforts to secure agency information systems and information. Two such programs, NCPS and CDM, offer the prospect of important advances in the security over federal systems. Enhancing NCPS's capabilities and greater adoption by agencies will help DHS achieve the full benefit of the system. Effective implementation of CDM functionality by federal agencies could better position them to protect their information technology resources from evolving and pernicious threats. Chairman Ratcliffe, Ranking Member Richmond, and Members of the Subcommittee, this concludes my statement. I would be happy to respond to your questions. If you or your staff have any questions about this testimony, please contact Gregory C. Wilshusen at (202) 512-6244 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Christopher Businsky, Michael W. Gilmore, Nancy Glover, Jeff Knott, Kush K. Malhotra, Scott Pettis, David Plocher, and Angela D. Watson. 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.

Cyber-based intrusions and attacks on federal systems are evolving and becoming more sophisticated. GAO first designated information security as a government-wide high-risk area in 1997. This was expanded to include the protection of cyber critical infrastructure in 2003 and protecting the privacy of personally identifiable information in 2015. DHS plays a key role in strengthening the cybersecurity posture of the federal government. Among other things, DHS has initiatives for (1) detecting and preventing malicious cyber intrusions into agencies' networks and (2) deploying technology to assist agencies to continuously diagnose and mitigate cyber threats and vulnerabilities. This statement provides an overview of GAO's work related to DHS's efforts to improve the cybersecurity posture of the federal government. In preparing this statement, GAO relied on previously published work, as well as information provided by DHS on its actions in response to GAO's previous recommendations. The Department of Homeland Security (DHS) is spearheading multiple efforts to improve the cybersecurity posture of the federal government. Among these, the National Cybersecurity Protection System (NCPS) provides a capability to detect and prevent potentially malicious network traffic from entering agencies' networks. In addition, DHS's continuous diagnostics and mitigation (CDM) program provides tools to agencies to identify and resolve cyber vulnerabilities on an ongoing basis. In January 2016, GAO reported that NCPS was limited in its capabilities to detect or prevent cyber intrusions, analyze network data for trends, and share information with agencies on cyber threats and incidents. For example, it did not monitor or evaluate certain types of network traffic and therefore would not have detected malicious traffic embedded in such traffic. NCPS also did not examine traffic for certain common vulnerabilities and exposures that cyber threat adversaries could have attempted to exploit during intrusion attempts. In addition, at the time of the review, federal agencies had adopted NCPS to varying degrees. GAO noted that expanding NCPS's capabilities, such as those for detecting and preventing malicious traffic and developing network routing guidance, could increase assurance of the system's effectiveness in detecting and preventing computer intrusions and support wider adoption by agencies. By taking these steps, DHS would be better positioned to achieve the full benefits of NCPS. The tools and services delivered through DHS's CDM program are intended to provide agencies with the capability to automate network monitoring, correlate and analyze security-related information, and enhance risk-based decision making at agency and government-wide levels. In May 2016, GAO reported that most of the 17 civilian agencies covered by the Chief Financial Officers Act that also reported having high-impact systems were in the early stages of CDM implementation. For example, 14 of the 17 agencies reported that they had deployed products to automate hardware and software asset inventories, configuration settings, and common vulnerability management but only 2 had completed installation of agency and bureau/component-level dashboards. Some of the agencies noted that expediting CDM implementation could be of benefit to them in further protecting their high-impact systems. GAO concluded that the effective implementation of the CDM program can assist agencies in resolving cybersecurity vulnerabilities that expose their information systems and information to evolving and pernicious threats. By continuing to make available CDM tools and capabilities to agencies, DHS can have additional assurance that agencies are better positioned to protect their information system and information. In addition, DHS offered other services such as monthly operational bulletins, CyberStat reviews, and cyber exercises to help protect federal systems. In May 2016, GAO reported that although participation varied among the agencies surveyed, most agencies had found that the services were very or somewhat useful. By continuing to make these services available to agencies, DHS is better able to assist agencies in strengthening the security of their information systems. In a January 2016 report, GAO made nine recommendations related to expanding NCPS's capability to detect cyber intrusions; notifying customers of potential incidents; providing analytic services; and sharing cyber-related information, among other things. DHS concurred with the recommendations and is taking actions to implement them.

CT uses ionizing radiation and computers to produce cross-sectional images of internal organs and body structures. MRI uses powerful magnets, radio waves, and computers to create cross-sectional images of internal body tissues. NM uses radioactive materials in conjunction with an imaging modality to produce images that show both structure and function within the body. During an NM service, such as a PET scan, a patient is administered a small amount of radioactive substance, called a radiopharmaceutical or radiotracer, which is subsequently tracked by a radiation detector outside the body to render time-lapse images of the radioactive material as it moves through the body. Imaging equipment that uses ionizing radiation--such as CT and NM--poses greater potential short- and long-term health risks to patients than other imaging modalities, such as ultrasound. This is because ionizing radiation has enough energy to potentially damage DNA and thus increase a person's lifetime risk of developing cancer. In addition, exposure to very high doses of this radiation can cause short-term injuries, such as burns or hair loss. To become accredited, ADI suppliers must select a CMS-designated accrediting organization, pay the organization an accreditation fee, and demonstrate that they meet the organization's standards. As we noted in our May 2013 report, the accrediting organization fees vary. For example, as of January 2013, ACR's accreditation fees ranged from $1,800 to $2,400 per unit of imaging equipment, while IAC's fees ranged from $2,600 to $3,800 per application. While the specific standards used by accrediting organizations vary, MIPPA requires all accrediting organizations to have standards in five areas: (1) qualifications of medical personnel who are not physicians and who furnish the technical component of ADI services, (2) qualifications and responsibilities of medical directors and supervising physicians, (3) procedures to ensure that equipment used in furnishing the technical component of ADI services meets performance specifications, (4) procedures to ensure the safety of beneficiaries and staff, and (5) establishment and maintenance of a quality-assurance and quality control program. To demonstrate that they meet their chosen accrediting organization's standards, ADI suppliers must submit an online application as well as required documents, which could include information on qualifications of personnel or a sample of patient images. MIPPA requires CMS to oversee the accrediting organizations and authorizes CMS to modify the list of selected accrediting organizations, if necessary. Federal regulations specify that CMS may conduct "validation audits" of accredited ADI suppliers and provide for the withdrawal of CMS approval of an accrediting organization at any time if CMS determines that the organization no longer adequately ensures that ADI suppliers meet or exceed Medicare requirements. CMS also has requirements for accrediting organizations. For example, accrediting organizations are responsible for using mid-cycle audit procedures, such as unannounced site visits, to ensure that accredited suppliers maintain compliance with MIPPA's requirements for the duration of the 3-year accreditation cycle. According to CMS officials, five full-time staff are budgeted to oversee and develop standards for the ADI accreditation requirement.report was issued in May 2013, CMS has begun to gather input from stakeholders on the development of national standards for the accreditation of ADI suppliers, which it intends to develop by the end of 2014. Medicare payment for the technical component of ADI services is intended to cover the cost of the equipment, supplies, and nonphysician staff and is generally significantly higher than the payment for the professional component. The payment for the professional component is intended to cover the physician's time in interpreting the image and writing a report on the findings. Medicare reimburses providers through different payment systems depending on where an ADI service is performed. When an ADI service is performed in an office setting such as a physician's office or IDTF, both the professional and technical component are billed under the Medicare physician fee schedule. Alternatively, when the ADI service is performed in an institutional setting, the physician can only bill the Medicare physician fee schedule for the professional component, while the payment for the technical component is covered under a different Medicare payment system, according to the setting in which the service is provided. For example, the technical component of an ADI service provided in a hospital outpatient department is paid under the hospital outpatient prospective payment system (OPPS). The use of imaging services grew rapidly during the decade starting in 2000--MedPAC reported that cumulative growth between 2000 and 2009 totaled 85 percent--although the rate of growth has declined in recent Growth in imaging utilization and expenditures--including those years.for ADI services--prompted action from Congress, CMS, and private payers. Congress has enacted legislation to help ensure appropriate Medicare payment for ADI services; in some cases, this legislation has had the effect of reducing Medicare payment for the technical component of certain imaging services, such as the following: The Deficit Reduction Act of 2005 required that, beginning January 1, 2007, Medicare payment for certain imaging services under the physician fee schedule not exceed the amount Medicare pays under the OPPS. The Patient Protection and Affordable Care Act (PPACA), as amended by the Health Care and Education Reconciliation Act of 2010 (HCERA) and the American Tax Relief Act of 2012 (ATRA), reduced payment for the technical component of ADI services by adjusting assumptions, known as utilization rates, related to the rate at which certain imaging equipment is used. These changes had the effect of reducing payments for the technical component of ADI services beginning in January 2011, with additional reductions scheduled to take effect in 2014. CMS implemented additional changes to Medicare payment policy to help ensure appropriate payment for ADI services, which had the effect of reducing Medicare payment for certain imaging services. In January 2006 CMS began applying a multiple procedure payment reduction (MPPR) policy to the technical component of certain CT and MRI services, which reduces payments for these services when they are furnished together by Beginning in the same physician, to the same patient, on the same day.January 2012, CMS expanded the MPPR by reducing payments for the lower-priced professional component of certain CT and MRI services by 25 percent when two or more services are furnished by the same physician to the same patient, in the same session, on the same day. Private payers have also implemented policies designed to help control imaging utilization and expenditures. One such policy is the use of prior authorization, which can involve requirements that physician orders of imaging services meet certain guidelines in order to qualify for payment. Further, best practice guidelines, such as ACR's Appropriateness Criteria, as well as efforts to educate physicians and patients about radiation exposure associated with imaging, have been used to promote the appropriate use of imaging services. We found that the number of ADI services provided to Medicare beneficiaries in the office setting--an indicator of access to those services--began declining before and continued declining after the accreditation requirement went into effect on January 1, 2012 (see fig. 1). In particular, the rate of decline from 2009 to 2010 was similar to the rate from 2011 to 2012 for the CT; MRI; and NM, including PET, services in our analysis. These results suggest that the overall decline was driven, at least in part, by factors other than accreditation. For example, the number of CT services per 1,000 FFS beneficiaries declined by 9 percent between 2009 and 2010, 4 percent between 2010 and 2011, and 9 percent between 2011 and 2012. The percentage decline in the number of ADI services provided in the office setting was generally similar in both urban and rural areas during the period we studied, although we found that substantially more services were provided in urban areas than in rural areas (see fig. 2). The number of ADI services per 1,000 FFS beneficiaries provided in urban areas declined by 7 percent between 2011 and 2012, while the number of services provided in rural areas declined by 8 percent. In addition, 148 services were provided per 1,000 FFS beneficiaries in urban areas in 2012, as compared to 81 services per 1,000 beneficiaries in rural areas. One reason the use of ADI services in the office setting was relatively low in rural areas was that a smaller percentage of ADI services in these areas were provided in the office setting. Specifically, in 2012, about 14 percent of ADI services in rural areas were provided in the office setting, compared to 23 percent of ADI services in urban areas. See appendix I for trends in the number of urban and rural ADI services by modality. The effect of accreditation on access--as illustrated by our analysis of the trends in ADI services in the office setting--is unclear in the context of recent policy and payment changes as well as other factors affecting the use of imaging services. In particular, the decline in ADI services occurred amid the implementation in recent years of public and private policies to slow rapid increases in imaging utilization and spending. Factors, including public and private policies, that may have played a role in the decline in ADI service utilization include the following: Medicare payment reductions. Reductions in Medicare payment may have contributed to the decline in ADI services between 2009 and 2012 as reduced fees may affect physicians' willingness to For example, provide imaging services for Medicare beneficiaries.PPACA and ATRA reduced payment for the technical component of ADI services by adjusting assumptions related to the rate at which certain imaging equipment is used. In addition, CMS implemented a 25 percent payment reduction for the professional component of certain CT and MRI services under the MPPR, effective January 1, 2012--the same date the accreditation requirement went into effect. Prior authorization. Studies have suggested that increased use of prior authorization policies among private payers in recent years has contributed to a decrease in ADI services provided to privately insured individuals. These policies may have had a spillover effect on Medicare, thus contributing to the decline in ADI services provided to Medicare beneficiaries from 2009 to 2012. Radiation awareness. Studies have suggested that increased physician and patient awareness of the risks associated with radiation exposure may have led to a decline in CT and NM services provided to Medicare beneficiaries. Of the remaining two suppliers, one indicated that it was unsure whether accreditation has affected the number of services it provides, while the other indicated that accreditation may have led to a slight increase in the number of services it provides. accreditation process. According to the representatives, IAC and ACR requested that CMS provide a provisional accreditation period for new suppliers that would allow them to obtain reimbursement for applicable ADI services while they undergo the accreditation process. According to CMS, it does not have the authority under MIPPA to provide provisional accreditation, as the statute only allows accredited suppliers to be paid for the technical component of ADI services beginning on January 1, 2012. We provided a draft of this report for review to the Department of Health and Human Services, and the agency stated that it had no comments. We are sending copies of this report to the Secretary of Health and Human Services and appropriate congressional committees. The report will also be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. In addition to the contact named above, Phyllis Thorburn, Assistant Director; William Black, Assistant Director; Priyanka Sethi Bansal; William A. Crafton; Richard Lipinski; Beth Morrison; Jennifer Whitworth; and Rachael Wojnowicz made key contributions to this report.

The Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) required that beginning January 1, 2012, suppliers that produce the images for Medicare-covered ADI services in office settings, such as physician offices, be accredited by an organization approved by CMS. MIPPA mandated that GAO issue two reports on the effect of the accreditation requirement. The first report, issued in 2013, assessed CMS's standards for the accreditation of ADI suppliers and its oversight of the accreditation requirement. In this report, GAO examined the effect the accreditation requirement may have had on beneficiary access to ADI services provided in the office setting. To do this, GAO examined trends in the use of the three ADI modalities--CT; MRI; and NM, including PET--provided to Medicare beneficiaries from 2009 through 2012 that were subject to the ADI accreditation requirement. GAO also interviewed CMS officials, representatives of the Intersocietal Accreditation Commission and the American College of Radiology--the two CMS-approved accrediting organizations that accounted for about 99 percent of all accredited suppliers as of January 2013; and 19 accredited ADI suppliers that reflected a range of geographic areas, imaging services provided, and accrediting organizations used. In addition, GAO reviewed relevant literature to understand the context of any observed changes in ADI services throughout the period studied. GAO found that the number of advanced diagnostic imaging (ADI) services provided to Medicare beneficiaries in the office setting--an indicator of access to those services--began declining before and continued declining after the accreditation requirement went into effect on January 1, 2012. In particular, the rate of decline from 2009 to 2010 was similar to the rate from 2011 to 2012 for magnetic resonance imaging (MRI); computed tomography (CT); and nuclear medicine (NM), including positron emission tomography (PET) services. These results suggest that the overall decline was driven, at least in part, by factors other than accreditation. The percentage decline in the number of ADI services provided in the office setting was generally similar in both urban and rural areas during the period GAO studied. The effect of accreditation on access is unclear in the context of recent policy and payment changes implemented by Medicare and private payers. For example, the Centers for Medicare & Medicaid Services (CMS) reduced Medicare payment for certain CT and MRI services, which could have contributed to the decline in the number of these services. Officials from CMS, representatives from the accrediting organizations, and accredited ADI suppliers GAO interviewed suggested that any effect of the accreditation requirement on access was likely limited. The Department of Health and Human Services stated that it had no comments on a draft of this report.

The KMCC currently faces significant cost, schedule, and performance problems, and it is unclear as to when the project will be completed and at what cost. Despite being originally scheduled to open in early 2006, neither LBB-Kaiserslautern nor the Air Force can estimate a completion date for the project because of the widespread construction management problems. In addition, estimated costs associated with the KMCC have already exceeded original estimates and will continue to grow. LBB- Kaiserslautern mismanagement has caused numerous problems with the KMCC. Examples include poor designs, substandard workmanship on key building components, and a significant reduction in the number of workers on-site. Furthermore, there may be fraud within the project, which is supported by the fact that there are ongoing criminal and civil investigations by AFOSI and German police. The latest official design schedule completed by LBB-Kaiserslautern and provided to the Air Force in September 2006 indicated that the KMCC would be completed by April 2007. However, during our visit to the KMCC in May 2007, LBB-Kaiserslautern and Air Force officials stated that key milestone dates from the most recent design schedule had obviously slipped. In fact, neither LBB-Kaiserslautern nor Air Force officials could provide a new estimated project completion date during our audit of the project. Also, both LBB-Kaiserslautern and the Air Force provided us current cost estimates of about $200 million, which have already exceeded the original estimate of about $150 million. We found that these cost estimates did not include substantial costs related to the expected roof repair and replacement discussed later, as well as hindrance claims associated with the project. Furthermore, the Air Force contract with LBB-Kaiserslautern is denominated in euros and therefore the U.S. cost equivalent varies with the exchange rate. For example, the original cost estimate of about $150 million was developed in 2003 when 1 dollar was able to purchase significantly more in euros than 1 dollar can currently purchase. Figure 1 below shows the trend in the strengthening of the euro against the U.S. dollar over the past several years. The schedule delays associated with the KMCC have compounded cost problems because of the appreciation of the euro versus the U.S. dollar. Given the substantial costs associated with repairs to the roof, schedule delays, and potential hindrance claims by contractors, assuming currency rates remain higher than they were for the original project budget, the appreciation of euros versus the U.S. dollar compounds the effect of cost overruns on this project. Since the start of construction in 2003, the KMCC has experienced numerous problems including poor design, substandard workmanship, poor coordination of the different contractors, and a reduction of workers on the site. Some of the more notable problems associated with this project include the following: Roof: The roof is experiencing water leaks causing considerable damage to the walls and the floors of the complex. According to Air Force officials, since the contractor responsible for roof construction went bankrupt, KMCC funding sources from the United States (AAFES, Air Force Services Agency, and Military Construction funds) will likely be used to pay the estimated millions of dollars in costs required to repair or replace the entire roof along with any internal damage. Figure 2 shows some damage in the KMCC resulting from the leak in its roof. Exhaust ducts: The kitchen exhaust ducts installed in the KMCC do not comply with fire code standards established by the National Fire Protection Association. According to Air Force officials, it will take several months to make the exhaust ducts compliant with the fire codes at a cost of hundreds of thousands of dollars. Bathroom faucets: Design plans called for some of the bathroom faucets in the KMCC to be automatic where water would turn on when a motion sensor indicated the presence of a person. However faucets and walls were installed prior to the electrical contractor installing wires needed to power the automated faucets. Vandalism: In April 2006, vandalism occurred in over 200 rooms inside the KMCC. The cost to repair damage caused by the vandalism is estimated to be over $1 million. To make matters worse, as shown in figure 3, due to poor project coordination, a German contractor installed light fixtures on top of the vandalized walls. These lights will need to be removed to enable wall repairs to be made and then reinstalled. Reduction of construction workers: In the past several months, the KMCC has faced a drastic reduction of the number of workers on-site. LBB-Kaiserslautern officials attributed this decrease to slow payment for services and reduced payment amounts from the Air Force due to increased scrutiny of invoices by the Air Force. The Air Force has delayed the payments to certain contractors because the total amount of charges billed to the Air Force has already risen to the contract cost ceiling for the specific contractor. Therefore, the Air Force has been unable to pay those contractors for work performed without a contract change order to increase the contract ceiling. As a result, many of the contractors either reduced the number of workers or have quit working altogether on the project. Prior to September 2006, the number of workers on the site was normally several hundred. Currently, the number of workers on the site is routinely less than 50. In addition to the construction problems faced by the KMCC, there have been a number of personnel who have been removed or have resigned from the project. In the past year, project management officials from LBB- Kaiserslautern have been replaced. Also, JSK, the firm hired by LBB- Kaiserslautern to manage the KMCC, was fired. Finally, a senior Air Force civilian in charge of the project resigned from the position and left the Air Force in 2006. On top of those personnel changes, both the AFOSI and the German Police have ongoing investigations into the project. The investigations span a variety of issues, both criminal and civil, including the investigations of Air Force project management officials as well as German government officials. In the past year, both Air Force and LBB- Kaiserslautern offices have been searched and documentation seized by both AFOSI and German police in relation to these investigations. Current problems facing the KMCC have been caused by the additional risks associated with overseas construction, project management deficiencies by LBB-Kaiserslautern, and the Air Force's lack of effective controls to mitigate project risks. Guidelines set forth in ABG-75 add risk to the contract management process for U.S. forces construction in Germany. In addition, during the design and construction of the KMCC, the German government construction agent, LBB-Kaiserslautern, did not effectively carry out its project design and construction management duties. Finally, the Air Force failed to recognize risks associated with the KMCC and develop control procedures to minimize project risks. Because the most significant control that the United States can exercise over construction projects in Germany is financial control, the Air Force should have increased the project oversight controls to identify any invalid, unsupported, or inaccurate costs before money was spent. Instead, the Air Force did not have basic oversight and in some cases has circumvented controls in order to expedite payments. The KMCC presented increased risk from the beginning because U.S. forces are not in direct control of construction projects in Germany. Under the terms of ABG-75, most U.S. military construction projects are required to be executed by German government construction agencies, in this case LBB-Kaiserslautern, in accordance with German laws. This includes all contractual authority for design, bid tender and award, project execution, construction supervision, and inspection for all military projects within Germany. As such, the German government construction agency contracts directly with the design and construction companies responsible for a given project. As a result, the United States is required to work through this indirect contracting method, and does not have any direct legal relationship with the contractors for construction projects that are to be built on their behalf. According to Air Force officials, because ABG-75 gives the German government such broad powers in the construction of military projects, the United States has limited influence on how construction projects are built. For example, Air Force officials stated that they were initially resistant to use a trade lots acquisition strategy for the construction of the KMCC because of the complexity involved with coordinating and managing the contractors associated with this strategy. Air Force officials stated that they relented to German government demands for trade lots after it was pointed out that the method of contracting was clearly within the German government's prerogative under ABG-75. ABG-75 stipulates that the U.S. government pay German government construction agencies (e.g., LBB-Kaiserslautern) between 5 and 7 percent of the project cost for administering the contract regardless of the total project costs with no incentives for early completion. As a result, no incentive exists to minimize costs or encourage early completion. Despite additional risks associated with ABG-75, U.S. forces do have some leverage in managing construction projects in Germany. Specifically, under ABG-75, the United States is granted the authority to approve designs and provide prior consent to any modifications to the construction contract (also known as "change orders") that affect the scope, quality, or cost of the project. Any excess costs must be approved in advance by U.S. forces, and the forces are not liable for costs proved to be the fault of German officials or contractors. Thus, U.S. forces do have the "power of the purse" which can be used to pay only for costs within the scope of the contract. According to Air Force officials, the Air Force has the ability to cut off funding for its projects. However, since the projects are needed for base operations, such a step would only be used as a last resort. Finally, general risks associated with overseas construction projects add to an already risky situation. Increased complexities of overseas projects include differences in languages, culture, construction laws, safety regulations, and exposure to changes in currency exchange rates. Changes in currency exchange rates can pose a significant risk when project costs must be paid in the host country's currency, especially when projects take substantially longer to complete than originally planned. Despite risks associated with overseas construction, the Air Force did not institute sufficient controls to manage the project. During the design and construction of the KMCC, LBB-Kaiserslautern did not effectively carry out its project design and construction management duties. LBB-Kaiserslautern's deficiencies in these areas have contributed to additional costs, schedule delays, and increased financial risk to the U.S. government for the KMCC project. The design of the KMCC was inadequate and resulted in numerous instances of rework costing millions of dollars to fix. LBB-Kaiserslautern hired an architect-engineer firm, JSK, to draft plans for the KMCC, and subsequently contracted with JSK to be the construction manager. According to Air Force and AAFES officials, numerous design flaws were identified by the Air Force in the initial design review of the KMCC and were communicated to both LBB-Kaiserslautern and JSK. However, according to these U.S. officials, neither LBB-Kaiserslautern nor JSK incorporated many of their comments into the final design, which later resulted in additional work and costs. Air Force officials stated that, as of June 2007, they have identified millions of dollars of additional work required because of identifiable design flaws, which the Air Force plans to pay for in order to keep construction work moving forward. The following are some examples of design and construction flaws for the KMCC project: Exhaust ducts: During review of the initial KMCC design, Air Force identified and commented to LBB-Kaiserslautern and JSK that the exhaust ducts used in the restaurant kitchens did not meet U.S. fire safety standards. However, LBB-Kaiserslautern and JSK failed to ensure the change was addressed by contractors responsible for duct construction. As a result, the exhaust ducts installed at the KMCC were not compliant with U.S. fire safety standards. In addition, when we toured the KMCC, an Air Force official showed us the material used to seal the exhaust ducts. According to the official, this material was flammable and, as such, posed a safety risk when hot gasses are vented through the exhaust ducts. Because of the poor design of the exhaust ducts, the Air Force has recently approved a change order for hundreds of thousands of dollars to fix the problem. Figure 4 below is a picture of the flammable sealant used in the kitchen exhaust ducts. Retail space ceiling: The design of the ceiling in the AAFES retail area was not adequate to support light fixtures. The design detailed an open- grid suspended ceiling (not fitted with tiles) with light fixtures fitted into some of the openings. However, during installation, workers discovered that the ceiling grid was not strong enough to support the light fixtures. Ceiling tiles stabilize the grid to keep it from shifting, so omitting the tiles weakened the grid to the point where the light fixtures could not be supported. As a result of this design error, a contract change was necessary in order to provide additional steel supports for the ceiling grid. Escalator/escalator pit: Poor design and construction coordination caused problems with installation of the building's escalator. The escalator pit was initially built as part of the contract to construct the building's concrete floor. A subsequent contract was issued for installation of the escalator itself. However, the contract specifications for the escalator installation did not sufficiently detail the size and location of the escalator pit, and the escalator provided by the contractor did not fit in the previously-built pit. As a result, rework was necessary to build a new pit in the proper location. LBB-Kaiserslautern did not effectively manage the KMCC project. Instead of using a general contractor who would be contractually responsible to build the project, LBB-Kaiserslautern attempted to execute the project by managing more than 30 separate trade lot contracts by itself. Each trade lot contractor was only responsible for its section of work, and no one party, other than LBB-Kaiserslautern, was responsible for the overall completion of the project. In addition, the LBB-Kaiserslautern's decision to use trade lot contracts also meant that LBB-Kaiserslautern would be required to properly coordinate the effort of all the contractors, adequately staff the project, and appropriately monitor construction schedule and costs, so that work could progress. As described below, LBB- Kaiserslautern did not carry out its requirements in the following areas: Poor project coordination: LBB-Kaiserslautern did not effectively coordinate the work of the more than 30 construction contractors on-site. This resulted in inefficiencies in construction as well as damage to finished work. For example, one contractor responsible for installing a tile floor was forced to delay work while the contractor responsible for installing the ceiling finished work over the area where the floor was to be installed. In another case, the contractor responsible for laying the paving stones outside the building was allowed to finish its work before major exterior construction was completed. This resulted in damage to the paving stones when heavy cranes were subsequently used on top of the stones to install exterior bracing to the building. Inadequate staffing: In our interviews, LBB-Kaiserslautern officials told us that their office was understaffed. LBB-Kaiserslautern officials stated that this lack of staffing hindered LBB-Kaiserslautern's ability to provide assurance that the project design was adequate and improve contractor coordination discussed previously. In part, as a result of the above listed design and coordination problems, numerous contract change orders were necessary. Again, the lack of staffing hindered LBB-Kaiserslautern's ability to process necessary change orders as required by ABG-75. According to Air Force officials, there are hundreds of change orders that LBB- Kaiserslautern has approved, yet has not submitted documentation to the United States for approval. Many of these change orders also had corresponding invoices submitted and certified by LBB-Kaiserslautern that the Air Force subsequently paid. LBB-Kaiserslautern was only able to provide us a listing of the change orders involved. This was far less than the detailed specifications required for review by the Air Force prior to the approval of the change and payment. Air Force officials also stated that this failure to process change orders was a major problem because this processing serves as the basis for increasing the obligation authority for the contract. In addition, LBB- Kaiserslautern officials stated they had approved the work for most of these change orders and thus the contractors performed the work and were expecting payment. According to Air Force officials, in some cases when the Air Force refused to make payment on the unapproved changes, contractors halted work and sent notices to the LBB-Kaiserslautern that they would be liable for any costs associated with delays in payment. In many cases, the Air Force chose to reduce controls and make payments on these items despite not having appropriate change order documents in an attempt to keep the work on the project progressing. The lack of staff also hindered LBB-Kaiserslautern's ability to sufficiently monitor the quality of the contractors work. For example, as stated previously, the KMCC roof is leaking substantially because LBB- Kaiserslautern did not properly monitor the contractor's work. Because of this, the Air Force is facing potentially millions of dollars in additional costs to replace the poorly built roof. Unreliable construction schedule and cost estimates: LBB- Kaiserslautern is responsible for providing the Air Force with up-to-date detailed construction schedules and cost estimates. According to Air Force officials, the latest official construction schedule provided by LBB- Kaiserslautern was in September 2006 and showed a completion date of March 2007 for the visiting quarters and April 2007 for the mall portion of the KMCC. During our visit in May 2007, LBB-Kaiserslautern officials stated that they do not have a current construction schedule or completion date established for the project. Despite the lack of an estimated completion date, LBB-Kaiserslautern officials had developed an estimate of the total KMCC cost at completion. This estimate currently projects that costs will be higher than original estimates of approximately $150 million. According to LBB-Kaiserslautern officials, this cost estimate does not include certain expected costs, which we consider significant. For example, as stated earlier, the roof on the facility is continually leaking and likely will need to be replaced. Air Force and AAFES officials estimate that the cost to replace the roof will be in the millions of dollars. In addition to roof estimates, there are additional costs associated with hindrance claims that were not included in the cost estimate. In fact, in May of 2007, LBB-Kaiserslautern officials stated they received a single claim for several million dollars, which has not been substantiated, from just one of the more than 30 contractors. Finally, LBB-Kaiserslautern cost estimates do not include adjustments for future cost increases on existing contracts. Although past experience on this project has shown that many of the contract amounts have increased due to change orders or quantity increases, LBB-Kaiserslautern did not include any estimates for these expected future increases. The Air Force did not incorporate sufficient controls to minimize the significant project risks involved with the KMCC. Control deficiencies included inadequate staffing, poor policies, and a lack of effective control processes in place. By not utilizing controls that were available to them through the ABG-75 agreement, the Air Force has given up any leverage it had on keeping project costs within budget. These control weaknesses contributed to schedule and performance problems without a sufficient reaction from the Air Force. In addition, after problems were identified, the Air Force did not take appropriate corrective actions. Air Force officials did not have adequate staff with appropriate expertise needed to oversee the KMCC. In 2002, the Air Force elected not to use the USACE as the servicing agent for the KMCC project. According to the Air Force officials, they were not required to use the USACE on this project because only a small percentage of the KMCC funds were based on appropriated military construction funding. However, in foregoing USACE oversight, the Air Force did not establish adequate staffing or contracting and construction management expertise needed for a project as complex as the KMCC. According to Air Force officials, at the inception of the project, there were approximately eight full time personnel assigned to the KMCC from the Air Force. In addition, the limited number of Air Force staff did not have adequate expertise in the areas of contracting or construction management. As of May 2007, no contracting officers or certifying officials have been assigned to the KMCC. These experts are trained and certified to obligate and spend funds on behalf of the U.S. government and would typically be found in any military construction- funded project. As a result of the lack of staffing with adequate contracting and construction management expertise, many invoices came into the Air Force office, overwhelming the ability of the staff to adequately review invoices prior to payment. According to Air Force officials, no invoices were disputed prior to September 2006. However, after September 2006 when significant problems with the KMCC were recognized, some staffing improvements were made. For example, the Air Force increased the number of personnel to approximately 17 full time personnel currently on site, because it became apparent that they did not have sufficient personnel to conduct adequate reviews of invoices. Since the increase in staff, the Air Force has been able to review invoices more thoroughly, and according to Air Force officials, the percentage of recent invoices disputed increased to 75 percent. The Air Force did not have adequate policies and control procedures in place for the management of the KMCC. At the beginning of the project, project management officers lacked a standard operating procedure to follow. According to Air Force officials, the only written process in place was a simple one-page process flow chart to delineate how the entire process was supposed to work. Since the recognition of numerous problems associated with the KMCC, the Air Force has instituted additional control procedures, such as increased invoice reviews, but has not formalized those procedures into a written operating procedure. We were unable to determine if there were any specific procedures in place prior to September 2006. However, the project schedule slippage and lack of disputes of invoices by the Air Force indicates that the controls in place were not fully effective. When we asked the Air Force officials about control procedures in place prior to September 2006, several officials, who were working on the project during the time in question, stated they were unable to answer questions based on advice from their legal counsel. The same officials who declined to answer questions stated that the project was under investigation by AFOSI. In addition, a senior Air Force civilian on the project prior to September 2006 had resigned and was therefore unable to answer questions. Without written procedures or explanations from Air Force staff, we could not determine what controls, if any, existed prior to September 2006. In September 2006, Air Force officials recognized that significant problems faced the project. One problem specifically recognized was that numerous payments were made on invoices for work that had been billed on the 400 contract changes, which lacked documentation and had not been previously approved by the Air Force. Upon this recognition, the Air Force attempted to institute controls going forward. For example, the Air Force instituted a closer review of invoices to identify items that were billed but were not approved by the United States through change orders. However, under pressure to keep the project moving forward to completion, the Air Force subsequently relinquished much of this control by expediting the payment of invoices upon receipt from LBB-Kaiserslautern including charges for unapproved work. Examples of the relaxing of these controls include: paying invoices submitted after September 2006 on work billed to the Air Force related to the 400 contract changes which had not been submitted by LBB-Kaiserslautern, and approving invoices even though the line item quantities greatly exceed contracted amounts. The Air Force stated the decision to relax the controls was made so that construction proceeded as expeditiously as possible on the KMCC. Despite the removal of these controls, the number of workers on-site has still decreased significantly. In addition, Air Force officials stated that they viewed these payments on unapproved work as "partial payments" of expenses, and that any disputes in payments could be recouped upon project completion. However, we have reported in the past that such "pay and chase" strategies are not effective and increase risks substantially to recover the unapproved amounts. The Air Force was unable to provide any examples were the United States had successfully recouped overpayments in German courts. The substantial schedule and cost overruns of the KMCC may affect military personnel and have major implications for future projects in Germany. The effects of these cost increases are likely to be shouldered by our men and women in the military. AAFES, the largest financial contributor to the KMCC, has stated that cost overruns have reduced the return of investment (e.g., the amount of profit they plan to receive from the project). As a result, AAFES and Air Force Services Agency funding of morale, welfare, and recreational activities for U.S. military members may be reduced. In addition, the escalation in costs may also affect the ability of AAFES and the Air Force Services Agency to finance future capital projects from its nonappropriated funds. Further, because of the delay in the completion of the visiting quarters portion of the KMCC, service members on travel to other locations, including Iraq and Afghanistan, may have to stay off-base. In addition to the inconvenience that this places on service members, the Department of Defense--and thus taxpayers--must fund the additional cost of any required temporary lodging off-base, which the Air Force estimates to be approximately $10,000 per day or $300,000 per month. In addition to the effect on military members and their families, the current Air Force project management weaknesses may have implications for future Air Force construction in Germany. The Air Force planned construction within the Federal Republic of Germany for the next 5 fiscal years totals more than $400 million. These construction projects include small operations and maintenance projects (such as school renovations and road repairs) and major military construction projects (such as a $50 million clinic and a $50 million base exchange and commissary). Absent better Air Force controls, these projects may experience the same types of heightened risks associated with KMCC. Although one of the major problems with KMCC related to ineffective project management by LBB-Kaiserslautern, the Air Force did not effectively institute oversight to mitigate the high-risk nature of the entire project. By the time the Air Force started making an attempt at oversight, the project was already several months past the original construction deadline of early 2006. With mounting problems including contractors walking off the job, the Air Force faces the dilemma of instituting controls far too late in the process and further extending the completion of the project versus paying whatever it costs to get the job done as quickly as possible. The likely substantial cost overruns and potential years of schedule slippage will negatively affect morale, welfare, and recreation programs for DOD service members, civilians, and their families for years. The Air Force needs to seriously consider substantial changes in oversight management capabilities for the hundreds of millions of dollars of planned construction projects planned in Germany over the next several years. Mr. Chairman and Members of the committee, this concludes our statement. We would be pleased to answer any questions that you or other members of the committee may have at this time. For further information about this testimony, please contact Gregory Kutz at (202) 512-7455 or [email protected] or Terrell Dorn at (202) 512-6293 or [email protected]. Contacts points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. To assess the current problems facing Kaiserslautern Military Community Center (KMCC), we interviewed agency officials from the Air Force at Ramstein Air Force Base in Germany. We physically inspected the KMCC facility with an Air Force project manager and documented construction problems. We also reviewed financial records and statements in the form of contracts, change orders, and invoices to the extent that they were available. To examine the effect the Auftragsbaugrundsaetze 1975 (ABG-75) had on the management of the KMCC project, we reviewed the ABG-75 agreement, which outlines construction requirements for U.S. forces stationed in Germany. In addition, we conducted interviews with officials from the Air Force, Landesbetrieb Liegenschafts- und Baubetreuung (LBB) the German government construction agency, and the U.S. Army Corps of Engineers. In order to determine the management weaknesses of LBB and the Air Force, we interviewed officials from both organizations, conducted interviews with other organizations affected by the KMCC project including the Air Force Office of Special Investigations (AFOSI), Air Force Audit Agency, Air Force Services Agency, and the Army and Air Force Exchange Service. We also reviewed applicable Department of Defense Financial Management Regulations as well as the National Fire Protection Association standards. To assess the effect that control weaknesses found in the KMCC project could have on future the Air Force projects in Germany, we obtained information from the Air Force on future construction plans in Germany. We also interviewed Air Force officials to determine what changes in processes had been made that would affect future construction projects. We performed our audit work from May 2007 through June 2007. Audit work was conducted in accordance with generally accepted government auditing standards. 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.

According to the Air Force, the Kaiserslautern Military Community Center (KMCC), an over 800,000 square-foot facility, is currently the Department of Defense's largest single-facility project under construction. It is intended to provide lodging, dining, shopping, and entertainment for thousands of U.S. military and civilian personnel and their families in the Kaiserslautern, Germany, area. Initial costs for the KMCC were estimated at about $150 million, with funding coming from a variety of appropriated and nonappropriated fund sources. The construction for the project, which began in late 2003, was originally scheduled to be completed in early 2006. This testimony discusses GAO findings to date related to the KMCC. The testimony describes (1) current problems facing the KMCC, (2) causes for identified problems, and (3) the effect of problems identified and their implications for future projects in Germany. To address our objectives, we interviewed officials from the U.S. Air Force, Army and Air Force Exchange Service, U.S. Army Corps of Engineers, and German government. We also conducted a site visit and reviewed relevant KMCC documents. We plan to continue our work and make recommendations to the Air Force as appropriate. The KMCC project has encountered cost, schedule, and performance problems. Currently neither Landesbetrieb Liegenschafts- und baubetreuung's office in Kaiserslautern (LBB-Kaiserslautern), the German government construction agency in charge of the project, nor the Air Force have a reliable estimated completion date or final cost for the project. Problems facing KMCC include construction flaws, vandalism of property, repeated work stoppages and slowdowns by contractors, and ongoing criminal investigations. Because of financial problems facing the project, the number of workers on-site has dwindled from several hundred to less than 50, which will likely further delay completion of the project. In addition, the KMCC's multimillion dollar "green" roof is experiencing water leaks, and will likely require the Air Force to spend millions of dollars for its replacement. The KMCC faced a high level of risk from its inception, which was not effectively mitigated by the Air Force. Increased risks included an overseas project controlled by LBB-Kaiserslautern with financial risks borne by the Air Force and its funding partners. Unfortunately, LBB-Kaiserslautern did not effectively manage the design and construction of the project. Rather than increase controls to mitigate project risks, the Air Force provided minimal oversight and in some cases circumvented controls to expedite the invoice payment process in an attempt to complete the project. Because this project is funded primarily with nonappropriated funds, the likely substantial cost increases in the project will be borne by military servicemembers, civilians and their families. Further, absent better Air Force controls, future projects may experience the same types of heightened risks associated with KMCC.

Federal operations and facilities have been disrupted by a range of events, including the terrorist attacks on September 11, 2001; the Oklahoma City bombing; localized shutdowns due to severe weather conditions, such as hurricanes Katrina, Rita, and Wilma in 2005; and building-level events, such as asbestos contamination at the Department of the Interior's headquarters. In addition, federal operations could be significantly disrupted by people-only events, such as an outbreak of severe acute respiratory illness (SARS). Such disruptions, particularly if prolonged, can lead to interruptions in essential government services. Prudent management, therefore, requires that federal agencies develop plans for dealing with emergency situations, including maintaining services, ensuring proper authority for government actions, and protecting vital assets. Until relatively recently, continuity planning was generally the responsibility of individual agencies. In October 1998, Presidential Decision Directive (PDD) 67 identified FEMA--which is responsible for leading the effort to prepare the nation for all hazards and managing federal response and recovery efforts following any national incident--as the lead agent for federal COOP planning across the federal executive branch. FEMA's responsibilities include * formulating guidance for agencies to use in developing viable plans; * coordinating interagency exercises and facilitating interagency coordination, as appropriate; and * overseeing and assessing the status of COOP capabilities across the executive branch. In July 1999, FEMA issued the first version of Federal Preparedness Circular (FPC) 65, its guidance to the federal executive branch on developing viable and executable contingency plans that facilitate the performance of essential functions during any emergency. FPC 65 applies to all federal executive branch departments and agencies at all levels, including locations outside Washington, D.C. FEMA released an updated version of FPC 65 in June 2004, providing additional guidance to agencies on each of the topics covered in the original guidance. In partial response to a recommendation we made in April 2004, the 2004 version of FPC 65 also included new guidance on human capital considerations for COOP events. For example, the guidance instructed agencies to consider telework--also referred to as telecommuting or flexiplace--as an option in their continuity planning. Telework has gained widespread attention over the past decade in both the public and private sectors as a human capital flexibility that offers a variety of potential benefits to employers, employees, and society. In a 2003 report to Congress on the status of telework in the federal government, the Director of OPM described telework as "an invaluable management tool which not only allows employees greater flexibility to balance their personal and professional duties, but also allows both management and employees to cope with the uncertainties of potential disruptions in the workplace, including terrorist threats." A 2005 OPM report on telework notes the importance of telework in responding flexibly to emergency situations, as demonstrated in the wake of the devastation caused by Hurricane Katrina, when telework served as a tool to help alleviate the issues caused by steeply rising fuel prices nationwide. In 2004, we surveyed major federal agencies at your request to determine how they planned to use telework during COOP events. We reported that, although agencies were not required to use telework in their COOP plans, 1 of the 21 agency continuity plans in place on May 1, 2004, documented plans to address some essential functions through telework. In addition, 10 agencies reported that they intended to use telework following a COOP event, even though those intentions were not documented in their continuity plans. The focus on using telework in continuity planning has been heightened in response to the threat of pandemic influenza. In November 2005, the White House issued a national strategy to address this threat, which states that social distancing measures, such as telework, may be appropriate public health interventions for infection control and containment during a pandemic outbreak. The strategy requires federal departments and agencies to develop and exercise preparedness and response plans that take into account the potential impact of a pandemic on the federal workforce. It also tasks DHS--the parent department of FEMA--with developing plans to implement the strategy in regard to domestic incident management and federal coordination. In May 2006, the White House issued an implementation plan in support of the pandemic strategy. This plan outlines the responsibilities of various agencies and establishes time lines for future actions. Although more agencies reported plans for essential team members to telework during a COOP event than in our 2004 survey, few documented that they had made the necessary preparations to effectively use telework during an emergency. While FPC 65 does not require agencies to use telework during a COOP event, it does state that they should consider the use of telework in their continuity plans and procedures. All of the 23 agencies that we surveyed indicated that they considered telework as an option during COOP planning, and 15 addressed telework in their COOP plans (see table 1). For agencies that did not plan to use telework during a COOP event, reasons cited by agency officials for this decision included (1) the need to access classified information-- which is not permitted outside of secured areas--in order to perform agency essential functions and (2) a lack of funding for the necessary equipment acquisition and network modifications. The agencies that did plan to use telework in emergencies did not consistently demonstrate that they were prepared to do so. We previously identified steps agencies should take to effectively use telework during an emergency. These include preparations to ensure that staff has adequate technological capacity, assistance, and training. Table 1 provides examples of gaps in agencies' preparations, such as the following: * Nine of the 23 agencies reported that some of their COOP essential team members are expected to telework during a COOP event. However, only one agency documented that it had notified its team members that they were expected to telework during such an event. * None of the 23 agencies demonstrated that it could ensure adequate technological capacity to allow designated personnel to telework during a COOP event. No guidance addresses the steps that agencies should take to ensure that they are fully prepared to use telework during a COOP event. When we reported the results of our 2004 survey, we recommended that the Secretary of Homeland Security direct the Under Secretary for Emergency Preparedness and Response to develop, in consultation with OPM, guidance on the steps that agencies should take to adequately prepare for the use of telework during a COOP event. However, to date, no such guidance has been created. In March 2006, FEMA disseminated guidance to agencies regarding the incorporation of pandemic influenza considerations into COOP planning. The guidance states that the dynamic nature of a pandemic influenza requires that the federal government take a nontraditional approach to continuity planning and readiness. It suggests the use of telework during such an event. According to the guidance, agencies should consider which essential functions and services can be conducted from a remote location (e.g., home) using telework. However, the guidance does not address the steps agencies should take when preparing to use telework during an emergency. For example, although the guidance states that agencies should consider testing, training, and exercising of social distancing techniques, including telework, it does not address other necessary preparations, such as informing designated staff of the expectation to telework or providing them with adequate technical resources and support. Earlier this month, after we briefed your staff, the White House released an Implementation Plan in support of the National Strategy for Pandemic Influenza. This plan calls on OPM to work with DHS and other agencies to revise existing telework guidance and issue new guidance on human capital planning and COOP. The plan establishes an expectation that these actions will be completed within 3 months. If the forthcoming guidance from DHS and other responsible agencies does not require agencies to make the necessary preparations for telework, agencies are unlikely to take all the steps necessary to ensure that employees will be able to effectively use telework to perform essential functions during any COOP event. In addition, inadequate preparations could limit the ability of nonessential employees to contribute to agency missions during extended emergencies, including a pandemic influenza scenario. In summary, Mr. Chairman, although more agencies reported plans for essential team members to telework during a COOP event than in our previous survey, few documented that they had made the necessary preparations to effectively use telework during an emergency. In addition, agencies lack guidance on what these necessary preparations are. Although FEMA's recent telework guidance does not address the steps agencies should take to prepare to use telework during an emergency event, new guidance on telework and COOP is expected to be released later this year. If the new guidance does not specify the steps agencies need to take to adequately prepare their telework capabilities for use during an emergency situation, it will be difficult for agencies to make adequate preparations to ensure that their teleworking staff will be able to perform essential functions during a COOP event. In our report, we made recommendations aimed at helping to ensure that agencies are adequately prepared to perform essential functions following an emergency. Among other things, we recommended that the Secretary of Homeland Security direct the FEMA Director to establish a time line for developing, in consultation with OPM, guidance on the steps that agencies should take to adequately prepare for the use of telework during a COOP event. In commenting on a draft of the report, the Director of DHS's Liaison Office partially agreed with this recommendation and stated that FEMA will coordinate with OPM in the development of a time line for further telework guidance. In addition, he stated that both FEMA and OPM have provided guidance on the use of telework. However, as stated in our report, present guidance does not address the preparations agencies should make for using telework during emergencies. With the release of the White House's Implementation Plan regarding pandemic influenza, a time line has now been established for the issuance of revised guidance on telework; however, unless the forthcoming guidance addresses the necessary preparations, agencies may not be able to use telework effectively to ensure the continuity of their essential functions. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions that you or other members of the Committee may have at this time. For information about this testimony, please contact Linda D. Koontz at (202) 512-6240 or at [email protected]. Key contributions to this testimony were made by James R. Sweetman, Jr., Assistant Director; Barbara Collier; Sairah Ijaz; Nick Marinos; and Kim Zelonis. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

To ensure that essential government services are available in emergencies, federal agencies are required to develop continuity of operations (COOP) plans. The Federal Emergency Management Agency (FEMA), within the Department of Homeland Security (DHS), is responsible for providing guidance to agencies on developing such plans. Its guidance states that in their continuity planning, agencies should consider the use of telework--that is, work performed at an employee's home or at a work location other than a traditional office. The Office of Personnel Management (OPM) recently reported that 43 agencies have identified staff eligible to telework, and that more than 140,000 federal employees used telework in 2004. OPM also reported that many government operations can be carried out in emergencies using telework. For example, telework appears to be an effective strategy for responding to a pandemic--a global outbreak of disease that spreads easily from person to person and causes serious illness and death worldwide. In previous work, GAO identified steps that agencies should take to effectively use telework during an emergency. GAO was asked to testify on how agencies are addressing the use of telework in their continuity planning, which is among the topics discussed in a report being released today (GAO-06-713). Although agencies are not required to use telework in continuity planning, 9 of the 23 agencies surveyed reported plans for essential team members to telework during a COOP event, compared to 3 in GAO's previous survey. However, few documented that they made the necessary preparations to effectively use telework during such an event. For example, only 1 agency documented that it had communicated this expectation to its emergency team members. One reason for the low levels of preparations reported is that FEMA has not provided specific guidance on preparations needed to use telework during emergencies. Recently, FEMA disseminated guidance to agencies on incorporating pandemic influenza considerations into COOP planning. Although this guidance suggests the use of telework during such an event, it does not address the steps agencies should take when preparing to use telework during an emergency. Without specific guidance, agencies are unlikely to adequately prepare their telework capabilities for use during a COOP event. In addition, inadequate preparations could limit the ability of nonessential employees to contribute to agency missions during extended emergencies, including pandemic influenza. In its report released today, GAO recommends, among other things, that FEMA establish a time line for developing, in consultation with the OPM, guidance on preparations needed for using telework during a COOP event. In commenting on a draft of the report, DHS partially agreed with GAO's recommendation and stated that FEMA will coordinate with OPM in developing a time line for further telework guidance. DHS also stated that both FEMA and OPM have provided telework guidance. However, as GAO's report stated, present guidance does not address the preparations federal agencies should make for using telework during emergencies. On May 3 the White House announced the release of an Implementation Plan in support of the National Strategy for Pandemic Influenza. This plan calls on OPM to work with DHS and other agencies to revise existing telework guidance and issue new guidance on human capital planning and COOP. The plan establishes an expectation that these actions will be completed within 3 months. If the forthcoming guidance does not require agencies to make necessary preparations for telework, agencies are unlikely to take all the steps necessary to ensure that employees will be able to effectively use telework to perform essential functions in extended emergencies, such as a pandemic influenza.

In 1987, the Congress directed FAA to choose three states to participate in a state block grant pilot program. While many states already had existing state airport capital improvement programs and staff in place to fund development and safety projects at small airports, the block grant program transferred the responsibility for administering AIP grants from FAA to the participating states. To select the states, the Congress directed FAA to determine whether a state was capable of administering the program, used satisfactory airport system planning and programming processes, and would agree to comply with federal procedures. Furthermore, FAA's regulations stipulated that states accepted into the block grant program could not use AIP funds to finance the costs associated with administrating the program unless granted a waiver. Thirty-five states initially expressed interest in participating in the program, 10 states applied, and an FAA review panel recommended that 3 states be selected--Illinois, Missouri, and North Carolina. FAA chose these states, in part, because they were diverse in their organization, staff size, budget, airport systems, and location. After the Congress expanded the program in 1992 to include four additional states, FAA selected Michigan, New Jersey, Texas, and Wisconsin on the basis of the same criteria. States participating in the pilot program receive a block grant consisting of AIP apportionment funds and, if available, AIP discretionary, and set-aside funds for distribution at small airports (see fig. 1). When discretionary and set-aside funds are available for small airports, they are distributed to the participating states for the projects that FAA has approved using its national priority system. According to FAA officials, once the participating states receive their block grant, they can use their AIP funds for eligible projects at any small airport. Airports in nonparticipating states receive their grant funds directly from FAA but often must apply to both their state and FAA for grant approval. The state's approval is necessary if the state provides airports with grant funds to help "match" their AIP grant. All airports, in both participating and nonparticipating states, must provide a certain percentage of funds to match their AIP grants. Small airports receive, on average, 30 percent of all AIP funds annually, or about $450 million, for safety, preservation, and development projects at airports. The seven states have seen a steady decline in AIP funds in recent years; the average allocation fell from a high of $21.5 million in fiscal year 1992 to a low of $7.4 million in fiscal year 1995 (see fig. 2). The reduction in block grant funding since fiscal year 1992 can be attributed to an overall reduction in appropriated AIP funds and increased competition for discretionary funds, including a reduction in the amount of funding set-aside for nonprimary commercial and reliever airports. State officials told us that under the block grant program, they have successfully assumed most of FAA's responsibilities for small airports.Most states took on responsibilities in four key areas: Planning: States participate in a number of planning tasks with airport officials. Such tasks include assisting with long-range airport planning, approving changes to airport layout plans to reflect future construction plans, and conducting environmental assessments. Grant administration: States help airports select projects qualifying for AIP funding, award AIP grants, issue grant reimbursements, and provide grant oversight. Safety and security inspections: The seven block grant states conduct safety inspections at small airports and investigate compliance issues and zoning concerns. Project construction: States provide technical assistance during the life of a project, including guiding airport sponsors in soliciting bids for construction, approving AIP construction change orders, and monitoring the progress of the project at preconstruction, interim, and final construction inspections. In 1992, FAA issued a performance review of the first three block grant states in which it concluded that the pilot program was generally working well. Since 1992, FAA has reviewed the implementation of the pilot program in all block grant states and maintains that the program is a success. FAA regional officials told us that some airport officials were initially confused about the delineation of state and federal responsibilities, but this uncertainty has largely disappeared as the states, FAA, and the airport officials have gained experience working with the pilot program. Officials from small airports with whom we spoke in each block grant state saw no major difference between the services delivered by the states and those previously delivered by FAA. The airport officials told us that they typically see state inspectors more frequently than FAA inspectors and believe that the state inspectors have more direct and current knowledge of individual airport's needs. The states told us that one factor easing their transition to the block grant program was their prior experience with their own airport improvement programs. Each state had previously administered a state-funded grant program that provided grants, planning, and construction assistance to small airports. Furthermore, these states had provided some matching funds to help airports finance their share of AIP grants; therefore, states had been directly involved with many federally administered AIP projects in conjunction with their own efforts to oversee the state's investment. In addition, four of the seven states required their state aviation agencies to participate in the process for approving, distributing, and overseeing federal funds for airport projects; thus, these states had already assumed an oversight role on behalf of the federal government. According to officials in six of the block grant states, another factor that facilitated their transition to the pilot program was having inspection programs in place when they assumed their new responsibilities. Even before the transition, state inspectors typically had visited the smaller airports more frequently than FAA because the states were already responsible for airport safety inspections and also routinely inspected ongoing airport construction projects. Having enough staff with the requisite expertise was also important to the block grant states' success. Five of the seven states already had a staff of engineers, planners, grant administrators, and inspectors in place to service and oversee state-funded and AIP projects at small airports. The other two states, Missouri and New Jersey, had smaller state programs with fewer staff and could not initially accommodate the increased workload. Although Missouri state officials sought approval from the state legislature to hire additional staff, their efforts were unsuccessful because the program was a pilot and the legislators viewed its future as uncertain. When New Jersey joined the pilot program, it had a relatively small state grant program and was not providing that same range of services to small airports as FAA had been providing. To overcome their staffing shortfalls, both states petitioned FAA for a waiver allowing them to use some of their block grant funds to help defray the costs of administering the block grant program. In their petitions, both states indicated that they required more staff and training in order to efficiently manage the program. FAA approved the requests, limiting the amount of the block grant funding used for this purpose to $75,000 annually. Participating states and airports in these states have derived important benefits from the state block grant pilot program. First, the program has expedited project approvals because the block grant states may now approve project scope's and financing which formerly required FAA approval. State officials told us that they can provide approval to airports more efficiently than FAA. The quicker turnaround time has enabled airports to use their contractors more efficiently--saving time and money on projects. The states now have also acquired the authority to review and approve airport layout plans for future projects. In the past, both the states and FAA reviewed such plans and FAA approved them. Second, the state officials told us they were able to reduce the paperwork required to apply for federal projects, using their own forms and applications instead of both their own and FAA's. This reduction, which simplified both the application and the review processes, created efficiencies for both the airport and state officials. Third, the duplication of airport oversight activities has been reduced or, in many cases, eliminated. In the past, for example, both the states and FAA typically conducted inspections during the life of an airport project, because both had provided funds for it. Now, the state is solely responsible for those inspections. FAA has benefited from the state block grant pilot program because it has been able to shift regional staff resources to deal with other pressing priorities. FAA has thus partially compensated for the effects of attrition and a hiring freeze, which have reduced its airport staff by 12 percent in the affected regions over the past 3 years. The states can now provide oversight for small airports where attrition had, according to some regional officials, already reduced FAA's coverage. FAA can now assign a greater portion of its remaining staff to emerging priorities at larger airports, such as reviewing passenger facility charges and environmental compliance issues. FAA regional officials told us that they are still available to advise the state officials on airport issues and to review many of the documents prepared by state officials. During the pilot program, FAA's and the states' views on the purpose of the state block grant pilot program have differed. FAA viewed the program's purpose as identifying administrative functions that might be shifted to or shared with the states. FAA also saw the program as a means of (1) giving the states more discretion in selecting and managing projects and (2) testing their ability to improve the delivery of federal funds. In contrast, the states viewed the block grant program as a vehicle for putting funding decisions into the hands of those with firsthand knowledge of the projects competing for funds. FAA's and the states' views on the priorities for using AIP funds have also differed. FAA maintains that federal funds should be used to meet the needs of the nation's airport system. FAA implemented a new system for prioritizing allocations of AIP discretionary funds in 1993. According to the states, however, FAA's national system does not adequately weigh the needs of small airports or reflect the goals of the individual states. The states in the pilot program expressed a desire for autonomy in allocating AIP funds according to their own priorities rather than those established by FAA. FAA applied its national priority system to all AIP projects competing for discretionary funds, including those submitted from the block-grant states. Furthermore, although the system applied only to requests for discretionary funds, state officials from five block grant states told us that FAA had directed them to allocate their apportionment funds in accordance with the national priority system or risk losing the opportunity to compete for discretionary funds. Before 1993, FAA had allowed the block grant states greater flexibility in setting their own project priorities when distributing apportionment and discretionary funds, and many had used their own priority systems. State officials told us that their priority systems emphasized high-priority safety and capacity-enhancement systems as required by FAA's system; however, the state systems target the funds to the airports that the states deem most important. These airports are not necessarily the same as those that FAA deems most important. FAA's and the states' differences in priorities have led to differences of opinion about how AIP funds should be spent. Under the state block grant law, states selected to participate in the program must have a process in place to ensure that the needs of the national airport system will be addressed when the states decide which projects will receive AIP funds. State officials said that they fulfill this requirement when they use their own priority systems to direct AIP funds to eligible projects at airports included in FAA's National Plan of Integrated Airport Systems (NPIAS). In FAA's view, however, according to the Director of FAA's Office of Airport Planning and Programming, the state block grant program is a tool to develop a national system of airports and the priority system is one method to ensure the development of that system. An attorney from FAA's Chief Counsel's Office, Airport Laws Branch, said that FAA had adequate authority to require the block grant states to adhere to the national priority system when distributing grant funds. He added that unless FAA receives other direction from the Congress, it should continue to require the block grant states to abide by its national priority system. State officials expressed concern that using FAA's national system does not allow them to take advantage of their expertise to direct federal funds to the airport projects that will go the farthest toward achieving the aviation goals established by their states. In their view, a primary purpose of the block grant program is to put decision-making power in the hands of decisionmakers with firsthand knowledge. State officials said they had sufficient information to make sound funding decisions on their own, because they routinely visit and inspect airports, establish local and state aviation goals, and develop state plans and priority systems. Three of the block grant states said that they had applied or would like to apply block-grant funds to projects that, under FAA's national priority system, probably would not rank high enough to receive funding even though the projects would increase safety or capacity. North Carolina. State officials said that, until very recently, North Carolina has had little need for reliever airports to help reduce congestion at busy commercial service airports. Now, however, this need is acute. As a result, the state has placed high priority on using its block grant funds to build new reliever airports or help general aviation airports evolve into reliever airports. To achieve its goal, North Carolina has requested AIP reliever set-aside funds and also used most of its AIP apportionment funds, (typically used for projects at general aviation airports) for projects at reliever airports. State officials said that had they used FAA's priority system in allocating these funds, the types of airports and the projects funded would have been different. New Jersey. The state has chosen to save its block-grant funds over the past few years to amass enough money to buy a private general aviation airport. Officials said that most of the state's remaining general aviation airports are privately owned, and many of the owners are either considering closing or have already closed their airports because of increased costs for property taxes and liability insurance. The state would eventually like to purchase several small airports, preserving them for general aviation access. Under FAA's criteria, purchasing new general aviation airports is a relatively low priority that probably would not be funded. Missouri. State officials said that in the first years of their program, they provided grants to airports that needed safety-related upgrades but had not previously received AIP funding, either because the airports were too small or the types of projects had not met FAA's funding criteria. State officials told us that the initial block grant program was scheduled to last for 2 years and they felt compelled to issue as many grants to small airports as possible during that time. Thus, the state awarded more grants to more airports than FAA would have typically funded in a similar period with the same amount of money. We conducted a nationwide survey to determine whether states would be interested in participating in a block grant program. Of the 43 nonparticipating states, 34, or 79 percent, indicated that they would be interested in participating in such a program and appeared capable of doing so. (See app. I for a list of the 34 states interested in participating in the block grant program.) Many states wanted the flexibility to manage airport funds and financial assistance to administer the program. Nearly all of the states expressing interest in the block-grant program already manage state-funded capital improvement programs of their own. Many of the state programs include funding for airport maintenance projects and emphasize aviation safety and education for pilots and the community at large. The majority of the states that expressed an interest in the block grant program appear to have the staff with the types of expertise that would be needed to successfully administer AIP grants for general aviation airports. In response to our survey, over 59 percent of the interested states said they had at least one full-time engineer, grant administrator, planner, and airport inspector. In addition, in 1995, over 71 percent of the interested states reported that they used either contract employees, personnel from other state agencies, or both to augment their own staff's expertise. Besides having staff with the requisite skills, the states interested in joining the block grant program have already assumed many of the responsibilities taken on by block grant states. Over 90 percent of these states currently perform half or more of the tasks normally performed by FAA. These tasks include assisting airports in land acquisition and sales, assisting airports in identifying improvement projects and eligible projects, and reviewing plans and specifications for specific projects. Many of the interested states would be more inclined to participate in the block grant program if they could use their own methodology for selecting projects. Over three-quarters of the states interested in the block grant program currently have their own systems for prioritizing airport projects. We reviewed several of these systems and found that they include many of the same elements that appear in FAA's priority system, including high priorities for safety projects. However, in some instances, states prioritize projects that would be ineligible for funding using FAA's priority system, such as constructing general aviation terminals and hangars. In addition, we found that when assessing an eligible project's priority for funds, some states consider factors that FAA's priority system does not, such as whether (1) an airport has the potential to enhance economic development in a community, (2) an airport has an ongoing airfield maintenance program, or (3) a project has local financial, political, or zoning support. Sixty-two percent of the interested states also said they would request additional funding to administer the block grant program. Over half of the interested states said that they hoped to obtain this additional funding from a combination of state and federal funds. Twenty-nine percent of the interested states indicated that FAA would have to provide additional funding. Fifteen percent of the states either planned to obtain additional funding solely from their own state or would not seek additional funds. The pilot program has demonstrated that, with good preparation, states can manage AIP grants to small airports. If the Congress elects to extend or expand the block-grant program before it expires in 1996, many states appear interested in participating, and most seem to have the programs and staff in place to do the job. In our view, the key question now is not whether the states can administer the program, but whose set of priorities should prevail--FAA's or the states'. Each set of priorities stems from a reasonable position. On the one hand, FAA maintains that federal funds should first be used to meet the needs of a national airport system. On the other hand, the states may prefer to allocate federal funds to local needs, such as encouraging economic development in particular areas or allocating funds to airports that have never ranked high enough to receive competitively awarded grants. FAA has taken the position that unless it receives alternative direction from the Congress, it will continue to require the states to use its national priorities and the states will risk losing discretionary grant funds if they choose otherwise. We make no recommendation as to whether the states should be required to follow FAA's national priorities or be left free to make their own decisions. However, any policy change may require the Congress to change the current method for allocating AIP funds for small airports, since airports of all sizes compete for AIP discretionary funds. Mr. Chairman, this concludes our prepared statement. We would be happy to respond to any questions you or the Members of the Subcommittee may have. 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GAO discussed the Federal Aviation Administration's (FAA) state block grant pilot program, which is part of its Airport Improvement Program (AIP). GAO noted that: (1) the 7 states in the pilot program are providing a board range of services to small airports and performing many functions that FAA formerly performed, such as long-range planning assistance, grant administration, safety and security inspections, and technical assistance and oversight; (2) airport officials believe that the only differences between FAA and state services are that state inspectors visit more frequently and are more knowledgeable; (3) the states' success under the pilot program is due to their already established state-financed airport development and inspection programs, experience with planning and oversight functions, and experienced staff; (4) participants and FAA believe that the program has streamlined AIP project approval processes, reduced paperwork requirements, eliminated duplication, and enhanced FAA ability to shift resources to other high-priority tasks; (5) the states would rather use their own project criteria than FAA national criteria because they include more state-level factors, but FAA believes its criteria are more equitable and ensures the development of a national airport system; and (6) 80 percent of nonparticipating states would like to receive block grants and most could successfully administer the grants, but they are concerned about autonomy and the availability of administrative funds under the program.

In February 2011, Boeing won the competition to develop the Air Force's next generation aerial refueling tanker aircraft, the KC-46. Boeing was awarded a fixed price incentive (firm target) contract for development because KC-46 development was considered to be a relatively low-risk effort to integrate military technologies onto a 767 aircraft designed for commercial use. The contract is designed to hold Boeing accountable for costs associated with the design, manufacture, and delivery of four test aircraft and includes options to manufacture the remaining 175 aircraft. It features two key delivery dates, requiring Boeing to first deliver four development aircraft between April and May 2016, and second, if the Air Force exercises the first two production options, deliver a total of 18 operational aircraft by August 2017. It also specifies that Boeing must correct any deficiencies and bring development and production aircraft to the final configuration at no additional cost to the government.In addition, all required aircrew and maintainer training must be complete and the required support equipment and sustainment support must be in place by August 2017. The contract includes firm-fixed-price contract options for the first and second production lots in 2016, and options with "not-to-exceed" ceiling prices for lots 3 through 13. Barring any changes, the development contract specifies a target price of $4.4 billion and a ceiling price of $4.9 billion, at which point Boeing assumes responsibility for all additional costs. By December 2015, both Boeing and the program office estimated that Boeing would incur additional costs to complete development of the aircraft of about $769 million and $1.4 billion, respectively. To develop a tanker, Boeing modified a 767 aircraft in two phases: In the first phase, Boeing modified the design of the 767 with a cargo door and an advanced flight deck display, borrowed from its new 787, and is calling this modified design the 767-2C. The 767-2C is being built on Boeing's existing production line. In the second phase, a 767-2C was militarized and brought to a KC-46 configuration. The KC-46 will allow for two types of refueling to be employed in the same mission-- a refueling boom that is integrated with a computer- assisted control system and a permanent hose and drogue refueling system. The boom is a rigid, telescoping tube that an operator on the tanker aircraft extends and inserts into a receptacle on the aircraft being refueled. The "hose and drogue" system involves a long, flexible refueling hose stabilized by a drogue (a small windsock) at the end of the hose. See Figure 1 for a depiction of the conversion of the 767 aircraft into the KC-46 tanker with the boom deployed. The FAA has previously certified Boeing's 767 commercial passenger airplane (referred to as a type certificate) and will certify the design for both the 767-2C and the KC-46 with amended and supplemental type certificates, respectively. The Air Force is responsible for certifying that the KC-46 works as intended. The Air Force will also verify that the KC-46 systems meet contractual requirements and certify the KC-46 with various specified receiver aircraft for refueling operations. For the third consecutive year, the program office has reduced its acquisition cost estimate and it continues to estimate that Boeing will meet performance goals. The total KC-46 program acquisition cost estimate (development, procurement, and military construction costs) has decreased $3.5 billion or about 7 percent--from $51.7 billion to $48.2 billion--since the program started in February 2011. The decrease is due primarily to stable requirements, fewer than expected engineering changes, and changes in military construction plans. In addition, the government competitively awarded a contract for an aircrew training system at a lower price than originally projected. Average program acquisition unit costs have decreased by about the same percent because quantities have remained the same. Table 1 provides a comparison of the initial and current quantity and cost estimates for the program. The current development cost estimate of $6.3 billion includes: $4.9 billion for Boeing's aircraft development contract; nearly $1 billion for other costs, including training systems development, program office support, and test and evaluation support; and roughly $400 million for risks associated with developing the aircraft and training systems. The program office estimates that Boeing will meet key performance capabilities, such as those related to air refueling and airlift, but has not yet fully verified the estimates through ground and flight testing. Boeing has developed a set of seven technical performance measures to gauge its progress toward meeting these key capabilities, and the program currently predicts that Boeing is on track to meet these measures. For example, the program projects that the aircraft will be able to perform one of its assigned missions at least 92 percent of the time, and that maintainers will be able to fix aircraft problems within 12 hours at least 71 percent of the time. Appendix I lists the status of KC-46 technical performance capabilities. The KC-46 program originally planned to hold its low-rate initial production decision in August 2015, but had to delay the decision 9 months, to May 2016, because Boeing experienced problems developing the aircraft. Although these problems have largely been addressed, Boeing and the government had to revise test and delivery schedules. The changes deferred development aircraft deliveries and, if the Air Force exercises its first two production lot options, will compress production aircraft deliveries. As Boeing implements the new schedule, challenges to flight test completion could affect its ability to deliver aircraft on time. Since the critical design review in July 2013, Boeing has made progress developing the aircraft's systems, including the extensive electrical and fueling systems that will allow the KC-46 to perform its primary mission. Boeing has also developed and integrated the software needed to support KC-46 operations. Boeing, however, experienced three major development challenges that ultimately contributed to a 9-month delay to the low-rate initial production decision. The following is a summary of these development challenges and steps Boeing has taken to address them. Wiring design issues: Wiring on the first development aircraft was nearly complete in the spring of 2014 when Boeing discovered wire separation issues caused by an incorrect wiring design. Boeing officials told us that a subsequent wiring audit found thousands of wire segments that needed to be changed. Boeing officials estimate that these changes affected about 45 percent of the 1,700 wire bundles on the aircraft. Boeing suspended wiring installation on the remaining three development aircraft for several months while it worked through the wiring issues on the first development aircraft. The required wiring rework led to a delay in the first flight of the first development aircraft and to manufacturing delays on the other development aircraft. Although Boeing has largely addressed this issue, it continues to execute some wiring rework across each of the development aircraft. Aerial refueling system redesign: Boeing identified several aerial refueling parts that needed to be redesigned. For example, according to program officials, the single-point refueling manifold, which is a mechanism that distributes and regulates the flow of fuel to various components, contained a coupler that was not built to withstand the pressure experienced during refueling operations. Following failures during testing, Boeing redesigned the manifold and began using a coupler manufactured by a different supplier. According to officials, Boeing also determined that the process used to manufacture the fuel system's fuel tube welds did not meet requirements. Boeing has since changed the weld process and implemented an x-ray inspection process for these parts. The process changes caused a delay to the first flight of the second development aircraft, which is being used for aerial refueling testing. Fuel contamination: A mislabeled fuel substitute used for ground testing in July 2015 led to the contamination of the fuel system on the second development aircraft and resulted in another delay to its first flight. According to Boeing, a distributor provided a product improperly labeled as a fluid approved for use as a fuel substitute. The material provided by the distributor and used during a ground test was an industrial cleaner and is highly damaging to aluminum. The incident became apparent when seals in the fuel system began to leak about 30 days after the substance was introduced. By then, the aircraft's centerline drogue system, fuel manifold, and piping were corroded. Due to the extent of the corrosion, Boeing had to take parts from the third development aircraft to repair the second development aircraft's damaged fuel system. Since that time, Boeing has had difficulty obtaining replacement parts for the third development aircraft from a new supplier and had to delay some testing on that aircraft. Boeing considers the contamination of the fuel system a one-time event and no longer uses the supplier responsible for mislabeling the packaging of the fuel substitute. As a result of the development problems, Boeing has used all of its schedule reserve and had to revise its testing schedule. To preserve the August 2017 operational aircraft delivery date, Boeing and the Air Force also had to revise the aircraft delivery schedule. Originally, Boeing contracted to complete developmental flight testing and deliver the four development aircraft by April and May 2016. Boeing planned to conduct operational testing starting in April 2016 and to complete that testing in October 2016. Boeing also planned to bring the four development aircraft to operational configuration and deliver those aircraft, along with 14 additional production aircraft, to the Air Force over 14 months, prior to August 2017. The current schedule is much more compressed because Boeing has not completed the developmental flight test program. As of January 2016 Boeing has two development aircraft flying developmental flight tests. The other two aircraft are expected to be ready for developmental flight testing in early March and April 2016, respectively. Boeing now plans to deliver four production aircraft to the Air Force to begin operational testing in May 2017, a year later than originally contracted. It plans to bring two development aircraft to operational configuration and deliver those aircraft, along with 16 additional production aircraft (2 more than it originally planned to deliver in this timeframe), to the Air Force over the 6 months leading up to August 2017. Operational testing will be completed about 2 months after the aircraft are delivered. While this risks late discoveries of aircraft deficiencies, Boeing must correct them at its own cost. Figure 2 illustrates the original and current schedules for test and delivery. In anticipation of the Air Force exercising its options for production lots 1 and 2, Boeing recently began building low-rate initial production aircraft using its own resources. Boeing also plans to enhance its production capabilities by opening a second finishing center to militarize 767-2C aircraft and bring them to a KC-46 configuration. Assuming the Air Force exercises its options for production lots 1 and 2, program officials stated that Boeing may need an additional 4 months beyond August 2017 to deliver all 18 aircraft due to challenges it faces with its developmental test program. Boeing is about 2 years into its developmental test program to determine if the aircraft works as intended. The developmental test program contains about 700 ground and flight test activities to be completed over a 38-month period. At the end of January 2016, Boeing had completed 114 of the test activities. This included a demonstration of the aircraft's aerial refueling capability with an F-16 aircraft using the boom, which is needed to support the low-rate initial production decision. Boeing faces two primary challenges to completing its planned developmental test program. These challenges and actions Boeing is taking to address them are described below. Complete optimistic test program: Since Boeing lost time addressing problems while developing the aircraft, it must now attain a high degree of test efficiency to adhere to the new schedule. Test efficiency refers to Boeing's ability to complete scheduled test activities on time. DOD developmental test officials believe that the schedule for completing the remaining test activities is risky because Boeing has not completed test activities at the rate it planned and upcoming tests will be more complex. In January 2016, for example, Boeing completed 7 of 55--13 percent--of the test activities that had been scheduled for that month because aircraft were in maintenance longer than expected, there were delays in completing earlier ground testing, and Boeing may have overestimated how much it could complete with two aircraft. Overall, as shown in figure 3, Boeing had planned to complete 29 percent of its total test activities through January 2016, but has completed 16 percent. Boeing may also face difficulties achieving the test efficiency it needs to complete the remaining 84 percent of the test activities. For example, Boeing may have overestimated how many flight hours it can complete over the next several months because the last two development aircraft will begin flight testing later than expected due to production delays. Further, upcoming test activities will focus to a large extent on demonstrating KC-46 aerial refueling capabilities, which test officials consider to be more complex than the testing already completed. Finally, the company must still complete tests that were not performed in earlier months, which had not been factored into the latest test plans provided for our review. To mitigate these risks, Boeing test officials told us that they are working to improve test efficiency. For example, testers are continually reviewing test plans to identify areas to reduce duplication or eliminate unproductive activities. Obtain FAA approval of key components: FAA and program officials report that while most of the KC-46 components have been deemed ready for certification by the FAA, two key aerial refueling systems have not. In order to obtain airworthiness certification from the FAA, the KC-46 and its components must be designed, built, and then tested through the FAA's regulatory process. The supplier for the centerline drogue system and wing aerial refueling pods, however, built the systems without following FAA processes. Consequently, the supplier was told by the FAA in late 2014 that the FAA would need to inspect the individual parts to ensure design conformance. During this process, the supplier discovered a design flaw with the aerial refueling pods, which caused further delays. Originally, Boeing estimated that these components would be ready for the FAA to certify by February 2014, and it now projects that they will be ready by July 2017, over 3 years later. To help mitigate schedule risk, Boeing obtained FAA approval in January 2016 to begin testing the KC-46 developmental aircraft without the two aerial refueling components being fully qualified. This will allow the program to proceed with most of the KC-46 certification testing. Once the remaining components have completed qualification testing, Boeing will need to conduct some additional testing to reach full airworthiness certification for the aircraft. The Air Force would then be able to conduct its review to determine that the aircraft and all its systems meet contract requirements and conform to the final design. However, because of these and earlier development delays, Boeing will not be able to complete development activities until June 2018, 5 months later than required. The Air Force and Boeing have agreed in principle to contract changes that reflect the delay. In exchange for extending the development aircraft delivery schedule, Boeing will provide, among other things, 4 production aircraft for operational testing and additional test infrastructure at Boeing Field to support a receiver aircraft needed for system specification verification and aerial refueling certification testing. After Boeing completes the developmental flight test program, the Air Force will begin 5 1/2 months of operational testing to determine if the KC- 46 aircraft performs effectively and suitably in its operating environment. Boeing has solved many of its early manufacturing problems and has taken steps to mitigate potential schedule risks. However, the company has a challenging road ahead in testing and delivering aircraft in a compressed amount of time, including possibly producing two more operational aircraft than it originally planned. If the Air Force exercises its options for production lots 1 and 2, any future delays may affect Boeing's ability to deliver all 18 operational aircraft by August 2017, but that risk is being measured in months rather than years. We are not making any recommendations in this report. We provided a draft of this report to the KC-46 program office for review and comment. The program office provided technical comments, which we incorporated into this report as appropriate. We are sending copies of this report to the appropriate congressional committees; the Secretary of Defense; the Secretary of the Air Force; and the Director of the Office of Management and Budget. The report is also available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions concerning this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. Description Maximum weight of the aircraft without usable fuel. Gallons of fuel per hour used by the aircraft during a mission. Percentage of time aircraft performed at least one assigned mission. Percentage of time mechanical problems were fixed within 12 hours (after 50,000 fleet hours). Percentage of breaks per sorties (after 50,000 fleet hours. Probability of completing the aerial refueling mission and landing safely. Probability an aircraft will be ready for operational use when required. In addition to the contact named above, Cheryl Andrew, Assistant Director; Andrea Bivens; Kurt Gurka; Stephanie Gustafson; Kristine Hassinger; Katheryn Hubbell; Roxanna Sun; and Nate Vaught made key contributions to this report. GAO, KC-46 Tanker Aircraft: Key Aerial Refueling Capabilities Should Be Demonstrated Prior to the Production Decision, GAO-15-308 (Washington, D.C.: April 9, 2015). GAO, KC-46 Tanker Aircraft: Program Generally on Track, but Upcoming Schedule Remains Challenging, GAO-14-190 (Washington, D.C.: April 10, 2014). GAO, KC-46 Tanker Aircraft: Program Generally Stable but Improvements in Managing Schedule Are Needed, GAO-13-258 (Washington, D.C.: February 27, 2013). GAO, KC-46 Tanker Aircraft: Acquisition Plans Have Good Features but Contain Schedule Risk, GAO-12-366 (Washington, D.C.: March 26, 2012).

Aerial refueling--when aircraft refuel while airborne--allows the U.S. military to fly farther, stay airborne longer, and transport more weapons, equipment, and supplies. The Air Force initiated the KC-46 program to replace its aging KC-135 aerial refueling fleet. Boeing was awarded a fixed price incentive contract with a ceiling price of $4.9 billion to develop the first four aircraft, which will be used for testing. Boeing is contractually required to deliver the four development aircraft between April and May 2016. Boeing is also required to deliver a total of 18 aircraft by August 2017, which could include some of the development aircraft if they are brought to operational configuration. The program plans to eventually field 179 aircraft in total. The National Defense Authorization Act for Fiscal Year 2012 included a provision for GAO to review the KC-46 program annually through 2017. This report addresses progress made in 2015 toward (1) meeting cost and performance goals and (2) delivering the aircraft on schedule. GAO analyzed key cost, schedule, development, test, and manufacturing documents and discussed results with officials from the KC-46 program office, other defense offices, the FAA, and Boeing, the prime contractor. KC-46 tanker aircraft acquisition cost estimates have decreased for a third consecutive year and the prime contractor, Boeing, is expected to achieve all the performance goals, such as those for air refueling and airlift capability. As the table below shows, the total acquisition cost estimate has decreased from $51.7 billion in February 2011 to $48.2 billion in December 2015, about 7 percent, due primarily to stable requirements that led to fewer than expected engineering changes. The fixed price development contract also protects the government from paying for any development costs above the contract ceiling price. Source: GAO presentation of Air Force data. | GAO-16-346 Regarding the schedule, the program office delayed the low-rate initial production decision 9 months because Boeing had problems developing the first four aircraft. Boeing has largely addressed the problems, but proposed a new schedule to reflect the delays. (See figure below.) Boeing still plans to deliver 18 operational aircraft to the Air Force by August 2017--assuming the Air Force approves production. Operational testing will be completed later, in October 2017. While aircraft deficiencies could be discovered late, the plan presents little cost risk to the government because Boeing must correct deficiencies using its own resources. Boeing plans to deliver the aircraft over 6 months, instead of 14. Note: The original schedule included delivery of four development aircraft in operational configuration by May 2016. Under the current schedule the last of these aircraft will be delivered by November 2017. Boeing has a challenging road ahead to complete testing and deliver aircraft. Test officials believe Boeing's test schedule is optimistic and it may not have all aircraft available when needed to complete planned testing. Boeing also has not gotten several key aerial refueling parts qualified by the Federal Aviation Administration (FAA) and cannot get final FAA certification of KC-46 aircraft until this occurs. Program officials estimate there are 4 months of schedule risk to delivering 18 aircraft by August 2017 due to testing and parts qualification issues. Boeing is working on ways to mitigate the schedule risks. GAO is not making recommendations at this time. DOD's technical comments on a draft are incorporated as appropriate in the final report.

The 89 recommendations in the panel report are largely consistent with our past work and recommendations. I will now discuss each of the seven areas the panel reviewed, the general thrust of the panel's recommendations, and our views on them. The first area the panel reviewed was commercial practices. According to the panel, the bedrock principle of commercial acquisition is competition. The panel found that defining requirements is key to achieving the benefits of competition because procurements with clear requirements are far more likely to produce competitive, fixed-price offers that meet customer needs. Further, the panel found that commercial organizations invest the time and resources necessary to understand and define their requirements. They use multidisciplinary teams to plan their procurements, conduct competitions for award, and monitor contract performance. Commercial organizations rely on well-defined requirements and competitive awards to reduce prices and obtain innovative, high-quality goods and services. Hence, practices that enhance and encourage competition were the basis of the panel recommendations. The panel recommended, among other things, that the requirements process be improved and competitive procedures be strengthened. Our work is generally consistent with the panel's recommendations, and we have issued numerous products that address the importance of a robust requirements definition process and the need for competition. For example, in January 2007, we testified that poorly defined or broadly described requirements have contributed to undesired services acquisition outcomes. To produce desired outcomes within available funding and required time frames, our work has shown that DOD and its contractors need to clearly understand acquisition objectives and how they translate into the contract's terms and conditions. The absence of well-defined requirements and clearly understood objectives complicates efforts to hold DOD and contractors accountable for poor acquisition outcomes. This has been a long-standing issue. Regarding competition, we have stated that competition is a fundamental principle underlying the federal acquisition process. Nevertheless, we have reported numerous times on the lack of competition in DOD's acquisition of goods and services. For example, we noted in April 2006 that DOD awarded contracts for security guard services supporting 57 domestic bases, 46 of which were let on an authorized sole-source basis. The sole- source contracts were awarded by DOD despite recognizing it was paying about 25 percent more than previously paid for the contracts awarded competitively. The second area the panel reviewed was improving the implementation of performance-based acquisitions. The panel reported that performance- based acquisition (PBA) has not been fully implemented in the federal government even though OMB has encouraged greater use of it--setting a general goal in 2001 of making performance-based contracts 40 percent or more of all eligible service acquisitions for fiscal year 2006. The panel reported that agencies were not clearly defining requirements, not preparing adequate statements of work, not identifying meaningful quality measures and effective incentives, and not effectively managing the contract. The panel noted that a cultural emphasis on "getting to award" still exists within the government, an emphasis that precludes taking the time to clarify agency needs and adequately define requirements. The panel recommended that OFPP issue more explicit implementation guidance and create a PBA "Opportunity Assessment" tool to help agencies identify when they should consider using PBA contracts. Like the panel, we have found that agencies have faced a number of issues when using PBA contracts. For example, we reported in April 2003 that there was inadequate guidance and training, a weak internal control environment, and limited performance measures and data that agencies could use to make informed decisions on when to use PBA. We have made recommendations similar to the panel's. For example, we have recommended that the Administrator of OFPP work with agencies to periodically evaluate how well agencies understand PBA and how they can apply it to services that are widely available in the commercial sector, particularly more unique and complex services. The panel's concern that agencies are not properly managing PBA contracts is also consistent with our work on surveillance of service contracts. In a March 2005 report, we found that proper surveillance of service contracts, including PBAs, was not being conducted, leaving DOD at risk of being unable to identify and correct poor contractor performance. Accordingly, we recommended that the Secretary of Defense ensure the proper training of personnel in surveillance and their assignment to contracts no later than the date of contract award. We further recommended the development of practices to help ensure accountability for personnel carrying out surveillance responsibilities. We have also found that some agencies have attempted to apply PBA to complex and risky acquisitions, a fact that underscores the need to maintain strong government surveillance to mitigate risks. The third area the panel reviewed was interagency contracting. The panel found that reliance on interagency contracts is significant. According to the panel report, 40 percent of the total 2004 obligations, or $142 billion, was obligated through the use of interagency contracts. The panel also found that a significant reason for the increased use of these contracts has been reductions in the acquisition workforce accompanied by increased workloads and pressures to reduce procurement lead times. Accordingly, the panel made numerous recommendations to improve the use of interagency contracts with the intent of enhancing competition, lowering prices, improving the expertise of the acquisition workforce, and improving guidance for choosing the most appropriate interagency contract for procurements. Our work is generally consistent with the panel's recommendations on interagency contracting. In fact, 15 of our reports on interagency contracting were cited in the panel report. These included numerous recommendations that are consistent with the panel's recommendations. Our reports recognize that interagency contracts can provide the advantages of timeliness and efficiency by leveraging the government's buying power and providing a simplified and expedited method of procurement. However, our prior work has found that agencies involved in the interagency contracting process have not always obtained required competition, evaluated contracting alternatives, or conducted adequate oversight. A number of factors render the use of interagency contracts high risk; these factors include their rapid growth in popularity, their use by some agencies that have limited expertise with this contracting method, and the number of parties that might be involved. Taken collectively, these factors contribute to a much more complex procurement environment-- one in which accountability is not always clearly established. In 2005, because we found that interagency contracts can pose risks if they are not properly managed, we designated the management of interagency contracting a governmentwide high-risk area. The fourth area the panel reviewed was small business. The panel made recommendations to change the guidance to contracting officers for awarding contracts to small businesses. These recommendations are intended to improve the policies and, hence, address the socioeconomic benefits derived from acquiring services from small businesses. OFPP has taken the position that all but one of the recommendations requires legislation to implement. While our work on small business has addressed a number of policy issues, we have not made recommendations for statutory and regulatory changes when arguments for such changes are based on value judgments, such as those related to setting small business contracting goals. The fifth area the panel reviewed was the federal acquisition workforce. The panel recognized a significant mismatch between the demands placed on the acquisition workforce and the personnel and skills available within the workforce to meet those demands. The panel found, for example, that demands on the federal acquisition workforce have grown substantially while at the same time, the complexity of the federal acquisition system as a whole has increased. Accordingly, the panel made a number of recommendations designed to define, assess, train, and collect data on the acquisition workforce and to recruit talented entry level personnel and retain its senior workforce. Our work is generally consistent with the panel's findings and recommendations on the acquisition workforce. On the basis of observations made by acquisition experts from the federal government, private sector, and academia, we reported in October 2006 that agency leaders have not recognized or elevated the importance of the acquisition profession within their organizations. The agency leaders further noted that a strategic approach had not been taken across government or within agencies to focus on workforce challenges, such as creating a positive image essential to successfully recruit and retain a new generation of talented acquisition professionals. In September 2006, we testified that while the amount, nature, and complexity of contract activity has increased, DOD's acquisition workforce, the largest component of the government's acquisition workforce, has remained relatively unchanged in size and faces certain skill gaps and serious succession planning challenges. Further, we testified that DOD's acquisition workforce must have the right skills and capabilities if it is to effectively implement best practices and properly manage the goods and services it buys. In July 2006, we reported that in the ever-changing DOD contracting environment, the acquisition workforce must be able to rapidly adapt to increasing workloads while continuing to improve its knowledge of market conditions, industry trends, and the technical details of the goods and services it procures. Moreover, we noted that effective workforce skills were essential for ensuring that DOD receives fair and reasonable prices for the goods and services it buys and identified a number of conditions that increased DOD's vulnerabilities to contracting waste and abuse. The sixth area the panel reviewed was contractors supporting the federal government. The panel reported that, in some cases, contractors are solely or predominantly responsible for the performance of mission-critical functions that were traditionally performed by government employees, such as acquisition program management and procurement, policy analysis, and quality assurance. Further, the panel noted that this development has created issues with respect to the proper roles of, and relationships between, federal employees and contractor employees in the "blended" workforce. The panel stated that although federal law prohibits contracting for activities and functions that are inherently governmental, uncertainty about the proper scope and application of this term has led to confusion, particularly with respect to service contracting outside the scope of OMB's Circular A-76, which provides guidance on competing work for commercial activities via public-private competition. Moreover, according to the panel, as the federal workforce shrinks, there is a need to ensure that agencies have sufficient in-house expertise and experience to perform inherently governmental functions by being in a position to make critical decisions on policy and program management issues and to manage the performance of contractors. The panel recommended (1) that the FAR Council consider developing a standard organizational conflict-of- interest clause for solicitations and contracts that sets forth a contractor's responsibility concerning its employees and those of its subcontractors, partners, and any other affiliated organization or individual; (2) that OFPP update the principles for agencies to apply in determining which functions government employees must perform; and (3) that OFPP ensure that the functions identified as those that must be performed by government employees are adequately staffed. On the basis of our work, we have similar concerns to those expressed by the panel, and our work is generally consistent with the panel's recommendations on the appropriate role of contractors supporting the federal acquisition workforce. We have testified and reported on the issues associated with an unclear definition of what constitutes inherently governmental functions, inadequate government experience and expertise for overseeing contractor performance, and organizational conflicts of interest related to contractor responsibilities. We found that there is a need for placing greater attention on the type of functions and activities that could be contracted out and those that should not, for reviewing the current independence and conflict-of-interest rules relating to contractors, and for identifying the factors that prompt the government to use contractors in circumstances where the proper choice might be the use of government employees or military personnel. In our recent work at DHS, we found that more than half of the 117 statements of work we reviewed provided for services that closely supported the performance of inherently governmental functions. We made recommendations to DHS to improve control and accountability for decisions resulting in buying services that closely support inherently governmental functions. Accordingly, our work is consistent with panel recommendations to update the principles for agencies to apply in determining which functions government employees must perform; and to ensure that the functions identified as those that must be performed by government employees are adequately staffed. Finally, the seventh and last area the panel reviewed was federal procurement data. The Federal Procurement Data System-Next Generation (FPDS-NG) is the federal government's primary central database for capturing information on federal procurement actions. Congress, Executive Branch agencies, and the public rely on FPDS-NG for a wide range of information including agencies' contracting actions, governmentwide procurement trends, and how procurement actions support socioeconomic goals and affect specific geographical areas and markets. The panel reported that FPDS-NG data, while insightful when aggregated at the highest level, continue to be inaccurate and incomplete at the detailed level and cannot be relied on to conduct procurement analyses. The panel believes the processes for capturing and reporting FPDS-NG data need to be improved if that data is to meet user requirements. As a result, the panel made 15 recommendations aimed at increasing the accuracy and the timeliness of the FPDS-NG data. For example, the panel recommended that an independent verification and validation should be undertaken to ensure all other validation rules are working properly in FPDS-NG. Our work has identified similar concerns as those expressed by the panel. In fact, the panel cited our work numerous times in its report. Like the panel, we have pointed out that FPDS-NG data accuracy has been a long- standing problem and have made numerous recommendations to address this problem. As early as 1994, we reported that the usefulness of federal procurement data for conducting procurement policy analysis was limited. More recently, in 2005, we again raised concerns about the accuracy and timeliness of the data available in FPDS-NG. We have also reported that the use of the independent verification and validation function is recognized as a best business practice and can help provide reasonable assurance that the system satisfies its intended use and user needs. OFPP representatives told us the office agrees with almost all of the 89 panel recommendations and has already acted on some, while potential actions are pending on others. OFPP identified legislative actions and FAR cases that could address over one third of the recommendations. OFPP expects to address at least 51 of the remaining recommendations and plans to work with the chief acquisition officer or senior procurement official within each agency to do so. In some cases, OFPP has established milestones and reporting requirements to help provide it with visibility over the progress and results of implementing the recommendations. Although OFPP has taken some steps to track the progress of selected recommendations, it does not have an overall strategy or plan to gauge the successes and shortcomings in how the panel's recommendations are implemented and how they improve federal acquisitions. Table 1 shows how OFPP expected the 89 recommendations to be implemented. In October 2007, OFPP representatives noted that while the panel directed 17 recommendations to Congress, legislative actions could address as many as 23 panel recommendations. Panel recommendations directed to Congress include potential legislative changes such as authorizing the General Services Administration to establish a new information technology schedule for professional services and enacting legislation to strengthen the preference for awarding contracts to small businesses. An example of the latter is amending the Small Business Act to remove any statutory provisions that appear to provide for a hierarchy of small business programs. According to the panel, this is necessary because an agency would have difficulty meeting its small business goal if any one small business program takes a priority over the others. Since October 2007, some panel recommendations have been addressed by legislative actions. For example, the panel recommended that protests of task and delivery orders valued in excess of $5 million be permitted. Section 843 of the National Defense Authorization Act for Fiscal Year 2008 allows for such protests, but raised the dollar threshold to orders valued in excess of $10 million. For those recommendations that were expected to be addressed by legislative actions but have not yet been the subject of congressional action, OFPP representatives told us the office could take administrative actions, such as issuing a policy memorandum or initiating a FAR case, to implement most of them. In closing, the SARA Panel, like GAO, has made numerous recommendations to improve federal government acquisition--from encouraging competition and adopting commercial practices to improving the accuracy and usefulness of procurement data. Our work is largely consistent with the panel's recommendations, and when they are taken as a whole, we believe the recommendations, if implemented effectively, can bring needed improvements in the way the federal government buys goods and services. OFPP, as the lead office for responding to the report, is now in a key position to sustain the panel's work by ensuring that panel recommendations are implemented across the federal government in an effective and timely manner. To do this, we recommended in our recent report that OFPP work with the chief acquisition officers and senior procurement officials across all the federal agencies to lay out a strategy or plan that includes milestones and reporting requirements that OFPP could use to establish accountability, exercise oversight, and gauge the progress and results of implementing the recommendations. Mr. Chairman and members of the subcommittee this concludes my statement. I would be pleased to respond to any questions you might have. For questions regarding this testimony, please call John P. Hutton at (202) 512-4841 or [email protected]. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this testimony. Key contributors to this testimony include James Fuquay, Assistant Director, Daniel Hauser, John Krump, Robert Miller, and Robert Swierczek. 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.

A growing portion of federal spending is related to buying services such as administrative, management, and information technology support. Services accounted for about 60 percent of total fiscal year 2006 procurement dollars. The Services Acquisition Reform Act (SARA) of 2003 established an Acquisition Advisory Panel to make recommendations for improving acquisition practices. In January 2007, the panel proposed 89 recommendations to improve federal acquisition practices. GAO was asked to testify on how the panel recommendations compare to GAO's past work and identify how the Office of Federal Procurement Policy (OFPP) expects the recommendations to be addressed. This statement is based on GAO's analysis of the advisory panel's report. GAO's analysis is included in its December 2007 report titled, Federal Acquisition: Oversight Plan Needed to Help Implement Acquisition Advisory Panel Recommendation, (GAO-08-160). The SARA Panel, like GAO, has made numerous recommendations to improve federal government acquisition--from encouraging competition and adopting commercial practices to improving the accuracy and usefulness of procurement data. The recommendations in the SARA Panel report are largely consistent with GAO's past work and recommendations. The panel and GAO have both pointed out the importance of a robust requirements definition process and the need for competition; the need to establish clear performance requirements, measurable performance standards, and a quality assurance plan to improve the use of performance-based contracting; the risks inherent in the use of interagency contracts because of their rapid growth and their improper management; stresses on the federal acquisition workforce and the need for a strategy to assess these workforce needs; concerns about the role of contractors engaged in managing acquisition and procurement activities performed by government employees and the proper roles of federal employees and contractor employees in a "blended" workforce; and the adverse effects of inaccurate and incomplete federal procurement data, such as not providing a sound basis for conducting procurement analyses. The panel also made recommendations that would change the guidance for awarding contracts to small businesses. While GAO's work has addressed some small business policy issues, GAO has not made recommendations that would change the guidance to be used for awarding contracts to small businesses. OFPP representatives told GAO that OFPP agrees with almost all of the panel recommendations and expected that most of the 89 panel recommendations would be implemented through one of the following means: congressional actions; changes to the Federal Acquisition Regulation; OFPP actions, such as issuing new or revised policy; and federal agency actions. OFPP has already acted on some SARA recommendations, while other actions are pending or under consideration. Milestones and reporting requirements are in place to help OFPP gauge the implementation status of some recommendations but not for others. Moreover, OFPP does not have a strategy or plan to allow it to exercise oversight and establish accountability for implementing all of the panel's recommendations and to gauge their effect on federal acquisitions.

EPA administers and oversees grants primarily through the Office of Grants and Debarment, 10 program offices in headquarters, and program offices and grants management offices in EPA's 10 regional offices. Figure 1 shows EPA's key offices involved in grants activities for headquarters and the regions. The management of EPA's grants program is a cooperative effort involving the Office of Administration and Resources Management's Office of Grants and Debarment, program offices in headquarters, and grants management and program offices in the regions. The Office of Grants and Debarment develops grant policy and guidance. It also carries out certain types of administrative and financial functions for the grants approved by the headquarters program offices, such as awarding grants and overseeing the financial management of these grants. On the programmatic side, headquarters program offices establish and implement national policies for their grant programs, and set funding priorities. They are also responsible for the technical and programmatic oversight of their grants. In the regions, grants management offices carry out certain administrative and financial functions for the grants, such as awarding grants approved by the regional program offices, while the regional program staff provide technical and programmatic oversight of their grantees. As of June 2003, 109 grants specialists in the Office of Grants and Debarment and the regional grants management offices were largely responsible for administrative and financial grant functions. Furthermore, 1,835 project officers were actively managing grants in headquarters and regional program offices. These project officers are responsible for the technical and programmatic management of grants. Unlike grant specialists, however, project officers generally have other primary responsibilities, such as using the scientific and technical expertise for which they were hired. In fiscal year 2002, EPA took 8,070 grant actions totaling about $4.2 billion.These awards were made to six main categories of recipients as shown in figure 2. EPA offers two types of grants--nondiscretionary and discretionary: Nondiscretionary grants support water infrastructure projects, such as the drinking water and clean water state revolving fund programs, and continuing environmental programs, such as the Clean Air Program for monitoring and enforcing Clean Air Act regulations. For these grants, Congress directs awards to one or more classes of prospective recipients who meet specific eligibility criteria; the grants are often awarded on the basis of formulas prescribed by law or agency regulation. In fiscal year 2002, EPA awarded about $3.5 billion in nondiscretionary grants. EPA has awarded these grants primarily to states or other governmental entities. Discretionary grants fund a variety of activities, such as environmental research and training. EPA has the discretion to independently determine the recipients and funding levels for grants. In fiscal year 2002, EPA awarded about $719 million in discretionary grants. EPA has awarded these grants primarily to nonprofit organizations, universities, and government entities. The grant process has the following four phases: Preaward. EPA reviews the application paperwork and makes an award decision. Award. EPA prepares the grant documents and instructs the grantee on technical requirements, and the grantee signs an agreement to comply with all requirements. Postaward. After awarding the grant, EPA provides technical assistance, oversees the work, and provides payments to the grantee; the grantee completes the work, and the project ends. Closeout of the award. EPA ensures that all technical work and administrative requirements have been completed; EPA prepares closeout documents and notifies the grantee that the grant is completed. EPA's grantees are subject to the same type of financial management oversight as the recipients of other federal assistance. Specifically, the Single Audit Act requires grantees to have an audit of their financial statements and federal awards or program-specific audit if they spend $300,000 or more in federal awards in a fiscal year., Grantees submit these audits to a central clearinghouse operated by the Bureau of the Census, which then forwards the audit findings to the appropriate agency for any necessary action. However, the act does not cover all grants and all aspects of grants management and, therefore, agencies must take additional steps to ensure that federal funds are spent appropriately. In addition, EPA conducts in-depth reviews to analyze grantees' compliance with grant regulations and specific grant requirements. Furthermore, to determine how well offices and regions oversee grantees, EPA conducts internal management reviews that address grants management. The Office of Management and Budget, as authorized by the act, increased this amount to $500,000 in federal awards as of June 23, 2003. closeouts, as a material weakness--an accounting and internal control system weakness that the EPA Administrator must report to the President and Congress. EPA's fiscal year 1999 Federal Managers' Financial Integrity Act report indicated that this oversight material weakness had been corrected, but the Inspector General testified that the weakness continued. In 2002, the Inspector General again recommended that EPA designate grants management as a material weakness. The Office of Management and Budget (OMB) also recommended in 2002 that EPA designate grants management as a material weakness. In its fiscal year 2002 Annual Report, EPA ultimately decided to maintain this issue as an agency-level weakness, which is a lower level of risk than a material weakness. EPA reached this decision because it believes its ongoing corrective action efforts will help to resolve outstanding grants management challenges. However, in adding EPA's grants management to our list of EPA's major management challenges in January 2003, we signaled our concern that EPA has not yet taken sufficient action to ensure that it can manage its grants effectively. We identified four key challenges that EPA continues to face in managing its grants. These challenges are (1) selecting the most qualified grant applicants, (2) effectively overseeing grantees, (3) measuring the results of grants, and (4) effectively managing grant staff and resources. In the past, EPA has taken a series of actions to address these challenges by, among other things, issuing policies on competition and oversight, conducting training for project officers and nonprofit organizations, and developing a new data system for grants management. However, these actions had mixed results because of the complexity of the problems, weaknesses in design and implementation, and insufficient management attention. EPA has not selected the most qualified applicants despite issuing a competition policy. The Federal Grant and Cooperative Agreement Act of 1977 encourages agencies to use competition in awarding grants. To encourage competition, EPA issued a grants competition policy in 1995. However, EPA's policy did not result in meaningful competition throughout the agency, according to EPA officials. Furthermore, EPA's own internal management reviews and a 2001 Inspector General report found that EPA has not always encouraged competition. Finally, EPA has not always engaged in widespread solicitation of its grants, which would provide greater assurance that EPA receives proposals from a variety of eligible and highly qualified applicants who otherwise may not have known about grant opportunities. EPA has not always effectively overseen grant recipients despite past actions to improve oversight. To address oversight problems, EPA issued a series of policies starting in 1998. However, these oversight policies have had mixed results in addressing this challenge. For example, EPA's efforts to improve oversight included in-depth reviews of grantees but did not include a statistical approach to identifying grantees for reviews, collecting standard information from the reviews, and a plan for analyzing the results to identify and act on systemic grants management problems. EPA, therefore, could not be assured that it was identifying and resolving grantee problems and using its resources more effectively to target its oversight efforts. EPA's efforts to measure environmental results have not consistently ensured that grantees achieve them. Planning for grants to achieve environmental results--and measuring results--is a difficult, complex challenge. However, as we pointed out in an earlier report, it is important to measure outcomes of environmental activities rather than just the activities themselves. Identifying and measuring the outcomes of EPA's grants will help EPA better manage for results. EPA has awarded some discretionary grants before considering how the results of the grantees' work would contribute to achieving environmental results. EPA has also not developed environmental measures and outcomes for all of its grant programs. OMB found that four EPA grant programs lacked outcome-based measures--measures that demonstrated the impact of the programs on improving human health and the environment--and concluded that one of EPA's major challenges was demonstrating program effectiveness in achieving public health and environmental results. Finally, EPA has not always required grantees to submit work plans that explain how a project will achieve measurable environmental results. In 2002, EPA's Inspector General reported that EPA approved some grantees' work plans without determining the projects' human health and environmental outcomes. In fact, for almost half of the 42 discretionary grants the Inspector General reviewed, EPA did not even attempt to measure the projects' outcomes. Instead, EPA funded grants on the basis of work plans that focused on short-term procedural results, such as meetings or conferences. In some cases, it was unclear what the grant had accomplished. In 2003, the Inspector General again found the project officers had not negotiated environmental outcomes in work plans. The Inspector General found that 42 percent of the grant work plans reviewed--both discretionary and nondiscretionary grants--lacked negotiated environmental outcomes. EPA has not always effectively managed its grants staff and resources despite some past efforts. EPA has not always appropriately allocated the workload for staff managing grants, provided them with adequate training, or held them accountable. Additionally, EPA has not always provided staff with the resources, support, and information necessary to manage the agency's grants. To address these problems, EPA has taken a number of actions, such as conducting additional training and developing a new electronic grants management system. However, implementation weaknesses have precluded EPA from fully resolving its resource management problems. For example, EPA has not always held its staff-- such as project officers--accountable for fulfilling their grants management responsibilities. According to the Inspector General and internal management reviews, EPA has not clearly defined project officers' grants management responsibilities in their position descriptions and performance agreements. Without specific standards for grants management in performance agreements, it is difficult for EPA to hold staff accountable. It is therefore not surprising that, according to the Inspector General, project officers faced no consequences for failing to effectively perform grants management duties. Compounding the accountability problem, agency leadership has not always emphasized the importance of project officers' grants management duties. EPA's recently issued policies on competition and oversight and a 5-year grants management plan to address its long-standing grants management problems are promising and focus on the major management challenges, but these policies and plan require strengthening, enhanced accountability, and sustained commitment to succeed. EPA's competition policy shows promise but requires a major cultural shift. In September 2002, EPA issued a policy to promote competition in grant awards by requiring that most discretionary grants be competed. The policy also promotes widespread solicitation for competed grants by establishing specific requirements for announcing funding opportunities in, for example, the Federal Register and on Web sites. This policy should encourage selection of the most qualified applicants. However, the competition policy faces implementation barriers because it represents a major cultural shift for EPA staff and managers, who have had limited experience with competition, according to EPA's Office of Grants and Debarment. The policy requires EPA officials to take a more planned, rigorous approach to awarding grants. That is, EPA staff must determine the evaluation criteria and ranking of these criteria for a grant, develop the grant announcement, and generally publish it at least 60 days before the application deadline. Staff must also evaluate applications-- potentially from a larger number of applicants than in the past--and notify applicants of their decisions. These activities will require significant planning and take more time than awarding grants noncompetitively. Oversight policy makes important improvements but requires strengthening to identify systemic problems. EPA's December 2002 policy makes important improvements in oversight, but it still does not enable EPA to identify systemic problems in grants management. Specifically, the policy does not (1) incorporate a statistical approach to selecting grantees for review so EPA can project the results of the reviews to all EPA grantees, (2) require a standard reporting format for in-depth reviews so that EPA can use the information to guide its grants oversight efforts agencywide, and (3) maximize use of information in its grantee compliance database to fully identify systemic problems and then inform grants management officials about oversight areas that need to be addressed. Grants management plan will require strengthening, sustained commitment, and enhanced accountability. We believe that EPA's grants management plan is comprehensive in that it focuses on the four major management challenges--grantee selection, oversight, environmental results, and resources--that we identified in our work. For the first time, EPA plans a coordinated, integrated approach to improving grants management. The plan is also a positive step because it (1) identifies goals, objectives, milestones, and resources to achieve the plan's goals; (2) provides an accompanying annual tactical plan that outlines specific tasks for each goal and objective, identifies the person accountable for completing the task, and sets an expected completion date; (3) attempts to build accountability into grants management by establishing performance measures for each of the plan's five goals; (4) recognizes the need for greater involvement of high-level officials in coordinating grants management throughout the agency by establishing a high-level grants management council to coordinate, plan, and set priorities for grants management; and (5) establishes best practices for grants management offices. According to EPA's Assistant Administrator for Administration and Resources Management, the agency's April 2003 5-year grants management plan is the most critical component of EPA's efforts to improve its grants management. In addition to the goals and objectives, the plan establishes performance measures, targets, and action steps with completion dates for 2003 through 2006. EPA has already begun implementing several of the actions in the plan or meant to support the plan; these actions address previously identified problems. For example, EPA now posts its available grants on the federal grants Web site http://www.fedgrants.gov. In January 2004, EPA issued an interim policy to require that grant funding packages describe how the proposed project supports the goals of EPA's strategic plan. Successful implementation of the new plan requires all staff--senior management, project officers, and grants specialists--to be fully committed to, and accountable for, grants management. Recognizing the importance of commitment and accountability, EPA's 5-year grants management plan has as one of its objectives the establishment of clear lines of accountability for grants oversight. The plan, among other things, calls for (1) ensuring that performance standards established for grants specialists and project officers adequately address grants management responsibilities in 2004; (2) clarifying and defining the roles and responsibilities of senior resource officials, grant specialists, project officers, and others in 2003; and (3) analyzing project officers' and grants specialists' workload in 2004. In implementing this plan, however, EPA faces challenges to enhancing accountability. Although the plan calls for ensuring that project officers' performance standards adequately address their grants management responsibilities, agencywide implementation may be difficult. Currently, project officers do not have uniform performance standards, according to officials in EPA's Office of Human Resources and Organizational Services. Instead, each supervisor sets standards for each project officer, and these standards may not include grants management responsibilities. Once individual project officers' performance standards are established for the approximately 1,800 project officers, strong support by managers at all levels, as well as regular communication on performance expectations and feedback, will be key to ensuring that staff with grants management duties successfully meet their responsibilities. Furthermore, it is difficult to implement performance standards that will hold project officers accountable for grants management because these officers have a variety of responsibilities and some project officers manage few grants, and because grants management responsibilities often fall into the category of "other duties as assigned." Although EPA's current performance management system can accommodate development of performance standards tailored to each project officer's specific grants management responsibilities, the current system provides only two choices for measuring performance-- satisfactory or unsatisfactory--which may make it difficult to make meaningful distinctions in performance. Such an approach may not provide enough meaningful information and dispersion in ratings to recognize and reward top performers, help everyone attain their maximum potential, and deal with poor performers. EPA will also have difficulty achieving the plan's goals if all managers and staff are not held accountable for grants management. The plan does not call for including grants management standards in managers' and supervisors' agreements. In contrast, senior grants managers in the Office of Grants and Debarment as well as other Senior Executive Service managers have performance standards that address grants management responsibilities. However, middle-level managers and supervisors also need to be held accountable for grants management because they oversee many of the staff that have important grants management responsibilities. According to Office of Grants and Debarment officials, they are working on developing performance standards for all managers and supervisors with grants responsibilities. In November 2003, EPA asked key grants managers to review all performance standards and job descriptions for employees involved in grants management, including grants specialists, project officers, supervisors, and managers, to ensure that the complexity and extent of their grant management duties are accurately reflected. Further complicating the establishment of clear lines of accountability, the Office of Grants and Debarment does not have direct control over many of the managers and staff who perform grants management duties-- particularly the approximately 1,800 project officers in headquarters and regional program offices. The division of responsibilities between the Office of Grants and Debarment and program and regional offices will continue to present a challenge to holding staff accountable and improving grants management, and will require the sustained commitment of EPA's senior managers. If EPA is to better achieve its environmental mission, it must more effectively manage its grants--which account for more than half of its annual budget. While EPA's new 5-year grants management plan shows promise, given EPA's historically uneven performance in addressing its grants management challenges, congressional oversight is important to ensure that the Administrator of EPA, managers, and staff implement the plan in a sustained, coordinated fashion to meet the plan's ambitious targets and time frames. To ensure that EPA's recent efforts to address its grants management challenges are successful, in our August 2003 report, we recommended that the Administrator of EPA provide sufficient resources and commitment to meeting the agency's grants management plan's goals, objectives, and performance targets within the specified timeframes. Furthermore, to strengthen EPA's efforts we recommended incorporating appropriate statistical techniques in selecting grantees for in-depth reviews; requiring EPA staff to use a standard reporting format for in-depth reviews so that the results can be entered into the grant databases and analyzed agencywide; developing a plan, including modifications to the grantee compliance database, to use data from its various oversight efforts--in-depth reviews, significant actions, corrective actions taken, and other compliance information--to fully identify systemic problems, inform grants management officials of areas that need to be addressed, and take corrective action as needed; modifying its in-depth review protocols to include questions on the status of grantees' progress in measuring and achieving environmental outcomes; incorporating accountability for grants management responsibilities through performance standards that address grants management for all managers and staff in headquarters and the regions responsible for grants management and holding managers and staff accountable for meeting these standards; and evaluating the promising practices identified in the report and implementing those that could potentially improve EPA grants management. To better inform Congress about EPA's achievements in improving grants management, we recommended that the Administrator of EPA report on the agency's accomplishments in meeting the goals and objectives developed in the grants management plan and other actions to improve grants management, beginning with its 2003 annual report to Congress. EPA agreed with our recommendations and is in the process of implementing them as part of its 5-year grants management plan. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Committee may have. For further information, please contact John B. Stephenson at (202) 512- 3841. Individuals making key contributions to this testimony were Carl Barden, Andrea W. Brown, Christopher Murray, Paul Schearf, Rebecca Shea, Carol Herrnstadt Shulman, Bruce Skud, and Amy Webbink. 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 Environmental Protection Agency (EPA) has long faced problems managing its grants, which constitute over one-half of the agency's annual budget, or about $4 billion. EPA uses grants to implement its programs to protect human health and the environment and awards grants to thousands of recipients, including state and local governments, tribes, universities, and nonprofit organizations. EPA's ability to efficiently and effectively accomplish its mission largely depends on how well it manages its grants resources. This testimony, based on GAO's August 2003 report Grants Management: EPA Needs to Strengthen Efforts to Address Persistent Challenges, GAO-03-846 , focuses on the (1) major challenges EPA faces in managing its grants and how it has addressed these challenges in the past, and (2) extent to which EPA's recently issued policies and grants management plan address these challenges. EPA continues to face four key grants management challenges, despite past efforts to address them. These challenges are (1) selecting the most qualified grants applicants, (2) effectively overseeing grantees, (3) measuring the results of grants, and (4) effectively managing grant staff and resources. In the past, EPA has taken a series of actions to address these challenges by, among other things, issuing policies on competition and oversight, conducting training for project officers and nonprofit organizations, and developing a new data system for grants management. However, these actions had mixed results because of the complexity of the problems, weaknesses in design and implementation, and insufficient management attention. EPA's recently issued policies and a 5-year grants management plan to address longstanding management problems show promise, but these policies and plan require strengthening, enhanced accountability, and sustained commitment to succeed. EPA's September 2002 competition policy should improve EPA's ability to select the most qualified applicants by requiring competition for more grants. However, effective implementation of the policy will require a major cultural shift for EPA managers and staff because the competitive process will require significant planning and take more time than awarding grants noncompetitively. EPA's December 2002 oversight policy makes important improvements in oversight, but it does not enable EPA to identify systemic problems in grants management. For example, the policy does not incorporate a statistical approach to selecting grantees for review so that EPA can project the results of the reviews to all EPA grantees. Issued in April 2003, EPA's 5-year grants management plan does offer, for the first time, a comprehensive road map with objectives, goals, and milestones for addressing grants management challenges. However, in implementing the plan, EPA faces challenges in holding all managers and staff accountable for successfully fulfilling their grants management responsibilities. Without this accountability, EPA cannot ensure the sustained commitment needed for the plan's success. While EPA has begun implementing actions in the plan, GAO believes that, given EPA's historically uneven performance in addressing its grants challenges, congressional oversight is important to ensure that EPA's Administrator, managers, and staff implement the plan in a sustained, coordinated fashion to meet the plan's ambitious targets and time frames.

Although a number of companies manufacture various non-lethal weapons, such as stun guns, the only company that manufactures Tasers is Taser International in Scottsdale, Arizona. First developed in the 1970s for use by police departments, Tasers differ from stun guns in that they can be fired from a distance and do not require contact with skin in order to work. Taser International has produced various models of Taser weapons including Air Tasers and the M-18, M-18L, M-26, X-26, and X-26C models. The M-18 and X-26C models are available to the civilian market. The M-26 and X-26 models are sold only to law enforcement agencies, the military, and more recently have been made available for use in maintaining aviation security. Both models, while varying in size, operate in the same manner and deliver approximately the same electrical charge. For the purposes of this report, Tasers refer to the M-26 and X-26 models. Figure 1 shows a picture of an M-26 model Taser, and figure 2 shows a picture of an X-26 model Taser. The Taser fires two metal barbs that are attached to wires, which can cover a distance of up to 25 feet. Once the barbs are embedded in an individual or on the individual's clothing, the weapon delivers an electrical charge of 50,000 volts through the wires to the barbs. This charge causes the muscles of the individual to involuntarily contract, which immediately incapacitates the individual for the duration of the shock, usually lasting about 5 seconds. The barbs need not be embedded in an individual's body in order to function. Because of the high voltage, an individual will be shocked even if the barbs are attached to an outer layer of clothing, such as a coat. If the barbs penetrate the skin, it is impossible to predict how deeply they will embed because of various factors, including wind speed and a subject's weight and muscle mass. The manufacturer estimated that the barbs will generally penetrate bare skin no more than half an inch. Once the Taser weapon's shock subsides, the individual can recover completely in about 10 seconds. If the weapon is fired correctly and the barbs hit the individual, no collateral damage occurs to the surrounding environment. The Taser can be reactivated numerous times as long as the barbs remain in the individual or the individual's clothing. Secondary electric shocks also last for about 5 seconds. The operator has the ability to shut the weapon off, thus ending the charge. A data port contained in the latest models of Tasers provides information suitable for downloading onto a computer detailing the date, time, and duration of each instance that the Taser was fired. A visual battery level indicator is located on the back of the hand guard. The Taser also utilizes a laser sight system. This system enables the operator, even with limited experience, to direct the barbs to the desired location on the individual. The seven law enforcement agencies we contacted have attempted to ensure proper deployment of the Taser weapon by establishing and employing use-of-force policies, training requirements, operational protocols, and safety procedures. Although none of the seven agencies had separate use-of-force policies that specifically addressed Tasers, all of the agencies included the use of such weapons into their existing policies so that police officers would have guidance on the circumstances in which the use of Tasers may be appropriate. A use-of-force policy provides police officers with a clearly defined set of rules or guidance to follow when encountering a subject, based on the subject's actions, the officer's perception of the situation, and the available types of officer responses. The use-of-force model-- frequently referred to by law enforcement officials as the use-of-force continuum--was developed using federal law enforcement training guidelines established by FLETC. According to FLETC, the continuum serves as a visual tool to help explain about the application of the use-of- force policy. Specifically, the continuum establishes for a police officer various options to use in responding to a subject's actions, while employing the minimum amount of force necessary under the circumstances. Generally, an officer should employ more forceful means to control a subject only if the officer determines that a lower level of force is inadequate. Officials in the seven law enforcement agencies we contacted told us that they rely on the continuum to help provide officers with guidance in carrying out their law enforcement responsibilities. As shown in figure 3, the use-of-force continuum includes five levels of potential subject actions and corresponding officer responses. For example, if a subject is compliant, an officer should use only "cooperative controls," such as verbal commands, to control the subject. On the other hand, the guidelines provide that if a subject is assaultive and an officer perceives a threat of serious physical injury or death--a lethal situation on the use-of-force continuum--the officer may use deadly force to control the subject. Officials in the seven law enforcement agencies we contacted stated that each agency has a use-of-force policy in which all officers are trained. Each of the seven agencies has incorporated the Taser into its existing use-of- force policy. The placement of the Taser on the use-of-force continuums of the agencies varied. Specifically, we found that the seven agencies placed the Taser at three different levels on their use-of-force continuums. As shown in table 1, two agencies--the Sacramento Police Department and the Sacramento Sheriff's Department--permit the use of Tasers when a police officer perceives the situation as potentially harmful, as when a subject engages in assaultive behavior that creates a risk of physical injury to another. Impact weapons, such as night sticks and batons, can also be used in these situations. They include, for example, instances in which a subject attacks or threatens to attack an officer by fighting and kicking. Four other police departments--the Austin Police Department, the Ohio Highway Patrol, the Phoenix Police Department, and the San Jose Police Department--allow the use of Tasers at a lower level in the use-of-force continuum in situations that the officer perceives as volatile. This occurs, for example, when a subject is actively resisting arrest but not attacking the officer. The use of chemical sprays to subdue the subject is another option in such a situation. Finally, one agency--the Orange County Sheriff's Department--allows the use of Tasers in situations that an officer perceives as tactical, such as when a subject is "passively resisting" by not responding to the lawful, verbal commands of the officer. "...it is of paramount importance that officers expect and receive the same results from one Taser to another. Their confidence in the weapon is based on the knowledge that all Tasers will operate the same each and every time and will achieve the same desired results each and every time." In all seven agencies, the training cycle begins by disseminating the previously discussed use-of-force policy. Police officers also receive mandatory firearms training. As shown in table 2, three of the agencies we contacted--the Sacramento Police Department, the Sacramento Sheriff's Department, and the San Jose Police Department--require a minimum of 100 hours of such training; three agencies--the Ohio Highway Patrol, the Orange County Sheriff's Department, and the Phoenix Police Department-- require a minimum of 80 hours; and one agency--the Austin Police Department--requires a minimum of 60 hours. In addition, all seven agencies require Taser-specific training. This training stresses such matters as how to (1) properly handle the weapon, (2) locate the shot, (3) safeguard the Taser, (4) conduct proper function tests, (5) overcome system malfunctions in a timely fashion, and (6) perform post-Taser deployment actions. Three agencies require 8 hours of Taser training, while three require 5 hours and one requires 4 hours. All seven agencies require officers to demonstrate physical competency with the weapon, and three agencies also require written tests generally consisting of approximately 10 true or false questions related to the application of the use-of-force policy, proper use of the weapon, and appropriate safety measures. Furthermore, six of the seven agencies required yearly recertification in the use of Tasers. One agency--the San Jose Police Department--does not require yearly recertification for Tasers and is not currently considering the establishment of such recertification. However, an official from the San Jose Police Department told us that the department includes Tasers in its annual use-of-force simulations training in which officers are trained in the use of Tasers that would be considered appropriate in various law enforcement scenarios. We also discussed with officials from the seven agencies how training other Taser users may differ from training law enforcement personnel in Taser use. All the officials agreed that the length and intensity of training must be increased for users who have no law enforcement experience or firearms training. The officials also stressed that any civilian training curriculum should have a very explicit use-of-force policy. Unlike police officers, civilians are not generally experienced in deciding whether the use of force is justified and, if so, to what extent. Therefore, the officials told us that it should be the goal of any civilian training curriculum to remove the need for independent decision-making as much as possible. Officials from all seven agencies agreed that training for non-traditional law enforcement individuals should involve as many "real life" scenarios as possible so that the trainee understands what level of force is appropriate. The seven law enforcement agencies we contacted have operational protocols, which are written policies and procedures that address and provide guidance on the daily activities of a law enforcement agency's officers. These protocols address a wide range of issues such as deployment of law enforcement personnel and weapons, inspection techniques, proper use of weapons, and post-incident procedures. Regarding Tasers, the protocols in the seven agencies require, among other things, that Tasers be visually inspected on a daily basis, be appropriately safeguarded, and, in some cases, be tested on a weekly basis or at the beginning of an officer's shift. With regard to Taser deployment, three of the seven agencies we contacted issued the Taser to all of their officers. Three of the agencies deployed Tasers only to patrol officers because they were considered to be the most likely personnel to have use for the device during the course of their work. The remaining agency issued Tasers to its patrol officers and members of some specialized police units such as narcotics. Regarding inspections, all seven agencies we contacted required a daily function test for Tasers. Officials in the seven agencies told us that this test generally consists of visually inspecting the weapon for any signs of damage or unusual wear and tear, inspecting the firing cartridge to ensure that there is no damage or obvious tampering, and checking the battery strength indicator located on the rear of the weapon. Furthermore, one of the seven agencies required that on a weekly basis, officers conduct a test fire of Tasers in which the officer initiates an arcing of the electric probes by pulling the trigger of a Taser that does not contain a firing cartridge. In addition, two of the seven agencies require that each officer conduct such a test at the beginning of the officer's shift. All of the agencies mandated that the Taser be safeguarded in the same fashion as a firearm issued by the agency. Once the law enforcement agency's internal policies and procedures were satisfied, including compliance with the use-of-force policy, the method and manner prescribed for Taser use did not significantly differ among the agencies we contacted. Officials in the seven agencies stated that the Taser is to be aimed at the center of an individual's largest amount of body mass, which is oftentimes the chest or, in some circumstances, the back. Shots to the neck or face are not advisable unless a significant danger exists to the officer or others, and this area is the only target area presented. All seven agencies we contacted required the officer involved in a use-of-force incident to complete an official form detailing the type of force used. As shown in table 3, three of the agencies required the officer to complete a specific form whenever a Taser was used. These forms included a description of barb placement, the effects achieved, and the subject's behavior before and after the Taser deployment. Following the use of the Taser, all seven agencies required that the subject be restrained, with handcuffs or an emergency restraint belt, to ensure that there would be no further threat of physical aggression. "...the officer runs the risk of injuring the intended target. A Taser is by nature a weapon and carries with it inherent dangers." As shown in table 4, the seven agencies' safety guidelines provide that the Taser should not be used on children, pregnant suspects, or near bystanders or flammable liquids. All the agencies we contacted require an emergency room physician to examine the subject in the event of Taser barb placement in the face or neck. The Orange County Sheriff's Department also requires any female subject shot in the breast or groin area to be seen by an emergency room doctor. Six of the seven agencies provide officers with the discretion to remove the barbs themselves or to request that emergency medical technicians (EMT) respond to the scene. Once removed, the barbs should be placed in a "Sharps" container to ensure safe and hygienic disposal. For these agencies, if the officer observes an adverse reaction to the electrical shock, he or she can request that the subject be transported to a local hospital emergency room. No other medical follow-up is required. The remaining agency--the San Jose Police Department--does not provide its officers with the discretion to remove Taser barbs. The San Jose Police Department calls for officers to transport subjects hit with Taser barbs to a hospital so that medical personnel can remove the barbs. Also, San Jose officers do not routinely call EMTs to the scene of Taser use. They do so only if other life threatening needs or medical treatment is needed. If such treatment is not needed, the officer transports the suspect to a hospital for medical clearance prior to being booked in the county jail. In reviewing various laws, including statutes, regulations, and ordinances, we found that Tasers were addressed in some federal, state, and local jurisdictions. We also found that these jurisdictions had different requirements for regulating Tasers. In some instances, the extent to which Tasers are regulated in these jurisdictions may depend on whether the Taser is classified as a firearm. For example, at the federal level, ATF has not classified Taser as a firearm, which exempts Taser from federal firearms requirements. However, we identified other federal agencies, such as the Army, that have established Taser-related regulations for the possession, use, and sale of Tasers. In addition, TSA has identified the Taser as a prohibited weapon that cannot be brought past airport security checkpoints by unauthorized personnel. TSA also has authority to approve the use of Tasers by flight crews on commercial aircraft. We also found that the state of Indiana and the city of Chicago, Illinois regulate the sale or possession of Tasers by non-law enforcement persons by requiring that the same restrictions that apply to firearms must also apply to Tasers. Other states, such as California, prohibit Tasers from being carried into public facilities such as schools and airports. At the federal level, we found that ATF--the federal agency responsible for determining whether a weapon should be classified as a firearm, which would make the weapon subject to federal firearms regulations--does not classify the Taser as a firearm. Thus, the Taser is not subject to any federal regulations regarding the distribution, sale, and possession of firearms. As a result, Tasers can be manufactured and distributed domestically without federal restriction. However, we identified some federal agencies that have established regulations that specifically prohibit the sale, possession, and transfer of Tasers. For example, Army regulations prohibit the sale, possession, carrying, or transportation of Tasers on or within specific installations in Georgia, including Fort Gordon and Fort Stewart, which also includes the Hunter Army Airfield. In addition, TSA has a regulation that prohibits unauthorized individuals from carrying weapons, explosives, and incendiaries beyond airport security checkpoints. To help provide guidance in implementing its regulation, TSA has developed a chart outlining specific items that are prohibited in carry-on baggage and has identified Tasers as a prohibited weapon. TSA also has broad authority under the Aviation and Transportation Security Act, as amended by Section 1405 of the Homeland Security Act of 2002, to approve the use of less-than- lethal weapons by flight deck crew members, as long as the TSA Secretary prescribes "...rules requiring that any such crew member be trained in the proper use of the weapon..." and "...guidelines setting forth the circumstances under which such weapons may be used." Based on this authority, in October 2004, TSA approved a request from Korean Airlines that specially trained cabin attendants be permitted to use Tasers on commercial flights in U.S. airspace. TSA officials told us they anticipate that in the future, other airlines will also submit requests to deploy less- than-lethal weapons. In reviewing various state and local laws, we identified some state statutes and municipal ordinances that specifically regulate the sale or possession of Tasers by non-law enforcement persons within their state or municipal boundaries. For example, in the state of Indiana, Tasers are subject to the same licensing requirements as other handguns. Therefore, in order to lawfully possess a Taser in Indiana, prospective purchasers are required to meet certain license requirements and consent to a criminal history background check. In addition, dealers in Indiana cannot sell a Taser until after requesting and receiving criminal history information on prospective purchasers. Similarly, in Chicago, Illinois, prospective purchasers are required to obtain a permit to lawfully purchase Tasers. Also, in the state of Pennsylvania and the city of Wilmington, Delaware, it is unlawful for non-law enforcement persons to manufacture, make, sell, or possess a Taser. In addition, individuals in various states, including California, Illinois, and Virginia, are prohibited from carrying Tasers in such areas as airports, courthouses, schools, prisons, or public buildings. The seven law enforcement agencies we contacted have established policies and procedures to attempt to ensure proper use of Tasers. Specifically, the agencies employ use-of-force policies, training requirements, operational protocols, and safety procedures, although specific practices vary from agency to agency. For example, the seven agencies place the threshold at which Taser use may be deemed appropriate at three different levels on their use-of-force continuums. However, even when these policies are strictly enforced, each situation in which a Taser may be used is unique. An officer must rely on prior experience and training and exercise good judgment to determine whether using the Taser constitutes an appropriate level of force. Consequently, officials in the seven law enforcement agencies we contacted stressed that proper training is essential for successful deployment. If Taser use becomes more widespread, particularly among non-law enforcement personnel who have little or no firearms experience, we believe that this training will become even more critical for safe, effective, and appropriate use of the weapon. We received written comments on a draft of this report from TSA, which are included in appendix II. In its comments, TSA stated that it generally concurred with the information in the report. Also, TSA stated that it agreed that training and oversight are essential for the use of Tasers. In addition, TSA discussed its authority to approve the use of less-than-lethal weapons by air carriers. Among other things, TSA explained that under the Aviation and Transportation Security Act, as amended by Sec. 1405 of the Homeland Security Act of 2002, air carriers are to contact TSA to request permission to carry less-than-lethal weapons aboard their aircraft. TSA would review the air carrier's request as well as the training program that the air carrier would provide for the proposed use of the weapon. After TSA approves the air carrier's request, an amendment to the air carrier's security program must be made to allow for the weapon's use while the aircraft is in flight. Requirements could also be mandated for storage of the weapon while the aircraft is standing at an airport. Furthermore, TSA stated that it has received a number of requests from air carriers as they attempt to enhance aircraft security and will continue to evaluate such requests and review training programs provided by air carriers. In addition, TSA and FLETC provided technical comments that we incorporated into this report where appropriate. We also received comments from Taser International and the seven law enforcement agencies we contacted. They generally agreed with the information in the report. In addition, Taser International and three of the seven law enforcement agencies--the Austin, Texas, Police Department; the Phoenix, Arizona, Police Department; and the San Jose, California, Police Department--provided some technical comments that we incorporated into this report where appropriate. As agreed with your office, unless you announce the contents of this report earlier, we will not distribute it until 30 days after its issuance date. At that time, we will send it to the Chairmen and Ranking Members of the Senate Committee on Homeland Security and Governmental Affairs and the House Committee on Government Reform. We will also send it to the Chairman and Ranking Member of the House Committee on Homeland Security and the Ranking Member of the Subcommittee on National Security, Emerging Threats and International Relations, Committee on Government Reform. We will also provide copies to the Secretary of the Transportation Security Administration and 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. Key contributors to this report are listed in appendix III. If you or your staff have any questions concerning this report, please contact me at (202) 512-7455 or at [email protected]. For this report, our first objective was to obtain information on the policies and procedures related to the issues of use of force, training, operations, and safety for selected law enforcement agencies that have purchased and used Tasers. We conducted this work for the purpose of providing information about the policies, procedures, and practices these agencies use to help ensure safe and successful deployment of the Taser. We did not attempt to draw conclusions about whether Tasers are in fact safe. Our second objective was to obtain information on federal, state, and local laws that specifically address Tasers, including the Transportation Security Administration's (TSA) authority to regulate Tasers on aircraft. To address the first objective, we used Taser International Incorporated's (Taser International) customer database to identify all U.S. law enforcement agencies that had purchased Tasers. As the sole manufacturer of Tasers, Taser International maintained the only centralized database from which we could obtain this information. Around the time we began our work in May 2004, Taser International reported that a total of over 7,000 law enforcement agencies had purchased Tasers. Time constraints would not permit us to contact all these agencies. Thus, we determined that the most reasonable approach for selecting law enforcement agencies to contact would be to focus on those agencies that had the largest number of Tasers for the longest period of time. To do this, we identified two key data elements for each agency--the date that the agency made its first Taser purchase and the total number of Tasers that the agency purchased. In identifying the initial Taser purchase date, we were able to determine how long ago various agencies had begun buying Tasers. We focused on this date because we determined that by the time we began our work, the agencies that had made the earliest Taser purchases would have been more likely to have established policies and procedures to help ensure the safe and appropriate use of Tasers. In addition to the initial purchase date, we identified for each agency the total number of Tasers that they had purchased. We determined that those agencies that purchased a significant number of Tasers would have been more likely to deploy them widely, which increased the chances that more law enforcement personnel would have used Tasers in training and field situations. As such, we reasoned that to help ensure that Tasers would be safely and appropriately used, law enforcement agencies would take steps as quickly as possible to establish Taser-related policies and procedures. Using these two data elements, we identified seven law enforcement agencies that had deployed the largest number of Tasers for the longest period of time. These agencies were the Austin, Texas, Police Department; the Ohio Highway Patrol; the Orange County, Florida, Sheriff's Department; the Phoenix, Arizona, Police Department; the Sacramento, California, Police Department; the Sacramento, California, Sheriff's Department; and the San Jose, California, Police Department. Our efforts in selecting the seven agencies constituted a case-study approach. Because we conducted case studies rather than a statistical survey, the results of our work can be applied only to the seven agencies we contacted; our work results cannot be applied to all law enforcement agencies that, according to Taser International's data, have purchased Tasers. With the assistance of GAO methodologists, we drafted a series of questions related to use-of-force policies, training requirements, operational protocols, and safety procedures. We asked officials in all seven agencies the same questions to ensure that we could compare their responses. To address the second objective, we researched various federal and state laws, including statutes and regulations, to determine whether Tasers are regulated at the federal and state levels. In addition, we reviewed information obtained from the Department of Justice's Bureau of Alcohol, Tobacco, Firearms, and Explosives on local ordinances that regulate Tasers. Also, we researched various published local ordinances to determine whether Tasers are regulated at the local level. In addition, we reviewed the Aviation and Transportation Security Act to ascertain federal requirements for approving the use of Tasers onboard aircraft. We conducted our work from May 2004 through February 2005 in accordance with quality standards for investigations as set forth by the President's Council on Integrity and Efficiency. In addition to the individual named above, Jennifer Costello, Richard Egan, Joseph Funk, Barbara Lewis, Latesha Love, John Ryan, and Barry Shillito made key contributions to this report. The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through GAO's Web site (www.gao.gov). Each weekday, GAO posts newly released reports, testimony, and correspondence on its Web site. To have GAO e-mail you a list of newly posted products every afternoon, go to www.gao.gov and select "Subscribe to Updates."

Emerging domestic and international threats have generated a growing interest in the use of less-than-lethal weapons by government and law enforcement agencies and other entities such as commercial airlines. One such weapon--the Taser--is a hand-held weapon that delivers an electric shock via two stainless steel barbs, effectively incapacitating an individual. According to the manufacturer--Taser International, Incorporated (Taser International)--Tasers are currently used by over 7,000 of the 18,000 law enforcement agencies in the United States, with more than 140,000 Tasers in use by police officers in the field and an additional 100,000 Tasers owned by civilians worldwide. Tasers have been used on over 100,000 volunteers, including individuals involved in training seminars and research experiments, and involved in over 70,000 actual field uses during police encounters. In light of the expanding interest in the Taser, GAO was asked to provide information on (1) the policies and procedures related to the issues of "use-of-force," training, operations, and safety for selected law enforcement agencies that have purchased and used Tasers and (2) federal, state, and local laws that specifically address Tasers, including the Transportation Security Administration's (TSA) authority to regulate Tasers on aircraft. The seven law enforcement agencies we contacted have established use-of-force policies, training requirements, operational protocols, and safety procedures to help ensure the proper use of Tasers. Although none of the agencies have separate use-of-force policies that specifically address Tasers, all seven agencies include the use of Tasers into their existing policies. Taser training is required for officers who use the weapons, and agency officials said that training for officers and other non-law enforcement persons who are allowed to use Tasers is critically important to help ensure their safe use. Operational protocols require that Tasers be visually inspected daily, appropriately safeguarded, and, in some cases, tested weekly or at the beginning of an officer's shift. Safety procedures require that Tasers not be used on children, pregnant suspects, or near bystanders or flammable liquids and that individuals hit in specific body areas with Taser barbs, such as the neck or face, be examined by a physician. Some federal, state, and local jurisdictions have laws that address Tasers but requirements differ. For example, at the federal level, the Army prohibits Tasers from being brought into selected military installations in Georgia. Also, TSA may approve the use of Tasers on aircraft but must prescribe training rules and guidance on appropriate circumstances for using Tasers. At the state and local levels, the state of Indiana and the city of Chicago, Illinois, regulate the sale or possession of Tasers by non-law enforcement persons by subjecting Tasers to the same restrictions that apply to firearms. Other states, such as California, prohibit Tasers from being carried into public facilities such as airports. GAO observes that as the Taser becomes more widely used, especially by non-law enforcement persons, training is critical to help ensure its safe, effective, and appropriate use. TSA, Taser International, and the seven law enforcement agencies we contacted generally agreed with the information in this report.

The natural gas and electricity industries perform three primary functions in delivering energy to consumers: (1) producing the basic energy commodity, (2) transporting the commodity through pipelines or over power lines, and (3) distributing the commodity to the final consumer. Historically, many local utilities in the electricity sector built their own systems of power plants and electricity transmission and distribution lines to serve the needs of all consumers in their local areas. Similarly, natural gas companies built networks of pipelines to deliver natural gas from areas where it was produced to the markets where local distribution companies served all local customers. These local monopolies were overseen by regulators, who restricted the entry of new companies and also approved investments, approved prices paid by customers, and determined profits of these utilities. However, due to rising electricity prices and technological, economic, and policy developments beginning in the 1970s, the electricity and natural gas industries have restructured from a regulated environment to one that places greater reliance on competition to determine entry, investment, prices, and profits. The passage of the Natural Gas Policy Act of 1978, the Natural Gas Wellhead Decontrol Act of 1989, and subsequent FERC orders in 1985 and 1992 opened access to pipelines and required pipeline companies to completely separate transportation, storage, and sales services, all of which facilitated the shift of natural gas to more competitive markets. Similarly, the 1978 passage of the Public Utility Regulatory Policies Act of 1978 and the 1992 passage of the Energy Policy Act facilitated restructuring in the electricity industry. FERC built upon these efforts through major regulatory actions in 1996 and 1999 that required utilities under its jurisdiction to, among other things, provide nonutility companies that generated electricity with access to the utility's interstate transmission lines and encouraged utilities to join in the creation of independent organizations to operate the transmission system, such as Independent System Operators (ISO) and Regional Transmission Organizations (RTO). Under federal statutes, FERC is the principal federal agency that regulates the natural gas and electricity industries to ensure that wholesale electricity and natural gas prices are fair. FERC is responsible for developing and maintaining the regulatory framework that approves or otherwise influences the utilities' terms, conditions, and rates for the sale or resale and transmission of natural gas and electricity in interstate commerce. Historically, to ensure that the prices these utilities charged were just and reasonable, FERC regulated rates by basing the prices on the utilities' costs to provide service plus a fair return on investment. Now, FERC seeks to ensure that wholesale natural gas and electricity prices are just and reasonable by promoting competitive markets, issuing market related rules that encourage efficient competition, and enforcing and correcting market rules as needed. In the newly restructured markets, many energy market participants rely on price information obtained from various sources, including price indices published in trade press because some companies can be reluctant to freely provide data on purchases and sales. Private companies develop these price indices by collecting information about market prices from market participants in a variety of ways, including phone calls to individuals within energy trading companies. Market participants use these indices to, among other things, help them make informed decisions about buying and selling natural gas and electricity. For example, energy market participants use price indices as a benchmark in reviewing the prudence of gas and electricity purchases and often reference price indices in the contracts they develop for gas and electricity purchases. As part of its market oversight efforts, FERC also monitors these price indices to detect anticompetitive behavior. Other federal agencies have roles affecting the electricity and natural gas markets. The Commodity Futures Trading Commission (CFTC) oversees markets and transactions related to the sale of commodity and financial futures and options, while the Federal Trade Commission (FTC) and Department of Justice police deceptive selling practices. In addition to these federal agencies, states also oversee aspects of natural gas and electricity delivery, often through public utility commissions. Since 2003, FERC has undertaken a series of efforts to improve the availability and accuracy of price information, including specifically addressing price indices. In 2000 and 2001 during the energy crisis in the West, some market participants knowingly misreported data to index providers in order to influence these indices for financial gain. Following that, FERC convened a series of conferences and workshops that included regulators, energy market participants, price index publishers, and industry experts. One of these events included participation by the CFTC and another included participation by the National Association of Regulatory Utility Commissioners (NARUC). As a result of these efforts, FERC staff developed a better understanding of market participants' desired characteristics of the price indices and behavior of other market participants. These conferences and workshops also revealed some practical short- and long-term solutions to problems such as how market price indices are developed and why reduced energy trading activity was occurring. Using the information that it developed through its conferences and workshops, FERC developed new standards and rules of conduct for both market participants submitting trade data and for price index publishers, to help ensure that price indices were more accurate and reliable and to strengthen market participants' confidence in price indices. FERC outlined the standards that energy market participants and index developers should follow in a 2003 policy statement. According to FERC, these standards were designed to encourage standardization in the voluntary reporting of price and other market information, among other things, and to assure companies that they will not be subject to administrative penalties for inadvertent errors in reporting. These standards also encourage energy market participants to report not only prices but also the volume of the traded commodity and the date and time of the transaction, and encourage the entities that publish price indices (e.g., Platts, Natural Gas Intelligence, and Dow Jones) to also publish this relevant market information. In addition, FERC standards encourage index publishers to verify the price data obtained from companies that provide price data, to indicate when a published price is an estimate made by the publisher rather than data reflecting only the results of actual trades, and to monitor the data to identify attempts to manipulate energy price indices. Finally, FERC standards encourage price index publishers to explain to users how the index is developed and include the formulas used to calculate the index. With regard to rules of conduct, FERC issued two orders in November 2003 designed to establish clear guidelines for sellers of wholesale electricity and natural gas subject to its jurisdiction. These guidelines prohibit actions that do not have a legitimate business purpose and are capable of manipulating prices. For example, they prohibit submitting false or misleading information to FERC or price index publishers. FERC has also taken steps to improve its ability to monitor price indices and enforce related market rules. Recently, we reported that FERC had made significant efforts to revise its oversight approach to better align with its new role in overseeing restructured markets. In particular, we have reported that through the establishment of its Office of Market Oversight and Investigations in 2002, FERC had taken a more proactive approach to monitoring by reviewing large amounts of data, including wholesale prices, for anomalies that could lead to potential market problems. In addition, FERC, which oversees the operators of electricity grids, including ISOs and RTOs, has worked with these organizations' market monitoring units-- many of which collect substantial amounts of information on prices and other data to determine, among other things, whether prices are the result of fair competition or appear to be a result of market manipulation. Finally, the passage of the 2005 Energy Policy Act included FERC's proposed statutory changes to address misconduct of market participants by increasing civil penalties imposed on companies that participate in anticompetitive behavior or manipulate the market. These changes increase FERC's ability to levy civil penalties under existing laws, raising potential fines to as much as $1 million per day per violation for as long as the violation continues. A FERC official said that increasing civil penalties would allow it to more effectively deter market manipulation and misconduct that is damaging to competitive markets. Moreover, FERC officials said that it would lead to greater certainty for market participants, thereby increasing participation in markets. The Energy Policy Act also gives FERC authority to collect transaction information if necessary to ensure price transparency. A FERC official said that this authority would give FERC additional tools if the current voluntary system of reporting prices to price index publishers proves inadequate. In addition, in response to requirements in the Energy Policy Act, FERC and the CFTC entered into a memorandum of understanding to share and coordinate requests for information, which they say will allow FERC to more readily identify and sanction market manipulation. Many industry stakeholders report that they are now reasonably confident in short-term price indices, although some concerns about the transparency of long-term electricity markets remain. As part of its effort to assess its efforts to improve price indices, FERC surveyed industry participants in March 2004, asking them to rate their confidence in price indices--with 1 representing no confidence and 10 representing total confidence that price indices accurately represent market pricing. Confidence in price indices ranged from an average of 7.5 for gas utilities to 6.7 for marketers, with nearly half reporting a confidence of 8 or greater. (See fig. 1.) In addition, in 2004, FERC reported that price index publishers have submitted information showing that the volume and number of transactions have increased significantly since 2002 and is influenced by at least two factors. First, companies that had been reporting transactions began reporting more transactions to publishers of price indices. Second, companies that had not been reporting had begun reporting transactions to publishers of price indices. Furthermore, many of the companies reporting in 2004 are among the industry's larger and more active participants. Consistent with what FERC found, industry trade and research organizations and others that we interviewed reported to us that their members have few significant concerns about the short-term, also called spot, price indices or long-term natural gas indices. They report that, overall, FERC's efforts to improve the transparency of spot price indices achieve sufficient oversight without being heavy-handed. In addition, industry participants told us that the quality of data being provided to publishers of price indices has improved since 2002. For example, according to a major price index publisher, the reporting of price information has significantly improved in the last 2 years, and, further, the quality of analysis and reliability of the prices that they report has improved. Finally, publishers are providing more information about the market, such as the number of transactions and the amounts of energy bought and sold at specific trading locations. For example, a major publisher reported to us that, as of August 2004, it includes volume and transaction data for each pricing point in the spot market. Despite their general satisfaction with most price indices, some stakeholders reported concerns about price indices for long-term electricity markets. In particular, representatives of one trade organization told us that while data regarding spot prices and long-term natural gas prices have improved, they still have concerns about electricity prices involving long-term purchase arrangements and similar long-term contracts (e.g., forward and futures markets, where long-term contracts for electricity and related financial instruments are bought and sold). Stakeholders are now able to see that these markets witness fewer transactions and, as a result, are less developed than others. One factor affecting price transparency in these long-term markets is that the use of these markets collapsed in 2002 over concerns that prices were manipulated. This collapse, in turn, has resulted in fewer market participants and a market that is less developed, making it difficult for those still wanting to participate in these markets to find a willing trading partner. In addition, two stakeholders told us that there are not many options for obtaining data regarding longer term energy market transactions. Complicating this concern, FERC does not have jurisdiction for overseeing futures markets and has only a limited direct role in long- term markets. As a result, FERC does not formally collect extensive data on futures or long-term markets. As a result, one energy market participant reported that it relies on limited data when developing or valuing long-term electricity contracts. In the absence of a mature and reliable long-term electricity market and information about prices, market participants noted that for now they rely on long-term natural gas markets and indices, which are more developed. These market participants told us that because natural gas is used extensively to generate electricity, the prices often change together. They also said that the availability and use of these natural gas markets only partly mitigates the lack of robust electricity markets, because electricity and natural gas prices can, and do, sometimes move independently. The move away from regulators setting prices and toward markets where prices are increasingly a function of competition has raised the importance of price indices as a mechanism to communicate information to the market. In recent years, market participants have used these indices in structuring their transactions and regulators have used them to judge how the market is performing. As a result, it is important that they accurately and reliably reflect actual prices. The federal government has taken a number of steps to encourage improved availability and accuracy of price indices, which has increased industry confidence in price and other market information provided in spot price indices. Although federal efforts appear to have had a positive impact on short-term (spot) price indices, some concerns remain about price indices for long-term electricity markets. It does not appear that there is an easy way to improve reporting on these long-term electricity markets until the markets themselves mature. Because of the importance of price indices, it will be important for FERC, Congress, and others to remain vigilant in their monitoring of existing price indices and attentive for alternatives to address the remaining issues in longer term markets. We provided a copy of our draft report to FERC for comment. FERC provided written comments, which are presented in appendix I. In its comments, FERC generally agreed with our findings and conclusions. In addition, FERC provided a variety of technical and other comments, which we incorporated as appropriate. To obtain information about efforts FERC has taken to improve natural gas and electricity price indices, we reviewed reports and other documents describing federal efforts to improve price transparency and examined literature on price transparency in the natural gas and electricity markets. In addition, we interviewed government officials at FERC, representatives of trade associations, and industry and academic experts in the field. We assessed the reliability of FERC confidence survey data by reviewing the survey instrument and methodology used to tabulate results, interviewing relevant agency officials knowledgeable about the data to understand any limitations of the data, and corroborating results by interviewing some of the entities surveyed. We conducted our work from June 2005 to November 2005 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Chairman of FERC as well as other appropriate congressional committees. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Office of Congressional Relations and Office of Public Affairs may be found on the last page of this report. GAO staff who contributed to this report are listed in appendix II. In addition to the individual named above, Jon Ludwigson, Kristen Massey, Frank Rusco, Barbara Timmerman, Alison O'Neill, Chris Pacheco, and Kim Wheeler-Raheb made key contributions to this report.

Since the 1970s, the natural gas and electricity industries have each undergone a shift toward greater competition, referred to as restructuring. This restructuring has moved these industries from regulated monopolies to markets in which competitors vie for market share and wholesale prices are largely determined by supply and demand. Amid this restructuring, private companies have published information about these markets, including reports of market prices in various locations--referred to as price indices. These indices, whether for short-term "spot" or long-term "forward" markets, are developed by surveying selected market participants who voluntarily supply price information. Market participants rely on these price indices to help them make informed decisions about trading these commodities and to evaluate new investments. In recent years, confidence in price indices has been shaken due to misreporting and other abuses. During the energy crisis in the West in 2000-2001, several market participants were found to have purposefully misreported prices in order to manipulate these indices for financial gain. In this context, GAO agreed to answer the following questions: (1) What federal regulatory and statutory efforts have been taken to improve price indices in electricity and natural gas markets? (2) Have federal efforts improved industry stakeholders' confidence in these price indices? Since 2003, the federal government has undertaken a series of regulatory and statutory efforts to improve the availability and accuracy of price information in price indices. First, FERC issued standards on voluntary price reporting and rules of conduct in a July 2003 policy statement. Second, FERC has taken steps to improve its ability to monitor price indices and enforce market rules by (1) reviewing wholesale prices for anomalies that could indicate market problems and (2) collaborating with other entities, such as the Commodity Futures Trading Commission (CFTC), and independent market monitoring units that monitor organized electricity markets to detect market manipulation. Third, the Energy Policy Act--enacted in August 2005--increases the amount and types of civil penalties that FERC may impose on companies that participate in anticompetitive behavior, including knowingly misreporting price information to index developers and gives FERC authority to collect additional transaction information if such information is necessary to ensure price transparency. Fourth, FERC and the CFTC entered into a memorandum of understanding to share and coordinate requests for information, which they say will allow FERC to more readily identify and sanction market manipulation. Many industry stakeholders reported that they now have greater confidence in most price indices, but some expressed concern about price indices for long-term electricity markets. FERC reported that stakeholders are generally satisfied with current price indices and that the quality of information has improved. For example, in a recent survey FERC found that two-thirds of respondents reported their confidence in price indices, on a scale of 1 to 10 (10 being most confident), as a 7 or greater. Further, FERC reported that since 2002 the quality of information has improved because (1) more companies are reporting data to publishers and (2) major publishers are providing more information about the number of transactions and volume of electricity and natural gas trades. GAO's own investigations corroborated what FERC found in its survey. Specifically, natural gas and electricity industry stakeholders reported that, in general, they are reasonably confident in the short-term prices now reported by trade publications and the improved quality of overall information. While stakeholders expressed general satisfaction with most price indices, some reported concerns about price indices in long-term electricity markets. Furthermore, stakeholders are now able to see that some of these markets witness fewer transactions and, as a result, are less developed than others. In the absence of a reliable long-term electricity market and information about prices, market participants noted that they rely on long-term natural gas markets and indices that are more developed. Stakeholders told GAO that, because natural gas is widely used to generate electricity, their prices often move together and, therefore, natural gas forward prices can substitute, to some extent, for electricity futures prices. They also said that the use of these natural gas markets only partly mitigates the lack of robust long-term electricity markets, because electricity and natural gas prices sometime move independently.

In August 2014, we reported that, on the basis of our review of land-use agreement data for fiscal year 2012, VA does not maintain reliable data on the total number of land-use agreements and VA did not accurately estimate the revenues those agreements generate. According to the land- use agreement data provided to us from VA's Capital Asset Inventory (CAI) system--the system VA utilizes to record land-use agreements-- VA reported that it had over 400 land-use agreements generating over $24.8 million in estimated revenues for fiscal year 2012. However, when one of VA's administrations--the Veterans Health Administration (VHA)-- initiated steps to verify the accuracy and validity of the data it originally provided to us, it made several corrections to the data that raised questions about their accuracy, validity, and completeness. Examples of these corrections include the following: at one medical center, one land-use agreement was recorded 37 times, once for each building listed in the agreement; and VHA also noted that 13 agreements included in the system should have been removed because those agreements were terminated prior to fiscal year 2012. At the three VA medical centers we reviewed, we also found examples of errors in the land-use agreement data. Examples of these errors include the following: VHA did not include 17 land-use agreements for the medical centers in New York and North Chicago, collectively. VHA incorrectly estimated the revenues it expected to collect for the medical center in West Los Angeles. VHA revised its estimated revenues from all land-use agreements in fiscal year 2012 from about $700,000 to over $810,000. However, our review of VA's land-use agreements at this medical center indicated that the amount that should have been reflected in the system was approximately $1.5 million. VA policy requires that CAI be updated quarterly until an agreement ends. VA's approach on maintaining the data in CAI relies heavily on data being entered timely and accurately by a staff person in the local medical center; however, we found that VA did not have a mechanism to ensure that the data in CAI are updated quarterly as required and that the data are accurate, valid, and complete. By implementing a mechanism that will allow it to assess whether medical centers have timely entered the appropriate land-use agreement data into CAI, and working with the medical centers to correct the data, as needed, VA would be better positioned to reliably account for land-use agreements and the associated revenues that they generate. In our August 2014 report, we also found weaknesses in the billing and collection processes for land-use agreements at three selected VA medical centers due primarily to ineffective monitoring. Inadequate billing: We found inadequate billing practices at all three medical centers we visited. Specifically, we found that VA had billed partners in 20 of 34 revenue-generating land-use agreements for the correct amount; however, the partners in the remaining 14 agreements were not billed for the correct amount. On the basis of our analysis of the agreements, we found that VA underbilled by almost $300,000 of the approximately $5.3 million that was due under the agreements, a difference of about 5.6 percent. For most of these errors, we found that VA did not adjust the revenues it collected for inflation. We also found that the West Los Angeles medical center inappropriately coded the billing so that the proceeds of its sharing agreements, which totaled over $500,000, were sent to its facilities account rather than the medical-care appropriations account that benefits veterans, as required. VA officials stated that the department did not perform systematic reviews of the billings and collections practices at the three medical centers, which we discuss in more detail later. A mechanism for ensuring transactions are promptly and accurately recorded could help VA collect revenues that its sharing partners owe. Opportunities for improved collaboration: At New York and North Chicago, we found that VA could improve collaboration among key internal staff, which could enhance the collections of proceeds for its land-use agreements. For example, at the New York site, the VA fiscal office created spreadsheets to improve the revenue collection for more than 20 agreements. However, because the contracting office failed to inform the fiscal office of the new agreements, the fiscal office did not have all of the renewed contracts or amended agreements that could clearly show the rent due. According to a VA fiscal official at the New York office, repeated requests were made to the contracting office for these documents; however, the contracting office did not respond to these requests by the time of our visit in January 2014. By taking additional steps to foster a collaborative environment, VHA could improve its billing and collection practices. No segregation of duties: On the basis of a walkthrough of the billing and collections process we conducted during our field visits, and an interview with a West Los Angeles VA official, we found that West Los Angeles did not properly segregate duties. Specifically, the office responsible for monitoring agreements also bills the invoices, receives collections, and submits the collections to the agent cashier for deposit. Because of the lack of appropriate segregation of duties at West Los Angeles, the revenue-collection process has increased vulnerability to potential fraud and abuse. This assignment of roles and responsibilities for one office is not typical of the sites we examined. At the other medical centers we visited, these same activities were separated amongst a few offices, as outlined in VA's guidance on deposits. VA headquarters officials informed us that program officials located at VA headquarters do not perform any systematic review to evaluate the medical centers' processes related to billing and collections at the local level. VA officials further informed us that VHA headquarters also lacks critical data--the actual land-use agreements--that would allow it to routinely monitor billing and collection efforts for land-use agreements across the department. One VA headquarters official told us that the agency is considering the merits of dispatching small teams of staff from program offices located at VA's headquarters to assist the local offices with activities such as billing and collections. However, as of May 2014, VA had not implemented this proposed action or any other mechanism for monitoring the billing and collections activity at the three medical centers. Until VA performs systematic reviews, VA will lack assurance that the three selected medical centers are taking all required actions to bill and collect revenues generated from land-use agreements. In our August 2014 report, we found that VA did not effectively monitor many of its land-use agreements at the New York and West Los Angeles medical centers. We found problems with unenforced agreement terms, expired agreements, and instances where land-use agreements did not exist. Examples include the following: In West Los Angeles, VA waived the revenues in an agreement with a nonprofit organization--$250,000 in fiscal year 2012 alone--due to financial hardship. However, VA policy does not allow revenues to be waived. In New York, one sharing partner--a local school of medicine--with seven expired agreements remained on the property and occupied the premises without written authorization during fiscal year 2012. Our review of VA's policy on sharing agreements showed that VA did not have any specific guidance on how to manage agreements before they expired, including the renewal process. In New York, we observed more antennas on the roof of a VA facility than the New York medical center had recorded in CAI. After we brought this observation to their attention, New York VA officials researched the owners of these antennas and could not find written agreements or records of payments received for seven antennas. According to New York VA officials, now that they are aware of the antennas, they will either establish agreements with the tenants or disconnect the antennas. The City of Los Angeles has used 12 acres of VA land for recreational use since the 1980s without a signed agreement or payments to VA. An official said that VA cannot negotiate agreements in this case due to an ongoing lawsuit brought on behalf of homeless veterans about its land-use agreement authority. We found that VA had not established mechanisms to monitor the various agreements at the West Los Angeles and New York medical centers. VA officials stated that they had not performed systematic reviews of these agreements and had not established mechanisms to enable them to do so. Without a mechanism for accessing land-use agreements to perform needed monitoring activities, VA lacks reasonable assurance that the partners are meeting the agreed-upon terms, agreements are renewed as appropriate, and agreements are documented in writing, as required. This is particularly important if sharing partners are using VA land for purposes that may increase risk to VA's liability (e.g., an emergency situation that might occur at the park and fields in the city of Los Angeles). Finally, with lapsed agreements, VA not only forgoes revenue, but it also misses opportunities to provide additional services to veterans in need of assistance and to enhance its operations. Our August 2014 report made six recommendations to the Secretary of Veterans Affairs to improve the quality of the data collected on specific land-use agreements (i.e., sharing, outleases, licenses, and permits), enhance the monitoring of its revenue process and monitoring of agreements, and improve the accountability of VA in this area. Specifically, we recommended that VA develop a mechanism to independently verify the accuracy, validity, and completeness of VHA data for land-use agreements in CAI; develop mechanisms to monitor the billing and collection of revenues for land-use agreements to help ensure that transactions are promptly and accurately recorded at the three medical centers; develop mechanisms to foster collaboration between key offices to improve billing and collections practices at the New York and North Chicago medical centers; develop mechanisms to access and monitor the status of land-use agreements to help ensure that agreement terms are enforced, agreements are renewed as appropriate, and all agreements are documented in writing as required, at the New York and West Los Angeles selected medical centers; develop a plan for the West Lost Angeles medical center that identifies the steps to be taken, timelines, and responsibilities in implementing segregation of duties over the billing and collections process; and develop guidance on managing expiring agreements at the three medical centers. After reviewing our draft report, VA concurred with all six of our recommendations. VA's comments are provided in full in our August 2014 report. In November 2014, VA provided us an update on the actions it is taking to respond to these recommendations in our August 2014 report. These actions include (1) drafting CAI changes to improve data integrity and to notify staff of expiring or expired agreements, (2) updating guidance and standard operating procedures for managing land-use agreements and training staff on the new guidance, and (3) transitioning oversight and operations of the West Los Angeles land-use agreement program to the regional level. If implemented effectively, these actions should improve the quality of the data collected on specific land-use agreements, enhance the monitoring of VA's revenue process and agreements, and improve accountability for these agreements. Chairman Coffman, Ranking Member Kuster, and members of the subcommittee, this concludes my prepared remarks. I look forward to answering any questions that you may have at this time. For further information on this testimony, please contact Stephen Lord at (202) 512-6722 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 testimony include Matthew Valenta, Assistant Director; Carla Craddock; Marcus Corbin; Colin Fallon; Olivia Lopez; and Shana Wallace. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

VA manages one of the nation's largest federal property portfolios. To manage these properties, VA uses land-use authorities that allow VA to enter into various types of agreements for the use of its property in exchange for revenues or in-kind considerations. GAO was asked to examine VA's use of land-use agreements. This report addresses the extent to which VA (1) maintains reliable data on land-use agreements and the revenue they generate, (2) monitors the billing and collection processes at selected VA medical centers, and (3) monitors land-use agreements at selected VA medical centers. GAO analyzed data from VA's database on its land-use agreements for fiscal year 2012, reviewed agency documentation, and interviewed VA officials. GAO also visited three medical centers to review the monitoring of land-use agreements and the collection and billing of the associated revenues. GAO selected medical centers with the largest number of agreements or highest amount of estimated revenue. The site visit results cannot be generalized to all VA facilities. According to the Department of Veterans Affairs' (VA) Capital Asset Inventory system--the system VA utilizes to record land-use agreements and revenues--VA had hundreds of land-use agreements with tens of millions of dollars in estimated revenues for fiscal year 2012, but GAO's review raised questions about the reliability of those data. For example, one land-use agreement was recorded 37 times, once for each building listed in the agreement, 13 agreements terminated before fiscal year 2012 had not been removed from the system, and more than $240,000 in revenue from one medical center had not been recorded. VA relies on local medical center staff to enter data timely and accurately, but lacks a mechanism for independently verifying the data. Implementing such a mechanism and working with medical centers to make corrections as needed would better position VA to reliably account for its land-use agreements and the associated revenues they generate. GAO found weaknesses in the billing and collection processes for land-use agreements at three selected VA medical centers due primarily to ineffective monitoring. For example, VA incorrectly billed its sharing partners for 14 of 34 agreements at the three centers, which resulted in VA not billing $300,000 of the nearly $5.3 million owed. In addition, at the New York center, VA had not billed a sharing partner for several years' rent that totaled over $1 million. VA began collections after discovering the error; over $200,000 was outstanding as of April 2014. VA stated that it did not perform systematic reviews of the billing and collection practices at the three centers and had not established mechanisms to do so. VA officials at the New York and North Chicago centers stated that information is also not timely shared on the status of agreements with offices that perform billing due to lack of collaboration. Until VA addresses these issues, VA lacks assurance that it is collecting the revenues owed by its sharing partners. VA did not effectively monitor many of its land-use agreements at two of the centers. GAO found problems with unenforced agreement terms, expired agreements, and instances where land-use agreements did not exist. Examples include the following: In West Los Angeles, VA waived the revenues in an agreement with a nonprofit organization--$250,000 in fiscal year 2012 alone--due to financial hardship. However, VA policy does not allow revenues to be waived. In New York, one sharing partner--a local School of Medicine--with seven expired agreements remained on the property and occupied the premises without written authorization during fiscal year 2012. The City of Los Angeles has used 12 acres of VA land for recreational use since the 1980s without a signed agreement or payments to VA. An official said that VA cannot negotiate agreements due to an ongoing lawsuit brought on behalf of homeless veterans about its land-use agreement authority. VA does not perform systematic reviews and has not established mechanisms to do so, thus hindering its ability to effectively monitor its agreements and use of its properties. GAO is making six recommendations to VA including recommendations to improve the quality of its data, foster collaboration between key offices, and enhance monitoring. VA concurred with the recommendations.

Through its disability compensation program, VA pays monthly benefits to veterans with service-connected disabilities. Under VA's BDD program, any member of the armed forces who has seen active duty--including those in the National Guard or Reserves--may apply for VA disability benefits prior to discharge. The program allows veterans to file for and potentially receive benefits earlier and faster than under the traditional claim process because medical records are more readily accessible and key forms needed to process the claim can be signed immediately. Establishing that the claim is related to the member's military service may also be easier under the BDD program because the member is still on active duty status. In 2008, VA and DOD offered the program at 142 bases, providing access to over 70 percent of servicemembers who were discharged in fiscal year 2007. In July 2008, VA issued policy guidance allowing servicemembers being discharged from any military base to initiate BDD claims at other locations where VA personnel were located, such as at all of its 57 regional offices. VA also established an alternative predischarge program, now called Quick Start, to provide members who cannot participate in the BDD program an opportunity to initiate claims before discharge. Last year, over 51,000 claims were filed through the BDD and Quick Start programs. To participate in the BDD program, servicemembers generally must meet six requirements: (1) be in the process of being honorably discharged from military service, (2) initiate their application for VA disability benefits between 60 and 180 days prior to their discharge date, (3) sign a Veterans Claims Assistance Act (VCAA) form, (4) obtain and provide copies of their service medical records to local VA personnel, (5) complete a VA medical exam, and (6) remain near the base until the exam process is done. The 60- to 180-day time frame is intended to provide sufficient time prior to discharge for local VA personnel at BDD intake sites to assist members with their disability applications, including scheduling exams. While VA has examination requirements for those applying for disability compensation, DOD also has examination requirements for those leaving military service. For all servicemembers leaving the military, the military services generally require health assessments that consist of a questionnaire about the member's general health and medical history, among other topics. In some cases, members who are separating from the military may receive a physical exam to obtain evidence for a particular medical problem or problems that might exist. The purpose of the exam is to obtain information on the individual's medical history, and includes diagnostic and clinical tests, depending on the types of disabilities being claimed. VA's exam for disability compensation is more comprehensive and detailed than the military services' separation exams, which are intended to document continued fitness for duty, whereas the purpose of the VA exam is to document disability or loss of function. Under the BDD program, DOD and VA coordinate efforts to perform exams for servicemembers being discharged that satisfy requirements of both the military and VA. Because of variation in the availability of local resources, such as physicians trained to use VA's exam protocols, DOD and VA agreed that local military bases should have flexibility to determine whether VA or military physicians or some combination of both will conduct the exam. In 2004, the agencies signed a memorandum of agreement (MOA) delineating their roles and responsibilities. The national agreement delegates authority to VA regional offices and individual military bases to create memorandums of understanding (MOU) that detail how the exam process will be implemented at the local level. VA's Veterans Benefits Administration (VBA) is responsible for administering and monitoring the BDD program. VBA personnel assemble claims-related information and send the claims to be processed at one of two regional offices. VBA is also responsible for the paperless BDD claims process, an initiative intended to improve efficiency by converting claims-related information stored in paper folders into electronic format, as part of VA's effort to have all claims processed electronically by the end of 2012. VA has established a performance goal to increase the percentage of first- time disability claims filed through the BDD program. Servicemembers generally learn of the BDD program through VA-sponsored benefits briefings conducted at military bases as part of TAP sessions. Led primarily by the Department of Labor, TAP consists of about 3 to 4 days of briefings on a variety of topics related to benefits and services available to servicemembers as they are discharged and begin life as veterans. Generally, servicemembers are required to attend a short introductory briefing, while all other sessions--including the VA benefits segment in which members learn about BDD--are optional. In addition to its participation goal for the BDD program, VA has three general goals for the timeliness and accuracy of all disability claims: average days pending (i.e., waiting for a final decision), average days to complete all work to reach a final decision, and average accuracy rate (percentage of claims with no processing errors). In 2009, VA reached its performance goal for one measure, i.e., average days to complete claims was 161 days compared with a goal of 168 days. However VA fell short of two goals last year: Average days pending was 117 days compared with a goal of 116 days, and national accuracy rates were 83 percent compared with a goal of 90 percent. VA has established one performance measure for the BDD program that tracks participation in the program. Since fiscal year 2005, VA has tracked the percentage of all disability claims filed through the BDD program within 1 year of discharge. VA's most recent data for fiscal year 2008 indicate that 59 percent of claims filed within 1 year of discharge were filed through the BDD program--9 percentage points higher than its fiscal year 2008 goal of 50 percent. VA recently revised this measure so that it accounts only for claims filed by members who are discharging from bases covered by the BDD program. Although VA fine-tuned its measure for BDD program participation, VA does not adequately measure timeliness of BDD claims. VA tracks the days it takes to process traditional claims starting with the date a veteran first files a claim, whereas it tracks days to process BDD claims starting with the date a servicemember is discharged. This approach highlights a key advantage of the BDD program--that it takes less time for the veteran to receive benefits after discharge. However, the time VA spends developing a claim before a servicemember's discharge--at least 60 days according to VA--is not included in its measures of timeliness for processing BDD claims, even though claims development is included in VA's timeliness measures for traditional disability claims. VA officials told us the agency does not measure the timeliness of BDD claims development for three reasons: (1) VA lacks legal authority to provide compensation until a servicemember is discharged and becomes a veteran; (2) VA officials perceive most development activities, such as obtaining the separation exam and medical records, to be outside of their control; and (3) VA officials said that a primary objective of the program was to shorten the time from which the member was entitled to benefits-- by definition, after discharge--to the time he or she actually received them. While it is useful to know how soon after discharge servicemembers begin receiving benefits, excluding the time VA personnel spend on developing BDD claims limits VA's information on challenges in this stage of the process and may inhibit VA from taking action to address them. Personnel in 12 of the 14 BDD intake bases we reviewed indicated significant challenges with claims development activities, such as scheduling and completing sometimes multiple exams for servicemembers who leave an area. Challenges such as these may delay the development of servicemembers' claims, putting them at risk of having to drop out of the BDD program. The fact that the servicemember is not yet a veteran does not absolve VA from tracking the time and resources spent developing BDD claims, which could ultimately help VA identify and mitigate program challenges. As for lack of control over the claims development process, VA also faces similar limitations with traditional disability claims, because VA must rely on veterans to submit their applications and on other agencies or medical providers for records associated with the claim. Nevertheless, VA tracks time spent developing these claims and could also do this for BDD claims. VA implemented two initiatives to improve the BDD program but did not fully evaluate either. In 2006, VA finished consolidating claims processing activities for BDD into two regional offices--Salt Lake City, Utah, and Winston-Salem, North Carolina--to improve the consistency and timeliness of BDD ratings. In fiscal year 2007, each office completed about 11,000 BDD claims. Although VA reported to us that it monitors claims workloads between these offices and, in one case, sent claims from one office to the other so that claims could be processed more quickly, VA had not conducted an evaluation to determine whether consistency improved compared with prior practices. VA also has not evaluated a second BDD initiative, known as the paperless claims processing initiative, which is intended to increase the timeliness of claims processing and security of BDD claims information. Since our report, VA told us that all BDD claims have been processed in the paperless environment since August 2008, and that it continues to monitor the BDD paperless initiative by hosting monthly teleconference calls with all 57 regional offices, intake sites, and area offices to provide ongoing guidance and training, as well as address any issues or problems the field may be experiencing. However, VA has not evaluated the extent to which this initiative improved overall timeliness or security. We identified gaps related to VA's monitoring of the BDD program, but VA has since taken some steps to address those gaps. For example, we found that between September 2002 and May 2008, VA conducted reviews of BDD operations in only 16 of the 40 offices it visited. Further, in 10 of the offices that were reviewed, VA personnel did not document the extent to which BDD claims were fully developed before being passed on to the processing office, pursuant to VA policy. We also found that the review protocol did not prompt reviewers to verify the extent to which claims were being fully developed before being sent to the processing office. In addition, for 14 offices, reviewers did not address whether agreements related to processing BDD claims existed between the processing office and relevant regional office, even though VA's BDD operations review protocol specifically prompts reviewers to check for such agreements. In response to our recommendations, VA officials reported that they have increased the number of BDD oversight visits, including visits to sites that had not been reviewed in several years, such as Honolulu, Hawaii, and Louisville, Kentucky. Furthermore, VA revised its protocol to require a review of BDD operations as part of its site visits to monitor regional offices. Although the BDD program is designed to provide most servicemembers with access, some members may be unable to initiate a claim 60 to 180 days prior to discharge or remain within the vicinity of the base long enough to complete their exams. According to VA officials, this is a challenge particularly for demobilizing servicemembers of the National Guard and Reserves, who typically remain at a base for only 2 to 5 days before returning home, and are generally unable in this brief time to complete requisite exams or obtain required copies of their service medical records. Servicemembers located in remote locations until just a few days prior to discharge may also be unable to participate. Finally, we were told that servicemembers going through the DOD Medical Board process are ineligible for the BDD program because they typically are not given a firm discharge date in advance of the 60- to 180-day discharge window, and a firm date is required to avoid servicemembers returning to active duty after completing the claims process. In April 2007, VA established an alternative predischarge program, now known as Quick Start, to provide members who cannot participate in the BDD program an opportunity to initiate disability claims before they are discharged. Under this program, local VA personnel typically develop servicemembers' claims as much as possible prior to discharge and then send the claims to the San Diego or Winston-Salem regional offices, which were designated as consolidated processing sites for Quick Start claims in August 2009. In addition, in 2009, VA also created a predischarge Web site, which allows servicemembers to initiate either a BDD or Quick Start claim electronically, although exams must still be completed in person. We found VA lacked data to assess the extent to which servicemembers benefit from the alternative predischarge program. Specifically, we found that VA was unable to assess participation in the Quick Start program by National Guard and Reserve servicemembers because they could not be distinguished from other servicemembers. In response to our recommendation, the agency reported that it has updated its data system to distinguish between National Guard/Reserves and full-time active duty servicemembers who file such claims. We also found that, like BDD claims, timeliness measures for Quick Start claims do not include days spent developing the claim prior to discharge. According to VA officials, the timeliness of Quick Start claims may vary substantially from both BDD and traditional claims. For example, servicemembers who are on base only a few days prior to discharge, such as members of the National Guard and Reserves, may have enough time only to fill out the application before returning home and may need to schedule the VA exam necessary to fully develop their claim after discharge. Overall, this will most likely result in less timely receipt of VA disability compensation than through the BDD program, but more timely than traditional claims. On the other hand, servicemembers with more time before discharge may be able to complete more or all of the claim development process, including the VA exam. Because VA does not adequately track timeliness of Quick Start, it may be unable to identify trends and potential challenges associated with developing and processing these claims. However, as with BDD claims, VA told us it has no plans to measure time spent developing these particular claims, and we continue to believe it should. VA and DOD have coordinated to provide servicemembers with information about the BDD program through VA benefits briefings and other initiatives, but attending these briefings is optional for most servicemembers. According to DOD and VA personnel, most servicemembers learn about the program through VA benefits briefings conducted as part of TAP sessions, although some may also learn about BDD through base television spots, papers, and word of mouth. However, the Marine Corps is the only service branch to require servicemembers to attend VA benefits briefings. For the other service branches, participation requirements may vary by base and command. We found that commanders' and supervisors' support for transition services, such as VA-sponsored benefits briefings, can vary by base. Even though DOD policy requires commanders to allow servicemembers to attend TAP sessions upon the member's request, we were told at one base that servicemembers have on occasion not been released from their duties to attend the briefings, resulting in VA personnel going up the chain of command to obtain permission for the members to attend. At two bases, VA officials considered outreach to be difficult--because of conflicting missions between VA and DOD and lack of support from some base commanders--resulting often in servicemembers being called away from the briefings. Although some military officials recommended that servicemembers be required to attend TAP sessions, rather than mandate attendance, DOD decided in August 2007 to establish a goal that 85 percent of separating servicemembers and demobilizing National Guard and Reserve members participate in TAP sessions, including VA benefits briefings. We recommended that DOD establish a plan with a specific time frame for meeting this goal, but DOD has not developed such a plan. We continue to believe that DOD should establish a plan for meeting its goal. In the course of our review, we also learned that TAP participation data may be inaccurate or overstated because unique identifiers were not used to document servicemembers' attendance and servicemembers who attend more than one briefing could be double-counted. Currently, the Department of Labor (DOL), VA, and DOD track participation in their respective TAP sessions separately. We recommended that DOD establish an accurate measure of servicemembers' participation in TAP, including VA benefits briefings. DOD recently reported it is working in collaboration with DOL and VA to determine what improvements can be made in measuring servicemembers' participation in all components of TAP. Most BDD sites employ local MOUs to establish a cooperative exam process, and implementation of the exam process varies significantly. According to data provided by VA during our review, more than 60 percent of bases offering the BDD program had local MOUs that called for the exclusive use of VA physicians, 30 percent used VA contractors to conduct exams, and 7 percent used a sequential process involving resources and exams from both VA and DOD. At bases offering the BDD program overseas, VA exams were conducted by physicians under contract with DOD because VA does not have physicians at these bases. At several bases we visited, we identified resource constraints and communication challenges that have affected servicemenbers' access to the program. Resource challenges we identified at five bases included no designated VA exam provider for more than 7 months, difficulties hiring physicians, and displaced staff because of construction. At seven bases, we identified communication challenges or a lack of awareness of the local cooperative exam MOU caused by uncertainties generally resulting from deployment of a key DOD local official or changes in command leadership. In one case, communication between DOD and VA personnel was conducted on an inconsistent basis, if at all. Such constraints and challenges have caused delays in servicemembers' exams or otherwise made it difficult to meet time frames required by the BDD program. At the time of our review, DOD and VA had provided some guidance on implementing and maintaining local MOUs; however, personnel in some sites we visited were interested in learning about promising practices at other bases. We recommended that VA and DOD identify and disseminate information on promising practices that address challenges local officials commonly face in ensuring servicemembers have full access to a cooperative exam. DOD officials recently reported collaborating with VA on a September 2009 conference focusing on seamless transition. DOD officials planned to work with conference sponsors to identify best practices for dealing with the cooperative exam process as it relates to the challenges local personnel commonly face. The BDD program appears to be an effective means for thousands of separating servicemembers to receive their disability benefits faster than if they had filed a claim under VA's traditional process. Despite BDD's inherent advantages, VA has not followed through on opportunities to ensure accountability and to optimize results. Similarly, although DOD and VA have made significant progress in increasing servicemembers' access to the BDD and Quick Start programs, opportunities to further ensure or improve access remain. At a time when so many servicemembers are being discharged with injuries, it is more important than ever to process benefits as efficiently and effectively as possible. BDD and Quick Start programs have great potential to achieve these goals, as long as VA maintains a sharp focus on accountability, and both DOD and VA follow through on recommended actions. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions that you or other Members of the Subcommittee may have. Veterans' Disability Benefits: Further Evaluation of Ongoing Initiatives Could Help Identify Effective Approaches for Improving Claims Processing. GAO-10-213. Washington, D.C.: January 29, 2010. Veterans' Disability Benefits: Preliminary Findings on Claims Processing Trends and Improvement Efforts. GAO-09-910T. Washington, D.C.: July 29, 2009. Military Disability System: Increased Supports for Servicemembers and Better Pilot Planning Could Improve the Disability Evaluation Process. GAO-08-1137. Washington, D.C.: September 24, 2008. Veterans' Benefits: Increased Focus on Evaluation and Accountability Would Enhance Training and Performance Management for Claims Processors. GAO-08-561. Washington, D.C.: May 27, 2008. Federal Disability Programs: More Strategic Coordination Could Help Overcome Challenges to Needed Transformation. GAO-08-635. Washington, D.C.: May 20, 2008. VA and DOD Health Care: Progress Made on Implementation of 2003 President's Task Force Recommendations on Collaboration and Coordination, but More Remains to Be Done. GAO-08-495R. Washington, D.C.: April 30, 2008. VA Health Care: Additional Efforts to Better Assess Joint Ventures Needed. GAO-08-399. Washington, D.C.: March 28, 2008. DOD and VA: Preliminary Observations on Efforts to Improve Care Management and Disability Evaluations for Servicemembers. GAO-08-514T. Washington, D.C.: February 27, 2008. Information Technology: VA and DOD Continue to Expand Sharing of Medical Information, but Still Lack Comprehensive Electronic Medical Records. GAO-08-207T. Washington, D.C.: October 24, 2007. DOD and VA: Preliminary Observations on Efforts to Improve Health Care and Disability Evaluations for Returning Servicemembers. GAO-07-1256T. Washington, D.C.: September 26, 2007. GAO Findings and Recommendations Regarding DOD and VA Disability Systems. GAO-07-906R. Washington, D.C.: May 25, 2007. Information Technology: VA and DOD Are Making Progress in Sharing Medical Information, but Are Far from Comprehensive Electronic Medical Records. GAO-07-852T. Washington, D.C.: May 8, 2007. Veterans' Disability Benefits: Processing of Claims Continues to Present Challenges. GAO-07-562T. Washington, D.C.: March 13, 2007. Veterans' Disability Benefits: Long-Standing Claims Processing Challenges Persist. GAO-07-512T. Washington, D.C.: March 7, 2007. High Risk Series: An Update. GAO-07-310. Washington, D.C.: January 31, 2007. Veterans' Disability Benefits: VA Can Improve Its Procedures for Obtaining Military Service Records. GAO-07-98. Washington, D.C.: December 12, 2006. Military Disability Evaluation: Ensuring Consistent and Timely Outcomes for Reserve and Active Duty Service Members. GAO-06-561T. Washington, D.C.: April 6, 2006. Military Disability System: Improved Oversight Needed to Ensure Consistent and Timely Outcomes for Reserve and Active Duty Service Members. GAO-06-362. Washington, D.C.: March 31, 2006. VA and DOD Health Care: Opportunities to Maximize Resource Sharing Remain. GAO-06-315. Washington, D.C.: March 20, 2006. Veterans' Benefits: Further Changes in VBA's Field Office Structure Could Help Improve Disability Claims Processing. GAO-06-149. Washington, D.C.: December 9, 2005. Veterans' Disability Benefits: Claims Processing Challenges and Opportunities for Improvements. GAO-06-283T. Washington, D.C.: December 7, 2005. Veterans' Disability Benefits: Claims Processing Problems Persist and Major Performance Improvements May Be Difficult. GAO-05-749T. Washington, D.C.: May 26, 2005. Military and Veterans' Benefits: Enhanced Services Could Improve Transition Assistance for Reserves and National Guard. GAO-05-544. Washington, D.C.: May 20, 2005. VA and DOD Health Care: Efforts to Coordinate a Single Physical Exam Process for Servicemembers Leaving the Military. GAO-05-64. Washington, D.C.: November 12, 2004. Veterans' Benefits: Improvements Needed in the Reporting and Use of Data on the Accuracy of Disability Claims Decisions. GAO-03-1045. Washington, D.C.: September 30, 2003. 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. 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Through the Benefits Delivery at Discharge (BDD) program, the Department of Veterans Affairs (VA) collaborates with the Department of Defense (DOD) to streamline access to veterans' disability benefits by allowing some servicemembers to file a claim and undergo a single collaborative exam process prior to discharge. BDD is designed for servicemembers with conditions that, while disabling, do not generally prevent them from performing their military duties. This program can shorten the time it takes for veterans to receive benefits by several months. GAO was asked to discuss issues surrounding VA's and DOD's BDD program and related Quick Start program, and identify ways VA and DOD could improve these programs for transitioning servicemembers. This statement is based on GAO's September 2008 report (GAO-08-901) that examined (1) VA efforts to manage the BDD program and (2) how VA and DOD are addressing challenges servicemembers face in accessing the BDD program. GAO updated some information to reflect the current status of claims processing and improvement initiatives in the BDD program. Although VA awards disability benefits more quickly under BDD than through its traditional disability claims process, gaps in program management and accountability remain. For example, VA does not separately measure the total time its personnel spend developing BDD claims. As a result, VA has limited information on potential problems and improvement opportunities regarding BDD claims. GAO continues to believe that VA should measure BDD development time; however, VA told GAO it has no plans to capture this information. GAO also found that VA implemented two initiatives to improve the BDD program--i.e., consolidating BDD processing in two offices and instituting paperless processing of BDD claims to increase efficiencies and improve security of information--but did not evaluate whether or the extent to which desired improvements resulted. Finally, GAO found that VA was not completely or consistently monitoring BDD operations at all locations. VA has since taken steps to review BDD operations at more sites and has revised its protocols to ensure more consistent reviews of BDD operations. VA and DOD have taken steps to improve servicemembers' access to the BDD program; however, opportunities remain for further improvement. For servicemembers such as National Guard and Reservists who are generally unable to complete the BDD claims process within the required time frame, VA established an alternative predischarge program called Quick Start. Under this program, servicemembers may still initiate a disability application prior to discharge, but can complete the claims process, including medical exams, at another location after discharge. In response to GAO's recommendation, VA has taken steps to collect additional data to determine the extent to which the Quick Start program is helping those with limited or no access to the BDD program. However, as with BDD claims, VA told GAO it has no plans to measure time spent developing these particular claims, and GAO continues to believe it should. VA and DOD have coordinated to increase BDD program awareness through VA benefits briefings for servicemembers, and DOD established a goal that 85 percent of servicemembers attend these non-mandatory briefings. GAO continues to believe that DOD should establish a plan with a specific time frame for meeting this goal, but DOD has not developed such a plan. Finally, GAO found that some bases faced difficulties maintaining local agreements intended to prevent redundancy and inconvenience for servicemembers in obtaining required medical exams. In response to GAO's recommendation, DOD reported that it is working with VA to identify best practices to address local challenges to implementing their cooperative exam process.

To encourage the sharing of federal health care resources, the Veterans Administration and Department of Defense Health Resources Sharing and Emergency Operations Act authorizes VA medical centers and DOD military treatment facilities (MTF) to enter into sharing agreements to buy, sell, and barter medical and support services. Local VA and DOD officials have identified benefits that have resulted from such sharing, including increased revenue, enhanced staff proficiency, fuller utilization of staff and equipment, improved beneficiary access, and reduced cost of services. Seven of these sharing agreements are joint venture agreements, which involve the sharing of physical space as well as health care services. These joint ventures range from a single, jointly staffed MTF serving both VA and DOD patients--as is the case with Mike O'Callaghan Federal Hospital at Nellis Air Force Base in Nevada--to more modest sharing in Key West, Florida, where VA and DOD share a building that houses their separate outpatient clinics. In addition to physical space, agreements at these sites usually provide for one agency to refer patients to the other for inpatient and/or outpatient care. As table 1 shows, DOD is most often the host agency, that is, the agency providing the majority of services. In addition to referred patients, joint ventures, like other VA and DOD facilities, share dually eligible patients. Recent changes in VA's and DOD's health care programs have increased both the number of dual eligibles and the likelihood that they will obtain services from both systems. The number of veterans, including all military retirees, eligible for VA health care was increased in fiscal year 1999 due to removal of statutory restrictions. In addition, the number of military retirees eligible for DOD health care increased in 2001 when full eligibility was extended to retirees age 65 and over. Furthermore, a February 2002 increase in VA's copayment for outpatient drugs--from $2 per prescription to $7 per prescription--has given dual eligibles who receive health care from VA more incentive to have their prescriptions filled at a DOD pharmacy. The Institute of Medicine (IOM) raised national awareness of the problem of medication errors with its 2000 study, To Err is Human: Building a Safer Health System. As we reported in 2000, there is general agreement that medication errors are a significant problem, although the actual magnitude of the problem is uncertain. Researchers and patient safety advocates have suggested certain measures to reduce the risk of medication errors, and VA and DOD have incorporated many of these measures as features of their health care systems. Figure 1 illustrates the typical process, including safeguards that VA and DOD use to provide medications to patients. Medication safety experts have identified the following factors that can contribute to reducing medication errors. According to experts from organizations such as the American Society of Health-System Pharmacists (ASHP) and IOM, access to patient medical information is important to both providers and pharmacists in reducing medication errors. A study of adverse drug events conducted by Brigham and Women's Hospital found that the inaccessibility of patient information--such as information on the patient's condition, results of laboratory tests, and current medications--was a leading cause of prescribing errors. The ASHP guidelines for preventing hospital medication errors state that prescribers should evaluate the patient's total status and review all existing drug therapy before prescribing new or additional medications. They also recommend that pharmacists and others responsible for processing drug orders should have routine access to appropriate clinical patient information--including medication and allergy profiles, diagnoses, and laboratory results--to help evaluate the appropriateness and efficacy of medication orders. One way to provide this ready access is a computerized medical record. A computerized medical record can improve health care delivery by providing medical personnel with better data access, faster data retrieval, and more versatility in data display than available with a paper record. Both VA and DOD are in the process of transitioning from paper-based to electronic systems for recording and accessing patient health information. VA's system, the Computerized Patient Record System (CPRS), captures a wide range of patient information, including progress notes, vital statistics, laboratory results, medications, drug allergies, and radiological and catheterization images. DOD's system, the Composite Health Care System (CHCS), captures similar, but less extensive, patient information. For example, CHCS cannot capture or store progress notes or electronic images. JCAHO standards for hospitals and ambulatory health organizations require that organizations maintain formularies and direct that they must consider the potential for medication errors as a criterion for selecting drugs that will be stocked. Although frequently considered a mechanism for controlling costs, patient safety experts maintain that formulary systems can also optimize therapeutic outcomes and facilitate medication safety. According to IOM, a formulary system can help reduce adverse drug events because the drugs selected for the formulary are evaluated by knowledgeable experts and chosen based on their relative therapeutic merits and safety. In addition, formularies limit unneeded variety in drug use--a practice supported by ISMP and the Institute for Healthcare Improvement--and assist in educating prescribers on safe and appropriate use of formulary drugs. Both VA and DOD have formulary systems. VA's national formulary consists of about 1,200 pharmacy items, including over 1,000 drugs, and each of VA's 21 regional Veterans Integrated Service Networks can augment the national formulary. DOD's Basic Core Formulary consists of about 165 drugs, and an MTF can add other drugs based on the clinical services and scope of care provided by that facility. Both agencies also have approval processes for prescribers to obtain nonformulary drugs for their patients when medically necessary. As part of their ordering systems, some VA and DOD facilities have also developed electronic decision- making support related to their formularies, such as prompts to remind physicians to order specific laboratory tests prior to administering certain drugs or alerts related to the safe use of certain drugs. CPOE systems can reduce medication errors by eliminating legibility problems of handwritten orders and providing clinical decision-making support by sending alerts and instantaneous reminders directly to providers as orders are being placed. For instance, as providers enter a medication order, they can be given a potential range of doses for medications ordered, alerted to relevant laboratory results, and prompted to verify which medication is being ordered when the drug sounds or looks like another drug on the formulary. Studies have shown computerized provider ordering reduced medication errors by 55 percent to 86 percent. In light of this evidence, the Leapfrog Group for Patient Safety adopted computerized provider order entry as one of its initial safety standards. ISMP has also emphasized the need to take advantage of electronic ordering technology, calling for the elimination of handwritten prescriptions nationwide by 2003. VA and DOD acknowledge the safety benefits of providers electronically ordering medications, and both CPRS and CHCS (for outpatient prescriptions only at most locations) have this capability. VA established a goal in its 2002 Network Performance Plan for 95 percent use of CPOE (both inpatient and outpatient) by 2002, with 100 percent use planned for 2004. While DOD officials told us that CPOE is encouraged and widely utilized, DOD has no written policy or goals related to its use. Both VA's and DOD's electronic ordering systems perform automatic checks for potential adverse reactions due to drug allergies and interactions. VA's CPRS performs checks for drug allergies and interactions between all medications ordered and dispensed by a VA facility, including those sent from VA's mail order center. Although medications dispensed for the same patient at another VA facility are generally not included in the check, VA officials told us that they are exploring methods to broaden their drug interaction capability. DOD's system for drug interaction checking is more comprehensive than VA's system. CHCS checks for drug allergies and interactions between drugs prescribed or dispensed at the MTF, and DOD's Pharmacy Data Transaction Service (PDTS) aggregates information from CHCS with other points of service--other MTFs, network pharmacies, and DOD's mail order pharmacy--to perform a complete drug interaction check. Automatic electronic checks for drug interactions, commonly available in retail drug stores, have been shown to greatly minimize medication errors. For example, one study found that an automated review of prescriptions written for 23,269 elderly patients produced 43,007 alerts warning about potential medication problems--24,266 of which recommended a change in drug or dosage. Professional groups such as ASHP and ISMP have also acknowledged the value of these systems. At the six joint venture sites where inpatient services are provided, all patients referred for inpatient care receive medications from the inpatient facility providing the care. Processes used to provide and record inpatient medications to referred patients are the same as those used for the host agency's own beneficiaries. Inpatient medications are ordered using the host facility's formulary guidelines and filled through the inpatient pharmacy. Initial supplies of discharge medications (usually 30 days or less) are also typically provided, although patients are expected to return to their home agency pharmacy for longer-term supplies. In contrast, the process for providing medications to shared outpatients differs across sites. At six of the joint venture sites, each agency maintains a separate outpatient pharmacy. As a general rule, each agency expects its beneficiaries to use its pharmacy for outpatient prescriptions, even when providers from the other agency order the prescription. For instance, in Hawaii, both the Tripler Army Medical Center and the VA outpatient clinic next door maintain outpatient pharmacies. VA patients who are referred to Tripler for outpatient specialty care are expected to return to the VA clinic pharmacy to have their prescriptions filled. Even though this is the general rule at most sites, we noted that exceptions occur. For instance, at David Grant Medical Center on Travis Air Force Base, DOD supplies oncology medications to VA patients. Another exception is that all joint venture inpatient facilities provide weekend and after-hours emergency room care to patients of the other agency and, generally, medications are also supplied if needed. In contrast to the general rule, at the DOD facility in El Paso, referred VA patients are not expected to return to their home agency for their initial prescriptions but rather are allowed to obtain an initial supply of drugs from the DOD pharmacy. Subsequent prescriptions for these patients (renewals or refills) must be filled by their VA pharmacy. At the seventh site, Key West, only DOD maintains a pharmacy. It serves both VA and DOD patients. However, VA patients receive only initial, short-term prescriptions (up to 30 days) from this DOD pharmacy and obtain longer-term prescriptions and refills via mail from the VA Medical Center in Miami. VA's and DOD's separate, uncoordinated information and formulary systems result in gaps in medication safeguards for shared inpatients and outpatients. Lacking coordinated information systems, providers and pharmacists at joint venture sites often cannot access shared patients' complete health information, including prescribed medications, nor can providers from one agency use electronic ordering to prescribe drugs that are to be dispensed by the other agency's pharmacy. Because information systems are uncoordinated, checks for drug allergies and interactions for shared patients are based on incomplete information. In addition, separate formulary systems introduce complications for shared patients because providers must either prescribe from the other agency's formulary, which may contain drugs unfamiliar to providers, or prescribe a limited supply of a drug, which may later be switched to comply with the formulary of the patient's home agency. These gaps are illustrated in figure 2. Ready access to pertinent clinical information is an important feature of medication safety; while VA's and DOD's patient information systems are capable of serving this function for each agency's own beneficiaries, gaps exist for shared patients. VA and DOD providers and pharmacists have ready access to health records of their own beneficiaries, largely through CPRS and CHCS, respectively. However, when agencies refer patients for care, the treating agency's providers and pharmacists have incomplete access to patients' health and medication information. Although referrals will usually be accompanied by some explanation of patients' medical conditions, the bulk of their electronic health and medication information, which resides in the health information system of their home agency, will often not be available to providers and pharmacists in the agency where they are referred for care. Access for pharmacists and treating providers to patient information in the referring agency's information system varies by location. For example, at four joint venture sites, pharmacists filling prescriptions for shared patients have no access to the other agency's patient information system. At another site, pharmacy access is restricted--at Tripler Army Medical Center in Hawaii, access to VA's CPRS is available in the inpatient pharmacy, but only one pharmacist has access. Providers at a few facilities have broader access. For example, at the David Grant Medical Center at Travis Air Force Base in northern California, CPRS is installed on every network computer that has CHCS, and providers in certain departments have been granted CPRS access. VA and DOD pharmacists and providers we spoke with noted that lack of relevant patient health information could be a problem for shared patients. One example given to us was a VA provider treating a dual-eligible patient for diabetes. Certain drugs cannot be safely prescribed for diabetics without monitoring through laboratory tests. If the patient receives care from a VA physician but has prescriptions filled at a DOD pharmacy, the pharmacist would be unable to access the patient's medical record to review these laboratory results. Without this access, the pharmacist must call VA to ensure these laboratory values are within normal limits. In addition, pharmacy personnel at Tripler in Hawaii, where a single inpatient pharmacist has CPRS access, told us that additional pharmacists need CPRS access to facilitate after-hours medication needs of VA patients when this pharmacist is unavailable. Computerized provider ordering of medications increases safety by assisting with medication decisions, providing alerts for drug interactions and allergies, and obviating handwriting legibility and transcription problems. However, prescriptions for shared patients are less likely to be ordered electronically by providers. Although both VA and DOD providers have outpatient electronic ordering capabilities when prescriptions are dispensed at their own pharmacies, patients referred from one agency to the other for care are typically expected to return to their home pharmacy to get prescriptions filled. With the exception of DOD providers in Hawaii, none of the joint venture sites have the capability for providers to electronically order medications through their own computer systems for drugs that are to be dispensed by the other agency's pharmacy, nor do they typically have access to the other agency's electronic ordering systems to issue medication orders. Consequently, providers either handwrite medication orders for shared patients or give them printed copies that must be retyped into the patients' home agency's pharmacy system. Both situations introduce risks unique to shared patients. We also found situations where providers had the capability to avoid handwriting prescriptions but continued to handwrite them. In Key West, for example, where all drugs are dispensed from the DOD pharmacy, VA providers have access to DOD's electronic ordering system, CHCS; but, for the most part, they handwrite prescriptions. These providers record patient care and medications in VA's CPRS, and if they were to electronically order medications, it would necessitate entry into a second system. They told us that using CHCS was slow and cumbersome, and ordering the medications using it took too much time. A VA provider in Hawaii told us that, for these same reasons, providers sometimes handwrote prescriptions for dual eligibles to have filled at the DOD pharmacy when only one or two medications were being ordered. Finally, although VA patients benefit when providers electronically order medications in VA hospitals, they generally lose this benefit when referred to DOD hospitals. Providers in VA hospitals have electronic ordering capability for inpatient medications, but this capability is not generally available in DOD hospitals. VA patients referred to DOD hospitals, like DOD's own beneficiaries, usually have their prescriptions handwritten by the provider, and then manually entered into CHCS by pharmacy personnel. Thus, these patients are subjected to the risks associated with handwritten prescriptions, such as illegible orders and transcription errors. Shared patients also do not get the full benefit of VA's and DOD's automatic checks for drug allergies and interactions. VA and DOD patients who receive all their medications through only one health care system will have comprehensive medication histories stored in either CPRS or CHCS (in conjunction with PDTS). When the medication is ordered, CPRS or CHCS/PDTS will perform automatic checks for drug allergies and interactions. However, if patients are taking medications obtained from both agencies, neither agency's record of patient medications is complete at any joint venture site. Thus, when interaction checks are done, they will be incomplete for shared patients because the checks are restricted to the information available within each system. Likewise, providers may be unaware of drug allergies. For example, when a patient who routinely gets health care at the VA clinic in El Paso is referred to the Army Medical Center for outpatient specialty care, the DOD pharmacy will fill a prescription for up to 30 days of medications. However, when the pharmacy performs its automatic checks, drug allergies may not be detected because information on drug allergies is likely to be in VA's CPRS where the bulk of the patient's clinical information is stored, not in CHCS/PDTS where the drug check will occur. In its interim report, the President's Task Force to Improve Health Care Delivery for Our Nation's Veterans stated that the instances of adverse drug events might be substantially reduced for shared patients through use of a comprehensive screening tool like PDTS and plans further analysis in this area for its final report. Because VA and DOD each has its own formulary system, providers who treat referred patients sometimes prescribe from the referring agency's formulary and sometimes from their own facility's formulary, depending on where the prescription will be filled. Unless the prescribed drug is common to both formularies, each situation limits the medication safety benefits of a formulary system, such as increased provider familiarity with drugs prescribed and the added safety net provided by clinical decision support. The President's Task Force to Improve Health Care Delivery for Our Nation's Veterans noted that a joint VA/DOD formulary could combine the clinical expertise of both VA and DOD and improve patient safety. Providers who use the other agency's formulary in prescribing for shared patients and find that the drug they would normally prescribe is not listed are disadvantaged in several ways. First, according to formulary system principles endorsed by the American Medical Association, ASHP, and others, one characteristic of a formulary system should be that the pharmacy and therapeutics committee educates providers about drugs on the formulary. A senior official from ISMP told us that provider drug knowledge is also reinforced by a formulary system because formularies limit the number of drugs providers need to be knowledgeable about. Consequently, providers should be less likely to make mistakes in drug selection or dosage when prescribing formulary drugs. Second, when prescribing a drug that is not on their formulary, providers may lose the clinical support capabilities that may be built into their agency's CPOE system. For example, the medication error prevention committee at Tripler in Hawaii evaluates Tripler's formulary drugs for safety problems and designs safeguards into CHCS, such as distinctive lettering to alert providers to drug names that look alike or sound alike. However, DOD providers typically try to prescribe for VA outpatients using VA's formulary. Consequently, this safeguard is lost to the shared patient. Providers usually prescribe from their own facility's formulary for a referred patient if the prescription is to be filled at their facility's pharmacy. For instance, at all joint venture sites, referred inpatients receive short-term supplies of discharge medications at the host facility's pharmacy. If patients need longer-term supplies of medications or refills, they typically are expected to return to their home pharmacy. This situation can also put patients at risk if the original medication is not on the formulary at their home pharmacy. For instance, in Key West, VA physicians write VA patients two different prescriptions: one for their initial supply to be filled at the joint venture's DOD pharmacy and a second for a longer-term supply that is mailed from the VA Medical Center in Miami. One VA physician told us that when a VA formulary drug he wants to prescribe is not on the DOD formulary, he prescribes an equivalent drug carried by the DOD pharmacy for the short term and orders the VA formulary drug from Miami to use on a long-term basis. Experts agree that such interchanging of drugs in a therapeutic class may sometimes cause problems because differences in individual physiology make some people react differently to a very similar therapeutic agent. Although such interchange is an accepted practice in formulary systems, when physicians are able to avoid switching drugs, they reduce the risk that an adverse reaction will occur. Recognizing these risks for shared patients, joint venture facilities have undertaken efforts intended to address these safety gaps. However, none of these efforts fully solve the problems that exist, nor are they all used at any site. All joint venture sites have taken steps to increase access to patient information. For example, at Tripler in Hawaii, VA and DOD recently added VA's CPRS to computers in the DOD hospital so that VA physicians monitoring the care of VA inpatients would have electronic access to patients' VA health records. However, at the time of our visit, most DOD physicians were unaware that the capability to access CPRS existed, and DOD officials at Tripler had no plans to promote its use or to provide training. Similarly, some physicians at all other joint ventures have access to both systems; but, as in Hawaii, this access is generally limited in the number of computers that have this capability and the number of providers who have been authorized to use it. For instance, access to both systems is available at some locations in the Mike O'Callaghan Federal Hospital in Nevada, but VA pharmacy officials at the VA outpatient clinic in this joint venture told us that the lack of such access in the clinic presented a major problem. They told us that not having access to such patient information as test results and physician notes made it difficult for them to research questions about patients' medications. Only two sites have pharmacies with access to the other agency's patient information system; access is very limited at one of those sites--at Tripler, only one pharmacist has been authorized to use CPRS. Furthermore, medical personnel who had access told us that its use is hindered by their lack of familiarity with the other agency's system and by the difficulties of accessing separate, dissimilar systems. Recognizing the increased risks associated with handwriting prescriptions rather than using CPOE, two joint venture sites have devised ways to minimize this risk for shared patients. In Hawaii, VA providers have worked out an agreement with the DOD pharmacy that they will provide dual beneficiaries a computer-printed copy of the electronic order, called an "action profile," which the pharmacy will accept in lieu of a handwritten order. In Hawaii--at the time of our visit--and northern California, a printer for DOD's CHCS had been installed in the VA pharmacy so that medication orders from DOD providers could be printed out in the VA pharmacy. VA pharmacy personnel then re-enter orders into CPRS to dispense the medications. While these efforts remove the potential for misreading handwritten prescriptions, they fall short of the full benefits of electronic ordering and filling because re-entering information into CPRS introduces the potential for transcription errors. In August 2002, information technology personnel in Hawaii implemented an electronic link that allows outpatient medication orders entered into CHCS for VA patients to be transmitted directly into CPRS, eliminating the need for manual re-entry in the VA pharmacy. Officials involved in the Hawaii project told us that this link is working well and that this technology was developed with the intent of transferring it to other sites. They also told us that the project was developed with the ultimate intent of two-way--or bi-directional--communications, so that with some additional modification a link could be established allowing VA physicians to send CPRS medication orders to CHCS at Tripler for processing and filling. Three joint venture sites have taken steps to compensate for problems associated with drug interaction checks for shared patients. For example, VA physicians in Hawaii told us that when they provide prescriptions for dual eligibles to be filled at DOD's pharmacy, they also enter them into VA's CPRS and mark them "hold" so that they will not be dispensed by the VA pharmacy. Thus, checks for interactions with other drugs prescribed by VA can be performed by CPRS, and the patients' medication information will be updated to reflect the medication orders. In Texas, VA adds information to CPRS about care and medications provided to referred patients by DOD physicians. This information is recorded in a special section of CPRS. When VA physicians subsequently access patients' records, CPRS alerts them that new information has been added to this section of the record, but the information is not included in automatic drug checks. The VA clinic in Anchorage, Alaska, uses a different approach to address the problem of incomplete medication records. Officials there told us they have developed software to supplement information in the CPRS record by capturing and displaying information about drugs obtained from DOD and other non-VA sources, including herbal supplements and over-the-counter drugs. Thus, providers and pharmacists have additional information that might help them prevent adverse drug interactions. However, information collected in this way may not be accurate or complete because it depends on patient recall and is entered manually. In addition, this information is not accessed by CPRS's automatic drug checks because it is a supplement to, not a part of, the CPRS record. Finally, five joint ventures have instituted practices to address safety problems related to separate formularies. For example, the Mike O'Callaghan Federal Hospital at Nellis Air Force Base in Nevada has a combined P&T committee that includes both VA and DOD representatives who select the medications that will be included on the hospital's inpatient formulary. In addition, the committee approved nearly 50 VA formulary medications to be stocked in the hospital pharmacy for use by VA inpatients at this facility. All measures taken to improve medication safety, such as entering reminders or alerts into CHCS to safeguard against medication mistakes, also apply to VA drugs stocked in the pharmacy. Other sites have undertaken less comprehensive measures to address problems arising from separate formularies. For instance, pharmacies at two sites stock drugs commonly prescribed for the other agency's patients, but neither host agency's P&T committee has representatives from both agencies. At two other sites, representatives from both agencies are on the host agency's P&T committee. While these efforts are helpful in overcoming difficulties associated with separate formularies, none is a complete solution. As VA and DOD strive to improve efficiency and access to care through greater collaboration and sharing of resources, it is likely that the number of patients who receive care from both systems will increase. Consequently, the safety of shared patients merits continuing concern. While our findings are based on the joint venture sites, they may have relevance wherever patient care is shared between VA and DOD. Some joint ventures have taken steps to address medication safety problems for shared patients, but these steps are partial solutions and gaps remain. For example, facilities have provided only limited access to the other agency's patient medical information system and have not always provided training in its use. Therefore, providers do not have adequate access to patient medical information for shared patients, and lacking the comprehensive capability afforded by a system like PDTS, they can perform only incomplete checks for drug interactions and allergies. In addition, when shared patients return to their home agency to have prescriptions filled, providers give them handwritten or computer-printed prescriptions, rather than electronically ordering medications, creating risk for legibility or transcription errors. Furthermore, separate P&T committees may be unable to effectively overcome problems that arise from separate formularies. The measures already taken by some joint ventures show that risks that shared patients face can be addressed. VA and DOD could develop systemwide rather than local solutions to address the needs of shared patients nationally as well as at the joint venture sites. To better protect shared patients at the joint ventures, we recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health and that the Secretary of Defense direct the Assistant Secretary of Defense for Health Affairs to develop the capability for VA and DOD providers to access patient medical information relevant to medication decision making, regardless of whether that information resides in VA's or DOD's information system and provide training to physicians and pharmacists who need to use this access; develop the capability to perform a comprehensive, automatic drug interaction check that uses medication information from all VA and DOD facilities and mail order operations and DOD's network pharmacies, and evaluate the potential for DOD's PDTS to be used for this purpose; require providers to use computerized order entry of medications for shared patients where it is available and implement system modifications that will enable providers to electronically order medications to be dispensed at the other agency's pharmacies; and establish a joint VA and DOD pharmacy and therapeutics committee, or similar working group, at each joint venture site to determine how best to safely meet the medication needs of VA and DOD shared patients and to overcome obstacles associated with separate formularies. The Department of Veterans Affairs and the Department of Defense provided written comments on a draft of this report. These comments are discussed below and reprinted in appendix I and appendix II, respectively. VA concurred with all our recommendations, while DOD concurred with two of our recommendations, partially concurred with one, and did not concur with one. Both VA and DOD concurred with our recommendation to develop the capability for VA and DOD providers to access patient medical information in both CPRS and CHCS. In their comments, both agencies discussed longer-term solutions, such as the joint VA-DOD Federal Health Information Exchange (FHIE) initiative. While we support long-term efforts that would lead toward a more seamless sharing of information between VA and DOD, we believe that a number of joint venture sites have demonstrated that interim steps, such as giving providers access to and training on the other agency's system, are both warranted and feasible. Both agencies also concurred with our recommendation regarding the development of comprehensive, automatic drug interaction checks, including the evaluation of PDTS for this purpose. VA stated that this capability would be accomplished with the second phase of the VA-DOD joint plan, called HealthePeople (Federal), which VA expects to be implemented in fiscal year 2005. Although agreeing to evaluate the cost benefit of adopting PDTS, VA said that, based on VA and DOD workload data, a relatively small number of veterans had been treated in both systems in the period from October 2001 through May 2002 (240,716 unique patients, or 29.6 percent of all dual eligibles) and raised the issue of whether the cost of PDTS was justified for so few cases. We believe this almost quarter of a million patients represents a significant opportunity for adverse drug events to occur, especially since, based on the prescription patterns of a typical VA patient, this group received an estimated 4 million prescriptions in this 8-month period. Furthermore, the number of patients potentially at risk is larger than the dual eligible group. It includes an unknown number of patients who receive care and medications from both agencies under VA-DOD resource sharing agreements. While we agree that cost is an important factor, we believe the large number of prescriptions for these patients justifies an evaluation of PDTS that considers both cost and patient safety. VA concurred and DOD partially concurred with our recommendation on CPOE. VA said it has already planned for its providers to use computerized order entry for all orders, including medications, by fiscal year 2004. It also made reference to the Hawaii pilot project discussed earlier in this report as a way of extending this capability for shared patients but said that a more robust bi-directional capability would be included as a systems requirement in the HealthePeople (Federal) effort. DOD also agreed to require that providers use CPOE for shared patients where available; however, it did not agree with system modifications as the approach for extending this capability. Instead, DOD advocated the joint procurement of a commercial off-the-shelf pharmacy information system. It said that this approach would provide greater economic returns and system interoperability since both agencies are pursuing plans to upgrade or replace their pharmacy information system modules. We agree with this approach as a longer-term solution. However, agency officials told us that neither agency has plans to upgrade or replace its system until fiscal year 2005 at the earliest, leaving shared patients at continued risk for medication errors until the new system is operational. System modifications already accomplished in Hawaii indicate that interim steps toward reducing these risks are possible. VA concurred with our recommendation on establishing a joint P&T committee or similar working group at each joint venture site and said it would pursue this recommendation via the VA/DOD Executive Committee, a working group for VA/DOD collaboration issues. DOD did not concur with establishing a joint P&T committee at each site; however, we recommended the establishment of a joint VA-DOD group, either a P&T committee or a similar working group, that would determine how best to safely meet the medication needs of shared patients at each site. DOD expressed support for the already-established working groups, but, as we have noted, only three joint venture sites have such collaborative groups. We are sending copies of this report to the Secretary of Veterans Affairs, the Secretary of Defense, and other interested parties. Copies will also be made available to others on request. In addition, the report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7101. Other contacts and major contributors are listed in appendix III. In addition to those named above, the following staff members made key contributions to this report: Irene J. Barnett, Linda Diggs, Mary W. Reich, Karen Sloan, and Thomas Walke.

Medication errors and adverse drug reactions are a significant concern for the Department of Veterans Affairs (VA) and the Department of Defense (DOD) because their large beneficiary populations receive many prescriptions. Each agency has taken steps to reduce the risk of medication errors, such as making patients' medical records more accessible to providers and performing checks for drug interactions. Although each agency has designed safeguards to protect its own patients, some VA and DOD patients receive medication from both agencies. Shared patients face a higher risk of medication error. Joint (DOD and VA) venture sites with inpatient facilities provide services to shared inpatients in the same manner as they do for their own beneficiaries; that is, medications are ordered using the facility's guidelines and filled through the inpatient pharmacy at that facility. Gaps in safeguards result primarily from VA's and DOD's separate, uncoordinated information and formulary systems. Joint venture sites have tried to address some of these safety gaps. For instance, all sites have made patient information more accessible by providing additional, although incomplete, access to the other agency's patient information system.

CDC partners with the National Institutes of Health to publish Biosafety in Microbiological and Biomedical Laboratories, which provides guidance on biosafety principles and practices for protecting laboratory personnel, the public, and the environment from exposure to biological agents for each biosafety level. BSL-3 laboratories work with indigenous or exotic agents with known potential for aerosol transmission or those agents that may cause serious and potentially lethal infections. BSL-4 laboratories work with exotic agents that pose a high individual risk of life-threatening disease by aerosol transmission and for which treatment may not be available. CDC and APHIS were delegated authority by their respective department Secretaries to regulate the use, possession, and transfer of select agents. a new certificate of registration or renewing an existing registration.CDC and APHIS may also conduct interim inspections, such as annual inspections, to assess compliance with select agent regulations. High- containment laboratories may also conduct work with biological agents that have not been designated as select agents and are therefore not registered with the select agent program. Many federal departments and agencies own and operate high- containment laboratories in the United States and abroad. For example, DOD conducts and supports research on detection, identification, and characterization of biological threats and the development of medical countermeasures against those threats at its high-containment laboratories in the United States and located overseas. As part of its bioterrorism preparedness and response program, and in addition to its responsibilities for overseeing other entities' laboratories under the select agent regulations, CDC also conducts research on potentially high-risk biological agents at its own high-containment laboratories. DOD and CDC had existing policies and procedures that addressed biosafety and biosecurity within their high-containment labs at the time the safety lapses occurred in 2014 and 2015. However, as a result of these lapses--which illustrated multiple breakdowns in compliance with established policies and procedures and inadequate oversight--both DOD and CDC have identified weaknesses in the management of their high-containment laboratories and have begun to take some steps to review and revise policies and procedures and improve monitoring and evaluation activities. DOD Steps to Address Weaknesses in Laboratory Management Our ongoing work shows that DOD has begun to take some steps to address weaknesses in the management of its high-containment laboratories but had not yet implemented them prior to the May 2015 anthrax safety lapse. After an internal reorganization in 2012, DOD began revising its policies and procedures for safeguarding select agents, including security standards for these agents, to streamline policies and improve monitoring and evaluation activities. DOD officials told us that the changes will include new requirements for all service laboratories (within Air Force, Army, and Navy) registered with the select agent program to submit all inspection reports, such as those from CDC's select agent office, to DOD senior management regardless of inspection findings. Officials stated that, prior to this new requirement, the laboratories were required to report only what they determined to be significant findings to DOD senior management, which officials stated was no longer acceptable. DOD expects to finalize the new policy by September 2015; Air Force, Army, and Navy will have 6 months to become compliant with the updated policy once it is finalized. In addition, DOD officials told us that they identified further changes that they plan to make to this policy as a result of the May 2015 anthrax safety lapse, which they will make after the current changes are finalized. DOD plans to collect inspection reports from its select agent-registered laboratories; however, it does not plan to collect and monitor the results of any reports of inspections conducted at high-containment laboratories that are not registered with the select agent program but nonetheless conduct research on potentially high-risk biological agents. According to officials, DOD does not conduct department-level inspections of its high- containment laboratories, including those high-containment laboratories that do not conduct research with select agents and are not registered with the select agent program. Instead, DOD delegates responsibility for inspections to the services, where management responsibility for conducting or monitoring the results of laboratory inspections varies and may not lie with senior-level offices, depending upon the service. For example, DOD officials stated that high-containment Air Force laboratories are inspected by an office one level higher than the office in which the laboratory is located. Air Force officials told us that inspectors general at various levels of the service inspect Air Force laboratories. However, in our initial conversations, officials we spoke with did not tell us whether senior Air Force offices monitor the results of laboratory inspections. Our ongoing work will examine service-level responsibilities for conducting and monitoring the results of inspections and the extent to which DOD, CDC's and APHIS's select agent offices, the services, and the laboratories communicate and coordinate to address significant findings and resolve deficiencies identified during inspections. DOD has also begun to address weaknesses in its incident reporting requirements. DOD requires its laboratories to report potential exposures to and possible theft, loss, or misuse of select agents to CDC's or APHIS's select agent office, but, according to officials, DOD does not currently track these incidents or laboratories' responses to them at the department level. DOD officials told us that the May 2015 anthrax safety lapse is the first incident that DOD has tracked at the department level; the updated biosecurity policy will include requirements for tracking exposures and other biosafety and biosecurity incidents. Our ongoing work will include an examination of the nature of DOD's tracking and what the department might require from the laboratories or the services as a result of this tracking, such as identifying corrective actions or requiring another type of response. CDC Steps to Address Weaknesses in Laboratory Management Our ongoing work shows that CDC has begun to take a number of steps as a result of the recent safety lapses but has not yet completed implementing some agency recommendations intended to address weaknesses in its laboratory management. In October 2014, an internal workgroup established by CDC issued a report from its review of the 2014 safety lapses, which included recommendations to improve agency management of its laboratories and improve biosafety. Among its findings, the workgroup discovered considerable variation across CDC in the level of understanding, implementation, and enforcement of laboratory safety policies and quality systems. Their recommendations addressed weaknesses identified in six functional areas. Recommendations addressed weaknesses in areas of particular relevance to our ongoing work: (1) policy, authority, and enforcement; (2) training and education; and (3) communications and staff feedback. Policy, authority, and enforcement. The workgroup noted that CDC lacked overarching biosafety policies, which limits accountability and enforcement. The workgroup also noted that CDC needed clear policies and effective training for leaders and managers to help them implement accountability measures, assure competency, and enforce biosafety adherence throughout agency laboratories. To address these gaps, the workgroup recommended that CDC (1) develop agency-wide policies to communicate biosafety requirements clearly and consistently to all of its laboratories and (2) enforce existing laboratory safety policies by clarifying the positive and negative consequences of adhering or not adhering to them. Training and education. The workgroup noted that CDC's training systems, competency and proficiency testing, and time-in-laboratory requirements varied greatly across the agency's laboratories. The workgroup recommended a comprehensive review and unification of training and education best practices across all CDC laboratories to improve laboratory science and safety. Communications and staff feedback. The workgroup noted CDC's need for comprehensive communication improvements to provide a transparent flow of information across the laboratory community regarding laboratory science and safety. The workgroup recommended that CDC should include clearer communication flow diagrams, point-of-decision signs, and improved notification systems to distribute information to neighboring laboratories when an event such as a potential exposure occurs. In addition, in January 2015, an external advisory group completed its review of laboratory safety at CDC and identified recommendations that reinforced the internal workgroup's findings and recommendations. For example, this advisory group found that CDC lacked a clearly articulated safety mission, vision, or direction and recommended the creation of a biomedical scientist position in the CDC Director's office. As we conduct our ongoing review of federal management of high- containment laboratories, we are assessing CDC's progress in implementing the recommendations from its internal and external workgroups. Our preliminary observations show that CDC has taken some steps to implement workgroup recommendations and address weaknesses in laboratory oversight but has not addressed some recommendations or fully implemented other activities. For example, CDC reported that, in response to the recommendation to develop overarching biosafety policies, it is developing policies for specimen transport and laboratory training. In addition, CDC developed a new procedure for scientists leaving the agency to account for any biological specimens they may have been researching, which the agency rolled out in February 2015. This procedure was among those policies the workgroup recommended to be included in overarching agency policies. However, as of July 2015, CDC has not developed other agency-wide policies that include comprehensive requirements for laboratory biosafety, such as policies that outline requirements for appropriate laboratory documentation and for laboratories to maintain site-specific operational and emergency protocols, to fully address the workgroup recommendation. To address the recommendation made by the external advisory group to create a senior-level biomedical scientist position, CDC created a new Laboratory Science and Safety Office within the office of the CDC Director and established the position of Associate Director for Laboratory Science and Safety to lead the new office. The primary responsibility of the associate director is to establish additional agency- level policies for laboratory safety and communicate CDC's safety efforts to agency staff. As of July 2015, CDC had not yet filled this position with a permanent staff member. In addition, CDC is taking other steps intended to improve the management of high-containment laboratories but has not yet completed these activities. For example, in its 2013 policy for sample and specimen management, CDC included a directive for the agency to implement an electronic inventory management system. According to officials, CDC rolled out its electronic specimen management system for inventorying biological agents to all of its infectious disease laboratories on March 30, 2015. However, CDC has not made the new system available to all agency laboratories; it expects to do so within the next 2 years. Since 2007, we have reported on several issues associated with high- containment laboratories and the risks posed by past biosafety incidents and recommended improvements for increased federal oversight. Our prior work included recommendations that address (1) the need for government-wide strategic planning for requirements for high- containment laboratories, including assessment of their risks; (2) the need for national standards for designing, constructing, commissioning, operating, and maintaining such laboratories; and (3) the need for federal oversight of biosafety and biosecurity at high-containment laboratories. HHS and other agencies to which the recommendations were directed have conducted some activities to respond but have not fully implemented most of the recommendations. For example, In our 2007 and 2009 reports, we found that the number of BSL-3 and BSL-4 laboratories in the United States had increased across federal, state, academic, and private sectors since the 2001 anthrax attacks but no federal agency was responsible for tracking this expansion. In addition, in our 2009 report we identified potential biosafety and biosecurity risks associated with an increasing number of these laboratories. We recommended that the National Security Advisor, in consultation with HHS, the Department of Homeland Security, DOD, USDA, and other appropriate federal departments, identify a single entity charged with periodic government-wide strategic evaluation of high-containment laboratories to (1) determine, among other things, the needed number, location, and mission of high- containment laboratories to meet national biodefense goals, as well as the type of federal oversight needed for these laboratories, and (2) develop national standards for the design, construction, commission, and operation of high-containment laboratories, including provisions for long-term maintenance, in consultation with the scientific community. We also recommended that HHS and USDA develop a clear definition of what constitutes exposure to select agents. The administration, HHS, and USDA have addressed some of our recommendations. For example, in 2013, the administration's Office of Science and Technology Policy reported that it had begun to support periodic, government-wide assessments of national biodefense research and development needs and has taken some steps to examine the need for national standards for designing, constructing, commissioning, maintaining, and operating high- containment laboratories. CDC and USDA have developed scenarios to more clearly define what exposures to select agents they consider to be reportable. In our 2013 report and 2014 testimony, we found that no comprehensive assessment of the nation's need for high-containment laboratories, including research priorities and capacity, had yet been conducted. We also found that no national standards for designing, constructing, commissioning, and operating high-containment laboratories, including provisions for long-term maintenance, had yet been developed.assigned responsibility for oversight of high-containment laboratories. In addition, no single federal entity has been In summary, the safety lapses of 2014 and 2015 continue to raise questions about the adequacy of (1) federal biosafety and biosecurity policies and procedures and (2) department and agency monitoring and evaluation activities, including appropriate levels of senior management involvement. Preliminary observations on DOD's and CDC's steps to address weaknesses in managing potentially high-risk biological agents in high-containment laboratories--as well as findings and recommendations from our previous work on high-containment laboratories--continue to highlight the need to consider how best the federal government as a whole and individual departments and agencies can strengthen laboratory oversight to help ensure the safety of laboratory personnel; prevent the loss, theft, or misuse of high-risk biological agents; and help recognize when individual safety lapses that appear to be isolated incidents point to systemic weaknesses, in order to help prevent safety lapses from continuing to happen. Chairman Murphy, Ranking Member DeGette, and Members of the Subcommittee, this completes our prepared statement. We would be pleased to respond to any questions that you may have at this time. If you or your staff have any questions about this statement, please contact Marcia Crosse, Director, Health Care at (202) 512-7114 or [email protected]; John Neumann, Director, Natural Resources and Environment at (202) 512-3841 or [email protected]; or Timothy M. Persons, Chief Scientist at (202) 512-6412 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Mary Denigan-Macauley, Assistant Director; Karen Doran, Assistant Director; Sushil Sharma, Assistant Director; Cheryl Arvidson; Nick Bartine; Colleen Corcoran; Shana R. Deitch; Melissa Duong; Terrance Horner, Jr.; Dan Royer; Elaine Vaurio; and Jennifer Whitworth. Appendix I: Timeline of Recent Centers for Disease Control and Prevention (CDC) Safety Lapses and Related Assessments 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.

Recent safety lapses at high-containment laboratories raise questions about how federal departments and agencies manage high-risk biological agents. DOD and CDC both conduct research on high-risk biological agents at their respective laboratories. Biosafety and biosecurity practices in these laboratories are intended to reduce exposure to, and prevent loss, theft, or misuse of, biological agents. CDC regulates the possession, use, and transfer of certain biological agents that pose potentially severe threats to public health under the select agent program. This statement summarizes (1) preliminary observations from ongoing GAO work on federal laboratories' biosafety and biosecurity policies and practices and (2) GAO's past work on oversight of high-containment laboratories. To conduct ongoing and past work, GAO reviewed documentation and interviewed federal agency officials, including those from DOD and CDC, about policies and procedures for high-containment laboratories; efforts to monitor compliance and evaluate effectiveness of biosafety and biosecurity policies and practices; and the status of federal oversight activities. Recent safety lapses--including shipments of live anthrax bacteria from the Department of Defense (DOD) to U.S. and international laboratories and potential exposures of Centers for Disease Control and Prevention (CDC) laboratory personnel to live anthrax bacteria--have illustrated multiple breakdowns in compliance with established policies and inadequate oversight of high-containment laboratories. In these laboratories, researchers work with potentially high-risk biological agents that may result in serious or lethal infection in humans. Preliminary observations from GAO's ongoing work show that DOD and CDC have begun to address weaknesses in the management of their high-containment laboratories, but their activities have not yet been fully implemented. GAO's ongoing work will include further examination of the status of DOD's and CDC's activities to improve management of high-containment laboratories. DOD began taking steps to address weaknesses in its management of high-containment laboratories in 2012 by reviewing and revising biosecurity policies and procedures. According to officials, the revised biosecurity policies will require all DOD laboratories that conduct research with certain high-risk biological agents to submit all inspection reports to senior DOD management, which was not previously required. DOD plans to finalize these policies by September 2015. DOD also plans to make further changes to these policies as a result of its assessment of the May 2015 anthrax incident, after the first set of revisions is finalized. DOD has also begun to track biosafety and biosecurity incidents at the senior department level, such as potential exposures to or misuse of biological agents, which it had not done prior to the May 2015 anthrax incident. DOD officials said the May 2015 incident is the first incident that DOD has tracked at the senior department level. CDC also began taking steps to address weaknesses identified in internal and external working group assessments of the June 2014 anthrax incident and other safety incidents but has not yet completed implementing some recommendations intended to improve its laboratory oversight. For example, an internal workgroup recommended that CDC develop agency-wide policies to provide clear and consistent requirements for biosafety for all agency laboratories. In response, CDC developed a specimen transport policy but has not developed other agency-wide policies, such as requirements for laboratory documentation and emergency protocols. Since 2007, GAO has reported on issues associated with high-containment laboratories and recommended improvements for federal oversight. GAO's prior work recommended the establishment of a single federal entity to (1) conduct government-wide strategic planning for requirements for high-containment laboratories, including assessment of their risks, and (2) develop national standards for designing, constructing, commissioning, operating, and maintaining such laboratories. Federal departments to which GAO's recommendations were addressed agreed with them and have conducted some activities to respond but have not implemented the recommendation to establish a single federal entity with responsibility for oversight of high-containment laboratories. GAO has previously made recommendations to agencies to enhance biosafety and biosecurity. Because this work is preliminary, GAO is making no new recommendations at this time. GAO shared preliminary observations from this statement with DOD and CDC and incorporated comments as appropriate.

Best management practices refer to the processes, practices, and systems identified in public and private organizations that performed exceptionally well and are widely recognized as improving an organization's performance and efficiency in specific areas. Successfully identifying and applying best practices can reduce business expenses and improve organizational efficiency. Best practices we have identified in our work resulting in recommendations to the defense community include: (1) relying on established commercial networks to manage, store, and directly deliver defense electronic items more efficiently; (2) using private sector food distributors to supply food to the military community faster and cheaper; and (3) adopting the use of supplier parks to reduce maintenance and repair inventories. Most of the Defense Management and NASA's (DMN) best practices reports have focused on using best management practices to improve a specific the Department of Defense (DOD) process. DMN has also reported on management concepts that are important in successfully implementing best management practices throughout an organization, such as reporting on techniques companies use to achieve and manage change. See appendix I for a list of the reports related to the use of best management practices and additional information on each report's findings. DMN chose initially to look at applying best management practices techniques in the area of supply management, because DOD's supply system has been an area with long-standing problems in which proposed solutions seldom corrected the conditions identified. Also, DOD's supply management is a large budget item so the potential for large dollar savings was present. DMN believed that comparing DOD's supply management practices to those that had a proven track record in the private sector would provide a picture of what improvements were possible and indicate proven strategies. A GAO consultants' panel, consisting of retired DOD officials and logistics business and academic experts, agreed that looking at private sector practices would help us find ways to improve DOD operations, because many private sector companies had made fundamental improvements in logistics management. DMN's best practices work can result in radical changes in certain DOD processes, as well as substantial dollar savings. Since 1992, as a direct result of our recommendations, the Defense Logistics Agency (DLA) has taken steps to have private sector vendors supply pharmaceutical products, medical supplies, food, and clothing and textiles directly to military facilities in lieu of the traditional military supply system. As a result, by 1997, DLA expects a 53-percent reduction in its 1992 inventory level of these items. With fewer days' worth of supplies on hand, DLA depot overhead costs will decline also. Other examples of results of best management practices reviews are shown in figure 1. Why Use the Best Management Practices Approach in Evaluations? Deciding whether to use a best practices approach involves considering a number of factors. Our experience shows that the following questions can serve as a guide in making the decision. Have GAO and others reported on the acknowledged problem areas before, and to what extent has there been attempts to make the process work as designed? In our case, GAO had reported on DOD's inventory problems for over 30 years, and DOD had generally agreed with our observations and had often taken steps to improve the process. However, improvements were incremental at best and failed to achieve significant gains in effectiveness or dollar savings. Is there a process with similar requirements that can be compared to the one being examined but is implemented in a way that provides significantly better results? For example, a military and private hospital both depend on timely and accurate delivery of supplies. Do the areas being considered have an established counterpart in the private or public sector that will provide evidence of the benefits of a new process? For example, we compared the way DOD procures, stores, and delivers food to base dining halls to the way institutional food users in the private and public sector obtain food. Other areas looked at, such as medical, clothing, and spare parts inventories, also allowed us to make comparisons with processes with similar objectives in the private and/or public sector. A best practices review can be applied to a variety of processes, such as payroll, travel administration, employee training, accounting and budgeting systems, procurement, transportation, maintenance services, repair services, and distribution. You may consider looking at an area where the agency has already begun to implement some best management practices, but with limited success. Additional work in the area may provide a crucial boost to an agency's efforts. Looking at current industry trends in contracting out business functions (also referred to as "outsourcing") can also suggest areas that could benefit from a best practices review. For example, private sector companies are beginning to outsource logistics functions, primarily transportation and distribution, and data processing functions. When Is a Best Practices Approach Appropriate? objectives. Ask questions like (1) What drives the costs in a particular process? and (2) Is the process effective in achieving its goals? An initial step is to determine all the variables that contribute to the expenditures associated with the area. Another early step is to start with the areas that the customers think are of major importance to the organization being reviewed. Identifying the scope of the process you plan to review is not always easy. It is not always clear where you begin and where you stop when you decide to benchmark a process. It is important that the entire process be considered, rather than just part of the process. For example, in reviewing DOD's food supply, we examined the entire food supply system, including buying, storing, and distributing food rather than just a part of the system such as distribution because these parts are interconnected and changes in one part will impact the others. If you fail to capture the entire process then you may push costs into another section of the process or create an improvement that is inhibited by trying to marry old ways with new ways that are in conflict with each other. However, you cannot look at everything. At least initially, select a process which is about ready to accept change. Under a best practices review, you are forced to consider new approaches. Specifically, you will compare how an organization performs functions with one doing them differently--such as a function in a unique government agency with a company performing the same or similar function in the private sector. The different approach may turn out to be a much better way of performing a function. Implementing this better way to perform a process throughout the organization is what allows an agency to make meaningful changes. In identifying best practices among organizations, the "benchmarking" technique is frequently used. In benchmarking with others, an organization (1) determines how leading organizations perform a specific process(es), (2) compares their methods to its own, and (3) uses the information to improve upon or completely change its process(es). Benchmarking is typically an internal process, performed by personnel within an organization who already have a thorough knowledge of the process under review. Our approach is similar. However, GAO's role is to look at the process from the outside, much like a consultant, and determine if that process can be improved upon or totally changed. The best practices evaluation will look not only at quantitative data, such as costs, but also at how other processes and aspects such as organizational culture might be affected by change. In our work, we have found several elements that any best practices review should include. These elements are listed below and then discussed separately in detail: (1) Gaining an understanding of and documenting the government process you want to improve. (2) Researching industry trends and literature, and speaking with consultants, academics, and interest group officials on the subject matter. How Do You Perform a Best Management Practices Review? (3) Selecting appropriate organizations for your review. (4) Collecting data from these selected organizations. (5) Identifying barriers to change. (6) Comparing and contrasting processes to develop recommendations. The first step in beginning a best practices review is to thoroughly understand the government process you are reviewing before you go out to speak with officials in various organizations. This will help not only to fully understand the process but to recognize opportunities for improvement. Understanding the process will ease your analysis by defining a baseline for comparison and providing more focus to your questions when you make inquiries on the best practices identified in other organizations. Further, a good depth of understanding is essential to selecting appropriate comparison companies. Discussing the process in detail with agency officials and flowcharting the process will facilitate data gathering from the comparison organizations and the comparative analysis. Preliminary planning and research are key elements in preparing a best practices review; both must be done before selecting the organizations for comparison. Performing a literature search, researching industry trends, and speaking with consultants, academics, and industry/trade group officials will provide valuable background information on the process under review. It will also provide you with the names of leading edge companies and public sector organizations. How Do You Perform a Best Management Practices Review? The people you speak with before selecting the organizations for comparison can give you useful information on the best practice you are reviewing, as well as the names of leading edge organizations. They may also be able to provide you with a contact into an organization. You will find the names of consultants, academics, and industry/trade groups during your literature search. Other resources for finding these names range from telephone book listings of industry groups to faculty rosters for schools that specialize in the area you are evaluating. Obtaining company annual reports or other background information on the organization before your visit will help you to prepare for your meetings with officials. Most of the leading edge organizations receive calls from many others to learn about their practices. Therefore, they will only provide you with a limited amount of time. Having a thorough background on the issue, including the government's process, will allow for an effective use of both parties' time. After you have reviewed the literature and after all of your discussions with consultants, academics, and industry/trade group officials, you will have compiled a list of many organizations cited as "best" in their respective industry for the process you are reviewing. The next decision is determining how many organizations to visit. In our best practices reports, we visited an average of nine companies per job. Visiting too many companies can cause "analysis paralysis," according to benchmarking experts. These experts say to keep the number of companies to a manageable number, which can be as low as five. Officials from each organization that you speak with will also be able to tell you which companies are the best in a given area. You may want to add a company to your list if it is one that you keep hearing about. Getting the names of other leading edge organizations from these officials will also help to confirm that you selected the right companies to visit and provide additional leads on others. Depending on the process under review, you may want to select companies that are geographically dispersed. We used this criterion for the selection of companies in the DOD food inventory report. You will need to determine the criteria that best meet your needs. How Do You Perform a Best Management Practices Review? organizations. In these cases, what is important is to find companies that are considered by experts to be among the best at the process you are reviewing. Such companies may be able to give you more time than the very best, which may be flooded with requests to study them. After you have researched and begun planning your review, you should develop a list of questions to use as a guide for discussions with the consultants, academics, and industry/trade group officials. You may need to refine the questions after these discussions and prior to your first interview with private sector company or public sector officials. You may also need to refine the questions again after your first interview with these officials. A standard list of questions will ensure that you are obtaining comparable information among the organizations you speak with. As with the process of the agency you are evaluating, you will need a thorough understanding of the process in the private sector before you can compare and contrast the two and make effective recommendations. The list of questions will help you obtain the information needed from all sources in order to make a detailed analysis. Your analysis will involve looking for common practices and characteristics among the organizations you have identified as having best practices in the selected function you are reviewing. A major challenge to ensuring that your final recommendations will be implemented and effective lies in identifying the barriers to change, whether real or perceived. Your discussions with agency officials and your background research should provide information on such potential sources of barriers as regulatory requirements, organizational culture, and the impact of the change on the agency and its services. Government agencies often must operate under many statutory requirements that do not exist in the private sector. While such regulations do not always prevent the use of best management practices, they may make change difficult. For example, DOD officials were concerned that using private sector distributors to deliver food to base dining halls would eliminate the participation of small businesses. This concern was alleviated when we demonstrated that most private sector food distributors were already small businesses. How Do You Perform a Best Management Practices Review? Organizational culture may be a major obstacle. In our work, we were faced with the fact that DOD has been doing business the same way for over 50 years. Such an entrenched system could make changes difficult to implement. As a way to encourage and support new ways of operating, we did a review on how leading edge companies were able to change their organizational culture in the face of radically new operations. The report provided an impetus for DOD to think differently. However, this work also showed that immediate and comprehensive change is unlikely in any organization: it can take 5 to 10 years or longer to change an organization's culture. A paramount consideration should be the effect of recommendations on the agency's future ability to provide its service. For example, if your review leads to recommending that a function be privatized, you will need to consider the impact this will have on taking the function away from the government. You will need to raise--and answer--such questions as what would happen if a strike should occur at the company that takes on the function, a natural disaster destroys the company building, or the company goes out of business. However, it is likely that the private sector may provide information on these instances since the same events would equally have an impact on the private and public sectors. The final step in the best practices review is to compare and contrast the agency's process to the processes of the organizations you benchmarked, and to decide whether the agency would benefit from implementing new processes. If the answer is "Yes," remember that flexibility is a key theme, as it may not be possible for the agency to do things exactly as they are done in the other organizations. A successful recommendation strategy in our work that encourages the idea of change is to give the agency a "basket of ideas" from which to choose and adapt to their unique operations. Demonstrating possible savings and recommending key steps for change will help to promote that change. Photographs of the consequences of the government's process versus the private/public sector's process are a convincing tool to illustrate the effectiveness of a recommended change. How Do You Perform a Best Management Practices Review? In addition, we have tried to help DOD one step past issuance of the report. Specifically, we have tried to use the knowledge gained during the review to help in facilitating the change. For example, we have met formally and informally with key officials to discuss how the change can be implemented. We also made presentations to groups affected by the change. In work such as this, "follow through" means staying in touch and educating and influencing with whatever assistance can be provided. At the same time, we maintain our ability to critique the results in a constructive way. Perhaps the most convincing argument for implementing recommendations for radical change lies in the environment of tight budgets. At DOD, such constraints have forced DOD officials to look toward new ways to do business and, in turn, save money. Consequently, most officials have been receptive to many of our streamlining recommendations. Much of what we have learned about doing best practices reviews goes into any evaluation-related work. However, we have some specific practices that were so useful to us that we created an ongoing list of helpful tips. These should help in planning the review and in establishing productive relationships with the selected organizations. We used two different approaches to arranging a meeting with the desired officials of the target organization. First, if you have a contact's name, you can call the person directly and request an interview. You might either call first or send a letter followed up with a call. Second, if you were not able to obtain a name through the literature or through your discussions with the consultants, academics, and industry/trade officials, you can contact the office of the president of the company either by phone or by letter. This office will be able to direct you to the appropriate official(s). With either approach, your letter or your phone call should state your purpose very clearly and ensure them that the information will only be used for benchmarking. Send a copy of the questions to the organization's officials before your visit. This will allow them the opportunity to prepare for the meeting, gather requested information, and invite pertinent personnel. If the list of questions is long, you may want to consider sending a shorter version. After you have set up a meeting time, date, and place, it is best to mail (or fax) a letter of confirmation. Your questions can be sent with this letter. It is also a good idea to reconfirm the meeting a few days prior to your scheduled time. After the meeting, follow up with a thank you letter. On average, plan to spend between 1/2 day to a day and 1-1/2 days with the company. However, the amount of time a company will give you will vary. DMN's experiences have run the gamut from a 1-hour phone interview to a 2-week detailed look at a company's operations. If you plan to use the organization's name in the report, ask for permission. Inform all interviewees that you will be providing them with a draft or relevant portions of the report for their review. This will help ensure that you correctly interpreted the information obtained from interviews. It also allows the company the opportunity to ensure that they did not give you any proprietary information during the interview. What Else Do You Need to Know? Plan for your review (planning, data collection, and analysis) to take an average of 12 months. As pointed out above, these reviews take a lot of up-front work, and getting into leading-edge companies can take a long time. Nonetheless, we have found that the results of these reviews have justified the time spent. Throughout the review, pay attention to establishing good working relationships with these organizations. As in any evaluation, this provides a sound foundation for future contacts.

GAO reviewed best management practices to make government operations more efficient and less costly, focusing on those approaches adopted by the Department of Defense (DOD) that other federal agencies could use to improve their operations. GAO found that: (1) best management practices refer to the processes, practices, and systems identified in public and private organizations that performed exceptionally well and are widely recognized as improving an organization's performance and efficiency in specific areas; (2) successfully identifying and applying best practices can reduce business expenses and improve organizational efficiency; (3) best practices GAO has identified in its work resulting in recommendations to the defense community include: (a) relying on established commercial networks to manage, store, and directly deliver defense electronic items more efficiently; (b) using private sector food distributors to supply food to the military community faster and cheaper; and (c) adopting the use of supplier parks to reduce maintenance and repair activities; (4) deciding to use a best practices approach involves considering a number of factors and several questions can serve as a guide in making the decision, including: (a) Have the acknowledged problem areas been reported on before and to what extent has there been attempts to make the process work as designed? (b) Is there a process with similar requirements that can be compared to the one being examined but is implemented in a way that provides significantly better results? and (c) Do the areas being considered have an established counterpart in the private or public sector that will provide evidence of the benefits of a new process? (5) a best practices review can be applied to a variety of processes such as payroll, travel administration, employee training, accounting and budget systems, procurement, transportation, maintenance services, repair services, and distribution; (6) the decision to use a best practices review should be made in a larger context that considers the strategic objectives of the organization and then look at the processes and operating units that contribute to those objectives asking questions like: what drives the costs in a particular process; and is the process effective in achieving its goals; (7) it is important that the entire process be considered rather than just part of the process; (8) failing to capture the entire process may push costs into another section of the process or create an improvement that is inhibited by trying to marry old ways with new ways that are in conflict with each other; and (9) not everything can be looked at so, at least initially, a process which is about ready to accept change should be selected.

For the past several decades, the United States has enjoyed relatively inexpensive and plentiful energy supplies, relying primarily on market forces to determine the energy mix that provides the most reliable and least expensive sources of energy--primarily oil, natural gas, and coal. In 1973, oil cost about $15 per barrel (in inflation-adjusted terms) and accounted for 96 percent of the energy used in the transportation sector and 17 percent of the energy used to generate electricity. As shown in figure 2, the 2004 U.S. energy portfolio is similar to the 1973 energy portfolio. In 2004, oil accounted for 98 percent of energy consumed for transportation, and coal and natural gas accounted for about 71 percent of the energy used to generate electricity. Renewable energy--primarily hydropower--remains at 6 percent of U.S. energy consumption. However, since 1973, U.S. crude oil imports have grown from 36 percent of consumption to 66 percent of consumption today, and crude oil prices have jumped particularly in recent years to today's $60 per barrel level. Despite growing dependence on foreign energy sources, DOE's budget authority for renewable, fossil, and nuclear energy R&D dropped from $5.5 billion (in real terms) in fiscal year 1978 to $793 million in fiscal year 2005--a decline of over 85 percent. As shown in figure 3, renewable, fossil, and nuclear energy R&D budget authority each peaked in the late 1970s before falling sharply in the 1980s. Total budget authority for the three energy R&D programs has risen after bottoming out in fiscal year 1998. DOE's renewable R&D program has focused on ethanol, wind, and solar technologies, making steady incremental progress over the past 29 years in reducing their costs. DOE's goal is for biofuels production in 2030 to replace 30 percent of current gasoline demand, or about 60 billion gallons per year. In 2005, ethanol refiners produced 3.9 billion gallons of ethanol, primarily from corn, that was used (1) as a substitute for methyl tertiary- butyl ether, known as MTBE, which oil refineries have used to oxygenate gasoline and (2) to make E85, a blend of 85 percent ethanol and 15 percent gasoline for use in flex fuel vehicles. To achieve its production goal, DOE is developing additional sources of cellulosic biomass--such as agricultural residues, energy crops, and forest wastes--to minimize adverse effects on food prices. In recent years, DOE's wind program shifted from high-wind sites to low-wind and offshore sites. Low-wind sites are far more plentiful than high-wind sites and are located closer to electricity load centers, which can substantially reduce the cost of connecting to the electricity transmission grid. Low-wind and offshore- wind energy must address design and upfront capital costs to be competitive. DOE's solar R&D program focuses on improving photovoltaic systems, heat and light production, and utility-size solar power plants. DOE is exploring thin-film technologies to reduce the manufacturing costs of photovoltaic cells, which convert sunlight into electricity. Similarly, DOE's solar heating and lighting R&D program is developing technologies that use sunlight for various thermal applications, particularly space heating and cooling. DOE is also working with industry and states to develop utility-size solar power plants to convert the sun's energy into high temperature heat that is used to generate electricity. Beginning in the mid-1980s, DOE's fossil energy R&D provided funding through the Clean Coal Technology Program to demonstrate technologies for reducing sulfur dioxide and nitrogen oxide emissions. DOE also has focused on developing and demonstrating advanced integrated gasification combined cycle (IGCC) technologies. More recently, DOE proposed a $1 billion advanced coal-based power plant R&D project called FutureGen-- cost-shared between DOE (76 percent) and industry (24 percent)--which will demonstrate how IGCC technology can both reduce harmful emissions and improve efficiency by integrating IGCC with carbon capture and sequestration technologies for the long-term storage of carbon dioxide. According to DOE, FutureGen is designed to be the first "zero- emissions" coal-based power plant and is expected to be operational by 2015. Beginning in fiscal year 1999, DOE's nuclear energy R&D program shifted from improving safety and efficiency of nuclear power reactors to developing advanced reactor technologies by focusing on (1) the Nuclear Power 2010 initiative in an effort to stimulate electric power companies to construct and operate new reactors; (2) the Global Nuclear Energy Partnership, or GNEP, to develop and demonstrate technologies for reprocessing spent nuclear fuel that could recover the fuel for reuse, reduce radioactive waste, and minimize proliferation threats; and (3) the Generation IV Nuclear Energy Systems Initiative, or Gen IV, to develop new fourth generation advanced reactor technologies intended to reduce disposal requirements and manufacture hydrogen by about 2020 to 2030. Advanced renewable, fossil, and nuclear energy technologies all face key challenges to their deployment into the market. The primary renewable energy technologies with the potential to substantially expand their existing production capacity during the next 25 years are ethanol, a partial substitute for gasoline in transportation, and wind and solar energy technologies for generating electricity. For advanced fossil technologies, the primary challenge is controlling emissions of mercury and carbon dioxide generated by conventional coal-fired plants by using coal gasification technologies that cost about 20 percent more to construct than conventional coal-fired plants and demonstrating the technological feasibility of the long-term storage of carbon dioxide captured by a large- scale coal-fired power plant. For advanced nuclear technologies, investors face substantial risk because of nuclear reactors' high capital costs and long construction time frames and uncertainty about the Nuclear Regulatory Commission's (NRC) review of license applications for new reactors. One of ethanol's biggest challenges is to cost-effectively produce ethanol while diversifying the biomass energy sources so it can grow from its current 3-percent market share. DOE is exploring technologies to use cellulosic biomass from, for example, agricultural residues or fast-growing grasses and trees. In addition, ethanol requires an independent transportation, storage, and distribution infrastructure because its corrosive qualities and water solubility prevent it from using, for example, existing oil pipelines to transport the product from the Midwest to the east or west coasts. As a result, fewer than 1,000 fueling stations nationwide provide E85 compared with 176,000 stations that dispense gasoline. Ethanol also needs to become more cost competitive. Even with the recent spikes in gasoline prices, ethanol producers rely on federal tax incentives to compete. In October 2006, Consumer Reports estimated that drivers paying $2.91 per gallon for E85 actually paid about $3.99 for the energy equivalent amount of a gallon of gasoline because the distance vehicles traveled per gallon declined by 27 percent. Finally, congressional earmarks of DOE's biomass R&D funding rose from 14 percent of the fiscal year 2000 funds to 57 percent ($52 million) of the fiscal year 2006 funds, according to a DOE program official. Both wind and solar technologies have experienced substantial growth in recent years, but both wind and solar technologies face important challenges for future growth. In particular, wind investors pay substantial upfront capital costs to build a wind farm and connect the farm to the power transmission grid, which can cost $100,000 or more per mile on average, according to DOE officials. Because both wind energy and solar energy are intermittent, utilities have been skeptical about using them, relying instead on large baseload power plants that operate full time and are more accessible to the transmission grid. In contrast, wind turbines operate the equivalent of less than 40 percent of the hours in a year because of the intermittency of wind. In addition, the electricity that is generated must be immediately used or transmitted to the grid because it cannot be cost effectively stored. For the wind industry to expand from high-wind sites to low-wind and offshore locations, DOE needs to also develop bigger wind turbines with longer blades mounted on taller towers, requiring improved designs and materials for blade and drive train components. In addition, offshore wind development faces such technical challenges as understanding the effects of wave and ocean current loads on the base of the structures. The wind industry also faces concerns about environmental impacts, including bird and bat fatalities caused by wind turbines. Finally, investors interested in developing wind energy have relied on the federal production tax credit as a financial incentive to construct wind farms. The credit has periodically expired, resulting in a boom-and-bust cycle for the wind power industry. Solar energy also faces a challenge of developing inexpensive photovoltaic solar cells. As a result of R&D efforts, photovoltaic cells, consisting mostly of crystalline-silicone materials, are becoming increasingly efficient, converting nearly 40 percent of sunlight into electricity for some applications, but the cells are expensive for the typical homeowner. DOE is exploring how to reduce manufacturing costs through thin-film technologies, but at a cost of efficiency. DOE's challenge is to increase efficiency and reduce costs in the thin-film technologies. Reducing emissions from coal-fired power plants continues to be the priority for DOE's fossil energy R&D. Having significantly reduced sulfur dioxide and nitrogen oxide, DOE is now focusing on reducing mercury and carbon dioxide emissions. Gasification technologies, such as the IGCC configuration, holds the most promise, but at a 20 percent higher cost than conventional coal-fired power plants. To address global warming concerns, DOE's challenge is to reduce the cost of gasification technologies and demonstrate the large-scale sequestration and long-term storage of carbon dioxide. A significant obstacle facing nuclear power is the high upfront capital costs. No electric power company has applied for a NRC license to construct a new nuclear power plants in almost 30 years in large part because of a long legacy of cost over-runs, schedule delays, and cancellations. Industry officials report that new nuclear power plants can cost between $1.5 billion and $4 billion to construct, assuming no problems in the licensing and construction process, with additional expenses for connecting the plant to transmission lines. In addition, investors have grown concerned about the disposal of a legacy of spent nuclear fuel. While NRC has revised its licensing process to address past concerns over licensing delays and added costs because of requirements to retrofit plants, investors are uncertain of the effectiveness of the revised regulations. Recently, the Massachusetts Institute of Technology (MIT) and the University of Chicago issued studies comparing nuclear power's costs with other forms of generating electricity. Both studies concluded that, assuming no unexpected costs or delays in licensing and construction, nuclear power is only marginally competitive with conventional coal and natural gas and, even then, only if the nuclear power industry significantly reduces anticipated construction times. MIT also reported, however, that if carbon were to be regulated, nuclear energy would be much more competitive with coal and natural gas. While federal R&D has declined in recent years, the states have enacted legislation or developed initiatives to stimulate the deployment of renewable energy technologies, primarily to address their growing energy demands, adverse environmental impacts, and their concern for a reliable, diversified energy portfolio. As of 2006, (1) 39 states have established interconnection and net metering rules that require electric power companies to connect renewable energy sources to the power transmission grid and credit, for example, the monthly electricity bill of residents with solar-electric systems when they generate more power than they use; (2) 22 states have established renewable portfolio standards requiring or encouraging that a fixed percentage of the state's electricity be generated from renewable energy sources; and (3) 45 states offer various tax credits, grants, or loans. For example, renewable energy accounts for 3 percent of Texas' electricity consumption because Texas enacted legislation in 1999 and 2005 that created a renewable portfolio standard requiring electric utilities to meet renewable energy capacity standards. We identified six countries--Brazil, Denmark, Germany, Japan, Spain, and France--that illustrate a range of financial initiatives and mandates to stimulate the development and deployment of advanced renewable, fossil, and nuclear energy technologies. Through mandates and incentives, Brazil initiated an ethanol program in 1975 that eventually led to an end to Brazil's dependence on imported oil. Denmark focused on wind energy and, in 2005, derived 19 percent of its electricity from wind energy. Germany began a more diversified renewable energy approach in 2000 and has a goal to increase the share of renewable energy consumption to at least 50 percent by 2050. Japan subsidized the cost of residential solar systems for 10 years, resulting in the installation of solar systems on over 253,000 homes and the price of residential solar systems falling by more than half. Spain hopes to lead the way for European Union investments in an IGCC coal power plant, improving efficiency and generating fewer emissions than conventional coal-fired plants. Finally, France has led Europe in nuclear energy and plans to deploy new nuclear power plants within the next decade. The United States remains the world's largest oil consumer. In the wake of increasing energy costs with the attendant threat to national security and the growing recognition that fossil fuel consumption is contributing to global climate change, the nation is once again assessing how best to stimulate the deployment of advanced energy technologies. However, it is unlikely that DOE's current level of R&D funding or the nation's current energy policies will be sufficient to deploy advanced energy technologies in the next 25 years. Without sustained high energy prices or concerted, high-profile federal government leadership, U.S. consumers are unlikely to change their energy-use patterns, and the United States will continue to rely upon its current energy portfolio. Specifically, government leadership is needed to overcome technological and market barriers to deploying advanced energy technologies that would reduce the nation's vulnerability to oil supply disruptions and adverse environmental effects of burning fossil fuels. To meet the nation's rising demand for energy, reduce its economic and national security vulnerability to crude oil supply disruptions, and minimize adverse environmental effects, our December 2006 report recommended that the Congress consider further stimulating the development and deployment of a diversified energy portfolio by focusing R&D funding on advanced energy technologies. For further information about this testimony, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Richard Cheston, Robert Sanchez, and Kerry Lipsitz made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

For decades, the nation has benefited from relatively inexpensive energy, but it has also grown reliant on fossil fuels--oil, natural gas, and coal. Periodic imported oil supply disruptions have led to price shocks, yet the nation's dependence on imported energy is greater than ever. Fossil fuel emissions of carbon dioxide--linked to global warming--have also raised environmental concerns. The Department of Energy (DOE) has funded research and development (R&D) on advanced renewable, fossil, and nuclear energy technologies. GAO's report entitled DOE: Key Challenges Remain for Developing and Deploying Advanced Energy Technologies to Meet Future Needs examined the (1) R&D funding trends and strategies for developing advanced energy technologies; (2) key barriers to developing and deploying advanced energy technologies; and (3) efforts of the states and six selected countries to develop and deploy advanced energy technologies. GAO reviewed DOE R&D budget data and strategic plans and obtained the views of experts in DOE, industry, and academia, as well as state and foreign government officials. DOE's budget authority for energy R&D, when adjusted for inflation, fell 85 percent from its peak in fiscal year 1978 to fiscal year 2005. Energy R&D funding in the late 1970s was robust in response to constricted oil supplies and an ensuing energy crisis, but R&D funding plunged when oil prices returned to their historic levels in the mid-1980s. DOE's R&D efforts have resulted in steady incremental progress in reducing costs for renewable energy, reducing harmful emissions of coal-fired power plants, and improving safety and efficiency for nuclear energy. Nevertheless, the nation's dependence on conventional fossil fuels remains virtually the same as 30 years ago. Further development and deployment of advanced renewable, fossil, and nuclear energy technologies face several key challenges. High Capital Costs: The high capital costs of advanced energy technologies worry risk-averse investors. For example, solar cells made to convert solar energy into electricity for homeowners and businesses have been typically too expensive to compete with fossil fuels. DOE's R&D efforts include developing new materials for solar cells that could decrease manufacturing costs. Environmental Concerns: Advanced energy technologies need to address harmful environmental effects, including bird and bat fatalities cause by wind turbines, carbon dioxide and mercury emissions by coal-fired power plants, and spent nuclear fuel from nuclear power reactors. Technology-Specific Challenges: Challenges that are unique to each technology also create barriers to development and deployment. Ethanol, for example, will need to be manufactured with more cost-competitive technologies using agricultural residues or other cellulosic materials in order to expand beyond corn. Other challenges include developing new wind technologies to expand into low-wind and offshore locations; developing advanced coal gasification technologies to further reduce harmful emissions and high capital costs; and working with the nuclear power industry to deploy a new generation of reactors and develop the next generation to enable reactors to reprocess highly radioactive spent nuclear fuel or produce hydrogen. Many states and foreign countries have forged ahead of the federal government by successfully stimulating the deployment of renewable energy technologies. For example, renewable energy accounts for 3 percent of Texas' electricity consumption because Texas enacted legislation in 1999 and 2005 requiring its electric utilities to meet renewable energy capacity standards. Similarly, Denmark has used mandates and financial incentives to promote wind energy, which provided 19 percent of its electricity in 2005.

The low priority assigned to increasing revenue results, in part, from the importance or emphasis given to other values and concerns, especially protecting resources and providing goods and services. Language in federal statutes implies that maximizing revenue should not be the overriding criterion in managing national forests. Moreover, increasingly, legislative and administrative decisions and judicial interpretations have required the Forest Service to give priority to non-revenue-generating uses over uses that can and have produced revenue. For example, the Endangered Species Act and other environmental and planning laws and their judicial interpretations limit the agency's ability to generate revenue, requiring instead that priority be given to protecting species' diversity and other natural resources, including clean water and clean air. In addition, both the Congress and the administration have increasingly set aside National Forest System lands for conservation--as wilderness, wild and scenic rivers, national monuments, and recreational areas. Only limited revenue-generating uses, such as timber sales and oil and gas leasing, are allowed in some of these areas. When the Forest Service can generate revenue, it is sometimes required to provide goods and services at less than their fair market value. For instance, the fee system for ski areas on national forests, developed by the ski industry and enacted into law in 1996, does not ensure that fees collected from ski areas reflect fair market value. Other legislative decisions not to charge fees for the use of most recreational sites and areas managed directly by the agency reflect a long-standing philosophy of free access to public lands. In addition, federal statutes and regulations have narrowly defined the instances in which the Forest Service can charge fees for noncommercial recreational activities, such as hunting and fishing by individuals on national forests, and the agency generally defers to state laws regulating these activities. As a result, forest managers do not charge individuals for hunting and fishing on their lands. Other legislative requirements that limit the generation of revenue from activities such as hardrock mining and livestock grazing reflect a desire to promote the economic stability of certain historic commodity uses. For example, the Mining Law of 1872 was enacted to promote the exploration and development of domestic mineral resources as well as the settlement of the western United States. Under the act's provisions, the federal government receives no financial compensation for hardrock minerals, such as gold and silver, extracted from Forest Service and other federal lands. In contrast, the 11 western states that lease state-owned lands for mining purposes impose a royalty on minerals extracted from those lands. Similarly, the formula that the Forest Service uses to charge for grazing livestock on its lands keeps fees low to promote the economic stability of western livestock grazing operators with federal permits. In addition, revenue-retention and revenue-sharing provisions discourage efforts to control costs. For example, legislation allows the Forest Service to retain a portion of the revenue it generates from timber sales and requires the agency to share a portion of that revenue with states and counties, without deducting its costs. The costs to prepare and administer the sales are funded primarily from annual appropriations rather than from the revenue generated by the sales. As a result, neither the agency nor the states and counties have an incentive to control costs, and the Forest Service may be encouraged to sell timber at prices that would not always allow it to recover its costs. From fiscal year 1992 through fiscal year 1997, the Forest Service spent about $2.5 billion in appropriated funds and other moneys to prepare and administer timber sales but returned less than $600 million in timber sale revenue to the General Fund of the U.S. Treasury. When the Congress has given the Forest Service the authority to obtain fair market value for goods or to recover costs for services, the agency often has not done so. As a result, forgone revenue has cost taxpayers hundreds of millions of dollars, as the following examples from our prior work show. In June 1997, we reported that the sealed bid auction method is significantly and positively related to higher bid premiums on timber sales. However, the Forest Service used oral bids at single-bidder sales rather than sealed bids, resulting in an estimated decrease in timber sale receipts of $56 million from fiscal year 1992 through fiscal year 1996. In December 1996, we reported that, in many instances, the Forest Service has not obtained fair market fees for commercial activities on the national forests, including resort lodges, marinas, and guide services, or for special noncommercial uses, such as private recreational cabins and special group events. Fees for such activities are the second largest generator of revenue for the agency, after timber sales. The Forest Service's fee system, which sets fees for most commercial uses other than ski operations, has not been updated for nearly 30 years and generally limits fees to less than 3 percent of a permittee's gross revenue. In comparison, fees for similar commercial uses of nearby state-held lands averaged 5 to 15 percent of a permittee's total revenue. In December 1996, we also reported that although the Forest Service has been authorized to recover the costs incurred in reviewing and processing all types of special-use permit applications since as far back as 1952, it has not done so. On the basis of information provided by the agency, we estimated that in 1994 the costs to review and process special-use permits were about $13 million. In April 1996, we reported that the Forest Service's fees for rights-of-way for oil and gas pipelines, power lines, and communication lines frequently did not reflect fair market value. Agency officials estimated that in many cases--particularly in high-value areas near major cities--the Forest Service may have been charging as little as 10 percent of the fair market value. The Forest Service's failure to obtain fair market value for goods or recover costs for services when authorized by the Congress results, in part, because the agency lacks a financial incentive to do so. One incentive would be to allow the agency to retain and spend the revenue generated to address its unmet needs. For example, from the end of World War II through the late 1980s, the Forest Service emphasized timber production on national forests, in part, because a substantial portion of the receipts from timber sales are distributed into a number of funds and accounts that the agency uses to finance various activities on a sale area. Even now, many forest managers have the opportunity to increase their budgets by increasing timber sales. Conversely, before fiscal year 1996, the Land and Water Conservation Act of 1965, as amended, required that revenue raised through collections of recreational fees be deposited in a special U.S. Treasury account. The funds in this account could become available only through congressional appropriations and were generally treated as a part of, rather than a supplement to, the Forest Service's regular appropriations. However, in fiscal year 1996, the Congress authorized the fee demonstration program to test recreational fees as a source of additional financial resources for the Forest Service and three other federal land management agencies. The demonstration program legislation allows these agencies to experiment with new or increased fees at up to 100 sites per agency. The Congress directed that at least 80 percent of the revenue collected under the program be spent at the unit collecting the fees. The remaining 20 percent can be spent at the discretion of each agency. In essence, the more revenue that a national forest can generate through new or increased fees, the more it will have to spend on improving conditions on the forest. By allowing the agency to retain the fees collected, the Congress created a powerful incentive for forest managers to emphasize fee collections. Gross revenue from recreational fees on the national forests increased from $10.0 million in fiscal year 1996 to $18.3 million in fiscal year 1997, or by 83 percent, and to $26.3 million in fiscal year 1998, or by 163 percent compared with fiscal year 1996. Five sites each generated over $1 million in fiscal year 1998 compared with only two sites in fiscal year 1997. Two sites--the Mount St. Helens National Volcanic Monument on the Gifford Pinchot National Forest in Washington State and the Enterprise Forest Project in Southern California--each generated over $2.3 million in fiscal year 1998. The legislation also provided an opportunity for the four federal land management agencies to be creative and innovative in developing and testing fees by giving them the flexibility to develop a wide range of fee proposals. As a result, the Forest Service has, among other things, developed new methods for collecting fees and has experimented with more businesslike practices, such as peak-period pricing. These practices can help address visitors' and resource management needs and can lower operating costs. According to Forest Service officials, the agency is evaluating whether to issue regulations that would allow forest managers to charge fees to recover their costs to review and process special-use permit applications. The administration also plans to forward legislative proposals to the Congress in the near future that would allow the agency to retain and spend all of the revenue generated by fees for commercial filming and photography on the national forests. Other legislative changes being considered by the agency would allow it to retain and spend all or a portion of the (1) revenue generated by fees charged to recover the costs to review and process special-use permit applications and (2) fees collected for resort lodges, marinas, guide services, private recreational cabins, special group events, and other commercial and noncommercial activities on the national forests. On the basis of our work, we offer the following observations on the Forest Service's ongoing efforts to secure alternative sources of revenue. First, sustained oversight by the Congress will be needed to ensure that the agency maximizes revenue under existing legislative authorities. For instance, according to Forest Service officials, the agency is evaluating whether to issue regulations to allow forest managers to charge fees to recover their costs to review and process special-use permit applications. However, the agency has been authorized by the Congress to recover these costs since 1952 and has twice in the past 12 years developed, but not finalized, draft regulations to implement the authority. According to Forest Service headquarters officials, both times, staff assigned to develop and publish the regulations were reassigned to other higher-priority tasks. As a result, the agency estimates that it forgoes $5 million to $7 million annually. Second, new legislation that would allow the Forest Service to retain and spend more of the revenue generated by fees would provide forest managers with additional incentive to emphasize fee collections. However, providing the agency with this authority at this time would involve risks and difficult trade-offs. In particular, the Forest Service would not be able to accurately account for how it spent the money and what it accomplished with it. While the agency has made progress in recent years, it is still far from achieving financial accountability and possibly a decade or more away from being fully accountable for its performance. Because of its serious long-standing financial management deficiencies and the problems it has encountered in implementing its new accounting system, we recently designated the Forest Service's financial management as a high-risk area vulnerable to waste, fraud, abuse, and mismanagement. In addition, allowing the Forest Service to retain and spend revenue that is generally treated as a part of, rather than an addition to, its regular appropriations would be included under the limits on discretionary spending imposed by the Budget Enforcement Act, as amended. Allowing the agency to retain fee revenue--rather than depositing the money in the General Fund of the Treasury--would also reduce the Congress's ability to use these funds for other priorities. Furthermore, while this fee revenue may be initially earmarked for the Forest Service, nothing would prevent the Congress from using the revenue to offset, rather than supplement, the agency's regular appropriations. Finally, new legislation being proposed or considered by the Forest Service is limited to special-use fees and, as such, does not address other potential sources of revenue. For instance, in a July 1998 report, a team of Forest Service employees identified steps that the agency should take to improve the way it conducts its business. In addition to recreational and special-use fees, the team identified the minerals and geology program and the relicensing of hydroelectric sites on the national forests as the greatest opportunities for securing alternative sources of revenue. In addition, we have reported that enacting legislation to impose a royalty on hardrock minerals extracted from Forest Service and other federal lands could generate hundreds of millions of dollars in increased revenue. However, allowing the Forest Service to collect, retain, and spend more of the revenue generated by goods and services on the national forests would require difficult policy choices and trade-offs. For example, collecting recreational fees conflicts with the long-standing philosophy of free access to public lands. Imposing a royalty on hardrock minerals extracted from national forests conflicts with the desire to promote the economic stability of this historic commodity use. And allowing forest managers to retain and spend revenue from oil and gas leasing and production would give them a strong financial incentive to lease lands that they might otherwise set aside for resource protection or conservation. Therefore, if the Congress believes that increasing revenue from the sale or use of natural resources should be a mission priority for the Forest Service, it will need to work with the agency to identify legislative and other changes that are needed to clarify and modify the Congress's intent and expectations for revenue generation relative to ecological, social, and other values and concerns. Mr. Chairman, this concludes our prepared statement. We will be pleased to respond to any questions that you or Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO discussed the barriers and opportunities for generating revenue on lands managed by the Forest Service. GAO noted that: (1) legislative and administrative decisions and judicial interpretations of statutory requirements have required the agency to shift its emphasis from uses that generate revenue, such as producing timber, to those that do not, such as protecting species and their habitats; (2) the Forest Service is required by law to continue providing certain goods and services at less than fair market value; (3) certain legislative provisions also serve as disincentives to either increasing revenue or decreasing costs; (4) because the costs are funded from annual appropriations rather than from the revenue generated, the agency does not have an incentive to control costs; (5) when Congress has provided the Forest Service with the authority to obtain fair market value for certain uses, or to recover costs for services, the agency often has not done so; (6) as a result, the Forest Service forgoes at least $50 million in revenue annually; (7) given a financial incentive and flexibility, the Forest Service can and will increase revenue; (8) for example, the recreational fee demonstration program, first authorized by Congress in fiscal year (FY) 1996, allows the agency to: (a) test new or increased fees at up to 100 sites; and (b) retain the revenue to help address unmet needs for visitor services, repairs and maintenance, and resource management; (9) by allowing the agency to retain the fees collected, Congress created an incentive for forest managers to emphasize fee collections; (10) gross revenue from recreational fees on the national forests increased from $10.0 million in FY 1996 to $26.3 million in FY 1998; (11) the administration plans to forward legislative proposals to Congress, and the Forest Service is considering other legislative changes that would allow the agency to collect, retain, and spend more fee revenue; (12) however, allowing forest managers to retain and spend all or a portion of the revenue they collect would involve risks and difficult trade-offs; (13) in particular, the Forest Service is still far from achieving financial and performance accountability and thus cannot accurately account for how it spends money and what it accomplishes with it; and (14) allowing the agency to collect, retain, and spend more of the revenue generated by goods and services on the national forests would also require difficult trade-offs or policy choices between increasing revenue and other values and concerns.

When disasters such as floods, tornadoes, or earthquakes strike, state and local governments are called upon to help citizens cope. Assistance from FEMA may be provided if the President, at a state governor's request, declares that an emergency or disaster exists and that federal resources are required to supplement state and local resources. The 1988 Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 U.S.C. 5121 and following) authorizes the President to issue major disaster or emergency declarations and specifies the types of assistance the President may authorize. The assistance includes temporary housing and other benefits for individuals as well as public assistance. The public assistance program funds the repair of eligible public facilities--such as roads, government buildings, utilities, and hospitals--that are damaged in natural disasters. Under the program, FEMA has obligated over $6.5 billion (in constant 1995 dollars) for disasters that occurred during fiscal years 1989 through 1994. FEMA may make public assistance grants to state and local governments and certain nonprofit organizations for three general purposes: debris removal, emergency protective measures, and permanent restoration. Generally, the grants are to cover not less than 75 percent of the eligible costs. Over the years, the Congress has increased eligibility for public assistance through legislation that expanded the categories of assistance and/or specified the persons or organizations eligible to receive the assistance. FEMA is responsible for developing regulations and guidance to implement the program. Following a disaster declaration, FEMA helps survey damaged facilities and prepares damage survey reports (DSRs) that contain estimates of repair costs. Officials in FEMA's regional offices make the initial eligibility determinations. The applicants may appeal these decisions, first to the regional office and subsequently to FEMA headquarters. For disasters declared in fiscal years 1989 through 1994, FEMA projects that public assistance grants for permanent repairs and restorations will total over $5.2 billion. Decisions on eligibility effectively determine the level of federal spending for public assistance, affecting the amounts of grants and of FEMA's and applicants' administrative costs. The importance of clear criteria is heightened because in large disasters FEMA often uses temporary personnel with limited training to help prepare and process applications. Our review of FEMA regulations and implementing guidance, and discussions with FEMA officials responsible for making eligibility determinations, revealed a need for clarifying the criteria related to the standards (building codes) to which damaged facilities should be restored. Generally, FEMA's regulations provide that the agency will provide funding to restore an eligible facility on the basis of its design as it existed immediately before the disaster and in accordance with applicable standards. For a number of reasons, determining what standards are "applicable" can be contentious. For example, following the January 1994 Northridge (California) earthquake, a decision on assistance for restoring damaged hospitals was delayed for 2 years because of a dispute over which standards were applicable. To be considered "applicable," the standards must--among other things--be in a formally adopted written ordinance of the jurisdiction in which the facility is located or be state or federal requirements. The standards do not necessarily have to be in effect at the time of the disaster; if new standards are adopted before FEMA has approved the DSR for the permanent restoration of a facility in the jurisdiction, the work done to meet these standards may be eligible for public assistance. FEMA regional officials cited a need to better define the authority for adopting and approving standards. Similarly, the criteria for determining the eligibility of certain private nonprofit facilities are unclear. The Stafford Act provides that, in addition to specific types of private nonprofit facilities such as educational institutions and medical facilities, "other" private nonprofit facilities that "provide essential services of a governmental nature to the general public" may be eligible for assistance. When developing regulations to implement the legislation, FEMA relied on an accompanying report to define the "other" category. The report's examples included museums, zoos, community centers, libraries, shelters for the homeless, senior citizens' centers, rehabilitation facilities, and shelter workshops. FEMA's regulations incorporated the list of examples from the House report but recognized that other similar facilities could be included. FEMA experienced problems in applying this regulation because, among other things, the wide range of services provided by state and local governments made it difficult to determine whether services were of a governmental nature. In 1993, FEMA amended its regulations to limit eligible "other" private nonprofit facilities to those specifically included in the House report and those facilities whose primary purpose is the provision of health and safety services. However, FEMA officials have still found it difficult to determine whether facilities are eligible. FEMA's Inspector General has cited examples of private nonprofits that do not appear to provide essential government services yet received public assistance funding. For example, following the Northridge earthquake, a small performing arts theater received about $1.5 million to repair earthquake damage because it offered discount tickets to senior citizens and provided acting workshops for youth and seniors. Clear criteria are important for controlling federal costs and helping to ensure consistent and equitable eligibility determinations. For example, depending on which set of standards--which determine the scope of work needed for permanent restoration--were deemed "applicable," FEMA's costs of restoring one of the hospitals damaged in the Northridge earthquake ranged from $3.9 million to $64 million. (The latter estimate is based on the cost of demolishing and replacing the hospital.) Additionally, without clear criteria, inconsistent or inequitable eligibility determinations and time-consuming appeals by grantees and subgrantees may be more likely to occur. According to FEMA officials, between fiscal year 1990 and the end of fiscal year 1995, there were 882 first-level appeals of public assistance eligibility determinations. FEMA headquarters had begun logging in second- and third-level appeals in January 1993 and could not quantify the number of such appeals that occurred before then; but from January 1993 to the end of March 1996, there have been 104 second-level appeals and 30 third-level appeals. Although FEMA may always expect some appeals, clearer guidance on applying eligibility criteria could help reduce their number. The need for clearer, more definitive criteria dealing with the eligibility for public assistance takes on added importance because of FEMA's use of temporary personnel with limited training to help prepare and process DSRs, which are used in determining the scope of work eligible for funding. The number of large disasters during the 1990s has resulted in a great number of DSRs; for example, over 17,000 after the Northridge earthquake and over 48,000 after the 1993 Midwest floods. FEMA regional officials working on the recovery from the Northridge earthquake pointed out that the lack of training directly results in poor quality DSRs that may cause overpayments or underpayments to public assistance recipients. According to FEMA regional officials, decisions made in determining eligibility following one disaster have not been systematically codified or disseminated to FEMA personnel to serve as a precedent in subsequent disasters. The regulations were intended to be supplemented with guidance, examples, and training to clarify eligibility criteria and help ensure their consistent application, but because of competing workload, this did not occur as envisioned. FEMA's written guidance supplementing the regulations include a manual published in draft in 1992 and policy memorandums. FEMA and other officials recognize the need to clarify the criteria and improve policy dissemination. At a January 1996 hearing, the Director of FEMA noted that in previous disasters FEMA staff worked without having policies in place that addressed public assistance, making eligibility determinations difficult. FEMA plans to republish and subsequently update the public assistance manual and has begun offering a new training course for officials who prepare DSRs. Also, FEMA has recently taken steps to improve policy dissemination. Examples include (1) a compendium of policy material compiled by one FEMA regional office, which FEMA headquarters is circulating to the other regions; (2) the development of a new system of disseminating policy memorandums, including a standardized format and numbering system; and (3) the dissemination--by headquarters to all regional offices--of the results of second- and third-level appeals. To ensure that expenditures are limited to eligible items, FEMA relies largely on states' (grantees') certifications. Further limited assurance is provided by audits. When FEMA approves a DSR, it obligates an amount equal to the estimated federal share of the project's cost. The obligation makes these funds available to the state to draw upon as needed by the subgrantees. If a subgrantee wishes to modify a project after a DSR is approved, or experiences cost overruns, it must apply through the state to FEMA for an amended or new DSR. This gives FEMA the opportunity to review supporting documentation justifying the modification and/or cost overrun. In accordance with a governmentwide effort launched in 1988 to simplify federal grant administration, FEMA relies on states--in their role as grantees--to ensure that expenditures are limited to eligible items. The states are responsible for disbursements to subgrantees and certify at the completion of each subgrantee's project and the closeout of each disaster that all disbursements have been proper and eligible under the approved DSRs. FEMA does not specify what actions the states should take to enable them to make the certifications, but provides that inspections and audits can be used. FEMA has no reporting requirements for subgrantees but expects grantees to impose reporting requirements on subgrantees so that the grantees can submit necessary reports. Most disasters stay open for several years before reaching the closeout stage. FEMA officials involved in the closeout process in the San Francisco, Atlanta, and Boston regions told us that they review the states' closeout paperwork to verify the accuracy of the reported costs, but they rely on the states to ensure the eligibility of costs. Independent audits serve as a further check on the eligibility of items funded by public assistance grants, although the audit coverage is somewhat limited. FEMA's Office of Inspector General (OIG) audits recipients on a selective basis and attempts to audit any disaster when asked to by a FEMA regional office. Officials in the OIG's Eastern District Office could not estimate their audit coverage but said that a significant percentage of the dollars were audited by focusing on where the large sums of money went. For example, although the officials had looked at only about 20 of the several hundred public assistance subgrantees for Hurricane Hugo, they believed that those subgrantees represented about $200 million of the $240 million in public assistance costs. Officials in the Western District Office said that less than 10 percent of the disasters receive some sort of audit coverage by the OIG. Overall, they believe that probably less than one percent of DSRs are covered. States may also perform audits of specific subgrantees. Currently, California is the only state that has an arrangement with FEMA's OIG to perform audits that meet generally accepted auditing standards. (Audit coverage in California is particularly important because in recent years California has received far more public assistance funds than any other state.) OIG officials said that they have attempted to negotiate for similar audit coverage by other states, but none have agreed to provide it, generally citing the difficulty of hiring and paying for the audit staff and keeping a sustained audit effort under way in light of the sporadic nature of FEMA's disaster assistance. FEMA may obtain additional assurances about the use of its funds from audits of subgrantees conducted as part of the "single audit" process.State and local governments and nonprofit organizations that receive $100,000 or more of federal funds in a year must have a "single audit" that includes an audit of their financial statements and additional testing of their federal programs. Auditors conducting single audits must test the internal controls and compliance with laws and regulations for programs that meet specified dollar criteria. The largest programs, in terms of expenditures, are therefore tested. Entities that receive $25,000 to $100,000 in federal assistance in a year have the option of having a single audit or an audit in accordance with the requirements of each program that they administer. Because the public assistance officials in FEMA's 10 regional offices are involved in the day-to-day operations of the public assistance program, giving them a high degree of expertise, we obtained their recommendations for reducing the costs of future public assistance. We also asked the officials to identify potential obstacles to implementing those recommendations. We asked the National Emergency Management Association, which represents state emergency management officials, to respond to the options that the FEMA officials generated because implementing many of the options would affect the states. Because the available records did not permit quantifying the impact of each option on past public assistance expenditures, and because future costs will be driven in part by the number and scope of declared disasters, the impact on the public assistance costs of future disasters is uncertain. Options that (1) the FEMA regional officials strongly recommended and (2) the National Emergency Management Association endorsed for further consideration are: Better define which local authorities govern the standards applicable to the permanent restoration of damaged facilities. Limit the time period following a disaster during which those authorities can establish new standards applicable to the restoration. Eliminate the eligibility of facilities that are owned by redevelopment agencies and are awaiting investment by a public-private partnership. Restrict the eligibility of public facilities to those being actively used for public purposes at the time of the disaster. Reduce the number of times that recipients may appeal a FEMA decision on eligibility of work. Improve insurance requirements by (1) eliminating states' current authority to waive mandatory purchase of property insurance otherwise required as a condition of FEMA's financial assistance and (2) requiring applicants to obtain at least partial insurance, if it is reasonably available. Additional options strongly recommended by the FEMA officials but not specifically endorsed for further consideration by the National Emergency Management Association include the following: Limit funding for facilities used to temporarily relocate subgrantees during appeals, because the appeals process can take several years. This option would be comparable to the insurance industry's practice of calculating maximum allowable temporary relocation costs. Eliminate the eligibility of revenue-generating private nonprofit organizations. Eliminate funding from FEMA for some water control projects. Limit funding for permanent restoration to the eligible cost of upgrading only the parts of structures damaged by the disaster. (Applicants would bear the expense of upgrading undamaged parts of the structures.) Eliminate the eligibility of publicly owned facilities that are being rented out to generate income. For example, facilities owned by local governments and rented to the private sector for use as warehouses, restaurants, stadiums, etc., would not be eligible. Eliminate or reduce the eligibility of facilities when the lack of reasonable pre-disaster maintenance contributes to the scope of the damage from a disaster. Eliminate the eligibility of the credit toward the local share of the costs of public assistance for volunteer labor and donated equipment and material. Increase the percentage of damage required for FEMA to replace a structure (rather than repair it) to a threshold higher than the current 50 percent. The National Emergency Management Association proposed that considerable savings in the federal costs of public assistance could be realized by reducing the federal administrative structures. The association also endorsed for further consideration the following options, identified but not most strongly recommended by FEMA respondents: Eliminate the eligibility of postdisaster "beach renourishment," such as pumping sand from the ocean to reinforce the beach. Limit the scope of emergency work to the legislative intent. (The association believes that assistance for debris removal and emergency protective measures has been used for permanent repairs.) Eliminate the eligibility of revenue-producing recreational facilities, e.g., golf courses and swimming pools. Clearer and more comprehensive criteria (supplemented with specific examples) that are systematically disseminated could help ensure that eligibility determinations are consistent and equitable and could help control the costs of future public assistance. To the extent that the criteria are more restrictive, the costs of public assistance in the future could be less than they would otherwise be. In the 1990s, the potential adverse effects of a lack of clear criteria have become more significant because of (1) an increase in large, severe disasters and (2) the need to use temporary employees with limited training in the process of inspecting damage and preparing damage survey reports. A number of FEMA public assistance officials' recommendations are consistent with options proposed by FEMA's Inspector General, with our work, and with our current review. Furthermore, the options highlight a number of instances in which existing eligibility criteria need to be clarified or strengthened with additional guidance. Our May report contains recommendations designed to clarify and help ensure consistent application of the criteria and to identify changes that should be implemented. Natural Disaster Insurance: Federal Government's Interests Insufficiently Protected Given Its Potential Financial Exposure (GAO/T-GGD-96-41, Dec. 5, 1995). Disaster Assistance: Information on Declarations for Urban and Rural Areas (GAO/RCED-95-242, Sept. 14, 1995). Disaster Assistance: Information on Expenditures and Proposals to Improve Effectiveness and Reduce Future Costs (GAO/T-95-140, Mar. 16, 1995). GAO Work on Disaster Assistance (GAO/RCED-94-293R, Aug. 31, 1994). Los Angeles Earthquake: Opinions of Officials on Federal Impediments to Rebuilding (GAO/RCED-94-193, June 17, 1994). Earthquake Recovery: Staffing and Other Improvements Made Following Loma Prieta Earthquake (GAO/RCED-92-141, July 30, 1992). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed the Federal Emergency Management Agency's (FEMA) public disaster assistance program. GAO noted that: (1) FEMA program criteria are ambiguous; (2) criteria clarifications are needed to determine which damaged facilities should be restored and the eligibility of nonprofit facilities' services for assistance; (3) inconsistent or inequitable eligibility determinations, time-consuming appeals, and waste are more likely to occur if eligibility criteria are not clear and current; (4) FEMA use of temporary employees with limited training to prepare damage survey reports makes the need for clearer criteria more urgent; (5) FEMA has not systematically updated or disseminated eligibility policy changes to its regional offices, but it plans to do so; (6) although it approves specific subgrantee projects, FEMA relies on states as public assistance grantees to certify that expenditures are limited to eligible items; (7) as an additional, limited control over disbursements, FEMA has independent auditors or its Inspector General Office audit some subgrantees; and (8) options to reduce costs include better defining local authorities that govern establishment of restoration standards, eliminating or restricting eligibility of certain facilities, placing limits on the appeals process, improving insurance requirements, limiting temporary relocation costs, and increasing the damage percentage for facility replacement.

In 2000, in response to calls from Congress, SEC directed U.S. stock and options markets to change from quoting equity securities and options in fractions of a dollar, such as 1/16th, to quoting in decimals. Proponents of this change believed decimal pricing would make stock prices easier for investors to understand, align U.S. markets with other major stock markets of the world, and lower investors' trading costs by narrowing spreads to as little as one penny. At the time of SEC's order, U.S. markets were the only major securities markets in the world still trading in fractions. After a phase-in period of several months, the major exchanges and Nasdaq began using decimal pricing for all quotes on equity securities and options on April 9, 2001. The national securities markets, including the New York Stock Exchange (NYSE) and Nasdaq, chose to allow quoting on their markets with an MPV, or tick size, of one penny. The MPV is the minimum increment in which stock prices on these markets are allowed to be quoted. However, even before the transition to decimal pricing, some stocks were trading in increments of less than the MPV, such as 1/256th of a dollar. Since U.S. markets converted to decimal pricing, professional traders trading outside the national securities markets have been the primary users of subpenny prices. Although the national securities markets set their MPVs at one penny, several electronic trading systemsknown as electronic communication networks (ECNs)display quotes and execute orders entered by their customers in subpennies and allow traders to quote prices and trade in subpenny increments. When quotes from these proprietary systems are displayed to traders outside the proprietary systems, the quotes are rounded to the nearest full penny increment-- specifically, down for buy orders and up for sell orders--to comply with the required one-penny MPV of the national securities markets. In such instances, orders executed against these quotes receive the subpenny price. According to SEC staff and others, although several ECNs initially allowed quoting in subpennies, some have curtailed the use of such quotes. At the time we prepared this statement, we were aware of only two ECNs that allowed quoting in subpennies--Instinet's INET and Brut ECN--for a few selected stocks. The extent to which stocks are quoted in subpenny increments appears to be limited. According to SEC staff, data on the extent to which subpenny increments are used to quote securities across all U.S. equity markets are not routinely reported or readily available. However, a 2001 Nasdaq report to SEC that reviewed trading in stocks listed on its market showed that less than 15 percent of limit orders were submitted in subpennies after decimals were introduced. A vast majority of the subpenny limit orders cited in the 2001 Nasdaq report were handled by a single ECN. SEC staff also conducted a study of the use of subpennies in trading that took place between April 21 and 25, 2003, and found that subpenny trades accounted for about 13 percent of trades in Nasdaq stocks, 10 percent of trades in American Stock Exchange stocks, and 1 percent of the trades in NYSE stocks. These trade execution data, however, do not directly demonstrate the extent of subpenny quoting, because trades may be executed using the subpenny increment for other reasons. For example, some institutional investors may ask their broker-dealers to execute orders at the weighted average price at which a stock traded on a particular day. This weighted average price can be carried out to several decimal places. Representatives of one ECN told us that it allowed traders to quote certain stocks in subpennies because its customers wanted to be able to quote in these increments. They also said that this use of subpenny quotes was a way to differentiate their business from that of their competitors. In addition, these ECN representatives said that subpenny quoting enhanced the efficiency of trading in certain actively traded securities, such as the Nasdaq 100 Index Tracking Stock (QQQ). According to SEC staff and market participants with whom we spoke, subpenny quotes are used primarily by professional traders, such as day traders or traders for hedge funds, to gain a competitive price advantage over other traders. However, some ECNs that were allowing their customers to use subpenny quoting more widely have significantly curtailed the number of stocks that could be quoted in subpennies. According to a representative at one ECN, its share of the total trading volumes of these stocks increased rather than declined after it stopped quoting in subpennies. Although some market participants saw benefits to subpenny pricing, most cited various disadvantages to the use of subpenny quotes. Some market participants said subpenny quoting allowed traders to raise the priority of their orders. For example, a representative of one ECN told us that when a large number of traders were all quoting the same full penny price, one trader could increase the chances of executing a trade by improving the price by a subpenny increment. This representative also said that the customers on the other side of the trade also benefited from the subpenny increment, as their orders were executed at slightly better prices. ECNs we contacted also told us that subpenny pricing allowed for more efficient and competitive markets. For example, a one-cent MPV could act as an artificial constraint on pricing for stocks that trade actively. According to representatives of one ECN, allowing such actively traded stocks to trade in increments of less than a penny allows buyers and sellers to discover a stock's true market price. However, most of the market participants we contacted mainly cited disadvantages to subpenny quoting. First, many participants told us that the benefits of subpenny pricing accrue to professional traders but not to the general investing public. Representatives of one firm with whom we spoke told us that quotes in subpenny increments were available to professional traders who pay to access proprietary trading systems the ECNs operate. Through these proprietary systems, professional traders can use fast order routing systems to obtain the subpenny prices, which may be better than those that are publicly displayed on other markets that use one-cent MPVs. According to market participants, many broker- dealers do not accept orders from their customers in subpenny increments, and so the average investor generally cannot access the subpenny quotes. A representative of a large broker-dealer stated at an April 2004 SEC hearing that his firm had stopped allowing clients to submit orders priced in subpenny increments for this reason. Further, representatives at one securities market argued that the integrity of the securities markets was reduced when some traders have advantages over others. Many of the market participants we contacted told us that quoting in subpenny increments also resulted in more instances of traders "stepping ahead" of large limit orders. According to some market participants, reduced MPVs that accompanied decimal pricing have negatively affected traders displaying large orders at one price. These traders find that their orders go unexecuted or have to be resubmitted when other traders step ahead of them by quoting a better price in increasingly small amounts. These participants argued that at higher MPVs, which were previously 1/8th or 1/16th of a dollar per share, traders stepping ahead of other orders were taking a greater financial risk if their orders were executed and prices then moved against them. However, market participants with whom we spoke said subpenny increments were generally an economically insignificant amount and that traders using them faced much lower financial risk. Recent SEC and Nasdaq studies of subpenny trading found that most trades executed in subpenny increments clustered at prices 1/10th of a cent above and below the next full penny increment, suggesting that subpenny quotes were primarily being used to gain priority over other orders and were not otherwise the result of natural trading activities. Market participants also told us that the more likely it is that a trader can step ahead of other orders--as they can by using subpenny quotes--the less likely traders are to enter their limit orders, which are an important source of liquidity. This reduced incentive to enter limit orders also reduces the number of shares displayed for sale and potentially affects liquidity and market efficiency. Furthermore, some market participants also saw subpenny quoting as reducing market transparency for retail investors and depth for institutional investors. When the MPV decreases, for example to subpennies, the number of potential prices at which shares can be quoted--called price points--increases, because displayed liquidity is spread over more price points. For example, subpenny quotes using 1/10th of a penny ($.001) increase the number of price points to 1,000 per dollar. This affects retail investors, because fewer shares are generally quoted at the only prices visible to them--the current best prices for purchase or sale. This affects institutional investors, because the more price points that must be considered, the more difficult it becomes to determine whether sufficient shares are available to fill larger orders. Market participants said that quotes in a subpenny pricing environment change more rapidly (a phenomenon known as quote flickering) and make determining the actual prices at which shares are available more difficult. Quote flickering reduces broker-dealers' ability to determine whether the trades they have conducted satisfy their regulatory responsibility to obtain the best execution price for their clients. Finally, some market participants told us that subpenny pricing has the potential to greatly increase the processing and transmission capacity requirements for the market data systems that transmit price and trade information, causing firms to expend resources to redesign electronic systems. SEC's proposed rule to prohibit market participants from pricing stocks in increments of less than one penny appears to be widely supported. As part of its proposed rule changes to Regulation NMS, SEC has proposed establishing a uniform pricing standard for stocks that trade in all market centers, which SEC defines as exchanges, over-the-counter market makers, specialists, and ECNs. Specifically, SEC proposes to prohibit market participants from accepting, ranking, or displaying orders, quotes, or indications of interest in a pricing increment finer than a penny in any stock, unless the stock has a share price of less than one dollar. The proposed rule would not prohibit executing trades in increments of less than one penny, which most markets currently permit, because there are instances when subpenny trading is appropriate--for example, when the trade's price is based on some averaging mechanism. According to SEC staff, this change would address differences in pricing that exist across markets and that benefit some investors at the expense of the general investing public. According to the staff, banning subpenny pricing should also reduce the extent to which limit orders lose priority because of subpenny pricing, thereby preserving incentives to display limit orders, which are an important source of liquidity for the markets. Most market participants we have contacted to date and most commenting on SEC's proposal appear to support a ban on subpenny pricing for stocks priced at more than one dollar. Of the over 500 comment letters available on SEC's Web site as of July 16, 2004, we determined that about 50 provided comments on the proposed ban. Of these, 86 percent of the commenters supported banning subpenny quoting. According to NYSE and Nasdaq representatives with whom we spoke, the current existence of quotes that not all investors can access is a significant reason for their support of SEC's proposed subpenny prohibition. Nasdaq's support for banning subpenny quoting comes despite filing for a proposed rule change with SEC in 2003 that would permit Nasdaq to adopt an MPV of 1/10th of one cent for its listed securities. According to the Nasdaq representatives, if SEC does not prohibit subpenny quoting, Nasdaq would want SEC approval to begin quoting in subpennies in order to compete with ECNs. Nasdaq subsequently withdrew its propsed rule change, presumably because SEC is proposing to ban subpennies in its proposed changes to Regulation NMS. Representatives at several institutional investors and broker-dealer firms also agreed that quoting in subpenny increments should be prohibited. In its June 30, 2004, comment letter to SEC, the Investment Company Institute (which represents the interests of the $7 trillion mutual fund industry) stated that quoting in subpennies eliminates many of the benefits brought by decimal pricing and exacerbates many of the unintended consequences that have arisen in the securities markets since its implementation that have proven harmful to mutual funds and their shareholders. However, other market participants and other commenters opposed SEC's proposal to ban subpenny quoting. Several of the organizations that opposed a ban said that subpenny quotes allow traders more ability to improve the prices they offer to others. A group of 10 academic researchers that commented to SEC argued that the impacts of subpenny quoting on market transparency could be resolved with technology. For example, data vendors can choose to update quotes only when there are meaningful changes. A letter from a university regulatory research center noted that banning subpenny quoting could stifle innovation in the way that quotes are displayed to investors. For example, graphical displays could replace flickering quotes with fluid motion and use patterns and shapes to help investors recognize changes. A ban could also reduce incentives for other market participants to invest in innovative technologies. Opinions among some ECNs were mixed, with roughly an equal number supporting and opposing SEC's proposal to ban subpenny quoting. Representatives of two ECNs indicated that SEC should not enact a ban, arguing that tick size is best determined by demand in the marketplace. Furthermore, representatives of two ECNs noted that stocks that trade at a spread of a penny benefit from the increased efficiency afforded by subpenny increments; one representative noted that a penny MPV artificially constrains price discovery for these stocks. In addition, this representative said that stocks with low share prices should be quoted in subpenny increments because subpennies become economically significant when the share price is a few dollars or less. Finally, these representatives said that as more traders and firms upgrade their trading technology, they may find more advantages from quoting in subpennies and that a regulatory ban enacted now might become an unpopular constraint in the future. One of the ECNs is supporting SEC's proposal to ban subpenny quoting because its customers preferred not to have subpennies used on that ECN's system. At the time we prepared this statement, we had not yet talked to entities that are reported to be key users of subpenny quotes and who may be opposed to SEC's proposal, such as day traders, hedge funds, or entities whose sole business is computer-enabled trading. At the request of this Committee's Subcommittee on Securities and Investment, we are conducting additional work to review the impact of decimal pricing on the securities markets, securities firms, and retail and institutional investors. To conduct this work, we are reviewing relevant regulatory, academic, and industry studies that address decimal pricing impacts. We are also interviewing and obtaining information from market participants, including: securities markets, including stock and options markets; securities firms, including broker-dealers that conduct large-block trading, market makers, and exchange specialists; industry associations, including those representing securities traders, broker-dealers, and mutual funds; trade analysis firms; institutional investors, including pension and mutual fund investment managers; and academic researchers who have studied trading and decimal pricing. To identify trends and changes since decimal pricing was introduced, we are also attempting to collect and analyze data on the characteristics of markets, firms, and investors and the impact of decimalization on these entities (table 1). In addition, we plan to conduct research and analysis using a comprehensive electronic database of quotes and trades that have occurred on U.S. stock markets. The Trade and Quote (TAQ) database offered by NYSE consolidates all quotes and trades that have occurred on NYSE, Nasdaq, the American Stock Exchange, and the regional exchanges. As part of this research, we plan to expand and extend analysis done for a recently published study on the impact of decimal pricing on trade execution costs and market quality, including volatility and liquidity. Among the types of information we plan to analyze using this database are: quotation sizes (i.e., number of shares being quoted), the percentage of trades and shares executed at prices less or greater than the best quoted price prevailing at the time of executions, and the volatility of returns from investing. We plan to use this analysis to shed light on how trade execution costs and market quality may have changed in transitioning from a fractional to a decimal pricing environment. In addition to the variables considered in the published study, we plan to gather data on trade size and the numbers of trades and quotes that may provide evidence on changes in trading behavior. We also plan to analyze the TAQ data to identify whether and to what extent clustering occurs when quotes or trade executions occur more frequently than would be expected at particular price points (e.g., multiples of 5 cents and 10 cents) despite the existence of the one-cent tick. Because we are continuing to review issues relating to decimal pricing, we do not have definitive conclusions on subpenny pricing at this time. Our work to date has shown that subpenny quoting can provide advantages to some traders but can also create disadvantages to others and potentially impair incentives to display liquidity. A significant majority of market participants appear to support SEC's proposed ban on quoting in subpennies, but little information is available on the impact of using these quotes. On the one hand, given that such quotes are currently used only in a few trading venues and for a limited range of stocks, SEC's proposed ban would probably not result in a significant change for the overall markets or most investors. On the other hand, if SEC did not ban subpenny quotes, it is possible that exchanges and more markets would want to quote in subpennies--a change that could have a significant impact on U.S. equity markets. Still, a ban would take away the ability of individual markets and investors to choose whether to use subpenny quotes if they decide their use would be advantageous. Subsequent changes in market structure, technology, and investor needs could require SEC to reconsider whether the use of subpenny quotes would be appropriate at some future date. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Committee may have. For questions concerning this testimony, please contact Cody Goebel at (202) 512-8678 or [email protected]. Other key contributors to this statement were Jordan Corey, Emily Chalmers, Joe Hunter, Kathryn Supinski, and Richard Vagnoni. 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 2001, U.S. stock and options markets, which had previously quoted prices in fractions, began quoting in decimals. Since then, various positive and negative effects have been attributed to the transition to decimal pricing. As part of this transition, the major stock markets chose one penny ($.01) as the minimum price variation for quoting prices for orders to buy or sell. However, some electronic trading systems allowed their customers to quote in increments of less than a penny (such as $.001). The use of subpenny prices for securities trades has proved controversial and the Securities and Exchange Commission (SEC) has proposed a ban against subpenny quoting for stocks priced above one dollar across all U.S. markets. As part of ongoing work that examines a range of issues relating to decimal pricing, GAO reviewed (1) how widely subpenny prices are used and by whom, (2) the advantages and disadvantages of subpenny pricing cited by market participants, and (3) market participants' reactions to SEC's proposed ban. Data on the extent to which market participants are quoting in subpenny increments across all U.S. equity markets are not routinely reported or readily available. However, studies of limited scope conducted by regulators and one market found that subpenny prices were not widely used. For example, a study done by the Nasdaq Stock Market in 2001 of Nasdaq stocks found that subpenny increments were used in less than 15 percent of the orders that specified a price (limit orders). Currently, the major markets do not allow subpenny quoting but a few electronic trading systems that match customer orders do. On electronic trading systems, professional traders (such as those employed by hedge funds) use subpenny quotes to gain a competitive price advantage over other orders. However, many market participants GAO interviewed cited numerous disadvantages to the use of subpenny quoting. They argued that subpenny quotes primarily benefit the professional traders who subscribe to market data systems displaying subpenny prices and who use fast systems to transmit their orders to take advantage of such prices. As a result, most investors do not benefit from subpenny quotes because they do not use these systems and because many broker-dealers do not accept orders from their customers in subpenny increments. In addition, participants said that subpenny quotes allow some traders to step ahead of others' orders for an economically insignificant amount. They said this discourages other traders from submitting limit orders and reduces overall transparency and liquidity in the markets. Based on the work GAO has conducted to date, including a limited review of comments on SEC's proposal to ban subpenny quoting, most market participants support SEC's proposed action. However, some organizations opposed to the ban said that it could reduce the ability of traders to offer better prices and stifle technological innovation and reduce market participants' incentive to invest in better systems. Although some electronic trading systems supported the ban, others indicated that the decision to use subpenny quotes should be left to market participants who, as technology advances, may increasingly find subpenny quotes more useful than they do today. In addition to reviewing subpenny pricing, GAO continues to review the broader impacts of decimal pricing on markets, securities firms, and investors. As part of this work, we plan to conduct original analysis using a comprehensive database of trades and quotes from U.S. markets to identify trends in quoted spreads, clustering of quotes and trades across certain prices, and other potential changes since decimal pricing was introduced.

As our past work has found, climate-related and extreme weather impacts on physical infrastructure such as buildings, roads, and bridges, as well as on federal lands, increase federal fiscal exposures. Infrastructure is typically designed to withstand and operate within historical climate patterns. However, according to NRC, as the climate changes, historical patterns do not provide reliable predictions of the future, in particular, those related to extreme weather events.may underestimate potential climate-related impacts over their design life, which can range up to 50 to 100 years. Federal agencies responsible for the long-term management of federal lands face similar impacts. Climate- Thus, infrastructure designs related impacts can increase the operating and maintenance costs of infrastructure and federal lands or decrease the infrastructure's life span, leading to increased fiscal exposures for the federal government that are not fully reflected in the budget. Key examples from our recent work include (1) Department of Defense (DOD) facilities, (2) other large federal facilities such as National Aeronautics and Space Administration (NASA) centers, and (3) federal lands such as National Parks. DOD manages a global real-estate portfolio that includes over 555,000 facilities and 28 million acres of land with a replacement value that DOD estimates at close to $850 billion. Within the United States, the department's extensive infrastructure of bases and training ranges-- critical to maintaining military readiness--extends across the country, including Alaska and Hawaii. DOD incurs substantial costs for infrastructure, with a base budget for military construction and family housing totaling more than $9.8 billion in fiscal year 2014. As we reported in May 2014, this infrastructure is vulnerable to the potential impacts of climate change, including increased drought and more frequent and severe extreme weather events in certain locations. In its 2014 Quadrennial Defense Review, DOD stated that the impacts of climate change may increase the frequency, scale, and complexity of future missions, while undermining the capacity of domestic installations to support training activities. For example, in our May 2014 report on DOD infrastructure adaptation, we found that drought contributed to wildfires at an Army installation in Alaska that delayed certain units' training (see fig. 1). systems in training and decreased the realism of the training. GAO-14-446. Adaptation is defined as adjustments to natural or human systems in response to actual or expected climate change. The federal government owns and operates hundreds of thousands of non-defense buildings and facilities that a changing climate could affect. For example, NASA's real property holdings include more than 5,000 buildings and other structures such as wind tunnels, laboratories, launch pads, and test stands. In total, these NASA assets--many of which are located in vulnerable coastal areas--represent more than $32 billion in current replacement value. Our April 2013 report on infrastructure adaptation showed the vulnerability of Johnson Space Center and its mission control center, often referred to as the nerve center for America's human space program. As shown in figure 3, the center is located in Houston, Texas, near Galveston Bay and the Gulf of Mexico. Johnson Space Center's facilities--conservatively valued at $2.3 billion--are vulnerable to storm surge and sea level rise because of their location on the Gulf Coast. The federal government manages nearly 30 percent of the land in the United States for a variety of purposes, such as recreation, grazing, timber, and habitat for fish and wildlife. Specifically, federal agencies manage natural resources on about 650 million acres of land, including 401 national park units and 155 national forests. As we reported in May 2013, these resources are vulnerable to changes in the climate, including increases in air and water temperatures, wildfires, and drought; forests stressed by drought becoming more vulnerable to insect infestations; rising sea levels; and reduced snow cover and retreating glaciers. In addition, various species are expected to be at risk of becoming extinct due to the loss of habitat critical to their survival. Many of these changes have already been observed on federally managed lands and waters and are expected to continue, and one of the areas where the federal government's fiscal exposure is expected to increase is in its role as the manager of large amounts of land and other natural resources. According to USGCRP's May 2014 National Climate Assessment, hotter and drier weather and earlier snowmelt mean that wildfires in the West start earlier in the spring, last later into the fall, and burn more acres. Appropriations for the federal government's wildland fire management activities have tripled, averaging over $3 billion annually in recent years, up from about $1 billion in fiscal year 1999. As we have previously reported, improved climate-related technical assistance to all levels of government can help limit federal fiscal exposures. Existing federal efforts encourage a decentralized approach to such assistance, with federal agencies incorporating climate-related information into their planning, operations, policies, and programs and establishing their own methods for collecting, storing, and disseminating climate-related data. Reflecting this approach, technical assistance from the federal government to state and local governments also exists in an uncoordinated confederation of networks and institutions. As we reported in our February 2013 high-risk update, the challenge is to develop a cohesive approach at the federal level that also informs action at the state and local levels. The Executive Office of the President and federal agencies have many efforts underway to increase the resilience of federal infrastructure and programs. For example, executive orders issued in 2009 and 2013 directed agencies to create climate change adaptation plans which integrate consideration of climate change into their operations and overall mission objectives, including the costs and benefits of improving climate adaptation and resilience with real-property investments and construction of new facilities. Recognizing these and many other emerging efforts, our prior work shows that federal decision makers still need help understanding how to build resilience into their infrastructure and planning processes. For example, in our May 2014 report, we found that DOD requires selected infrastructure planning efforts for existing and future infrastructure to account for climate change impacts, but its planners did not have key information necessary to make decisions that account for climate and We recommended that DOD provide further information to related risks. installation planners and clarify actions that account for climate change in planning documents. DOD concurred with our recommendations. GAO-14-446. even with the creation of strategic policy documents and high-level agency guidance. The federal government invests tens of billions of dollars annually in infrastructure projects prioritized and supervised by state and local governments. In total, the United States has about 4 million miles of roads and 30,000 wastewater treatment and collection facilities. According to a 2010 Congressional Budget Office report, total public spending on transportation and water infrastructure exceeds $300 billion annually, with roughly 25 percent of this amount coming from the federal government However, the and the rest coming from state and local governments. federal government plays a limited role in project-level planning for transportation and wastewater infrastructure, and state and local efforts to consider climate change in infrastructure planning have occurred primarily on a limited, ad hoc basis. The federal government has a key interest in helping state and local decision makers increase their resilience to climate change and extreme weather events because uninsured losses may increase the federal government's fiscal exposure through federal disaster assistance programs. Congressional Budget Office, Public Spending on Transportation and Water Infrastructure, Pub. No. 4088 (Washington, D.C.: November 2010). the national gross domestic product by about $7.8 billion.shows Louisiana State Highway 1 leading to Port Fourchon. We found in April 2013, that infrastructure decision makers have not systematically incorporated potential climate change impacts in planning for roads, bridges, and wastewater management systems because, among other factors, they face challenges identifying and obtaining available climate change information best suited for their projects.when good scientific information is available, it may not be in the actionable, practical form needed for decision makers to use in planning and designing infrastructure. Such decision makers work with traditional Even engineering processes, which often require very specific and discrete information. Moreover, local decision makers--who, in this case, specialize in infrastructure planning, not climate science--need assistance from experts who can help them translate available climate change information into something that is locally relevant. In our site visits to several locations where decision makers overcame these challenges-- including Louisiana State Highway 1--state and local officials emphasized the role that the federal government could play in helping to increase local resilience. Any effective adaptation strategy must recognize that state and local governments are on the front lines in both responding to immediate weather-related disasters and in preparing for the potential longer-term impacts associated with climate change. We reported in October 2009, that insufficient site-specific data--such as local temperature and precipitation projections--complicate state and local decisions to justify the current costs of adaptation efforts for potentially less certain future benefits. We recommended that the appropriate entities within the Executive Office of the President develop a strategic plan for adaptation that, among other things, identifies mechanisms to increase the capacity of federal, state, and local agencies to incorporate information about current and potential climate change impacts into government decision making. USGCRP's April 2012 strategic plan for climate change science recognizes this need, by identifying enhanced information management and sharing as a key objective. According to this plan, USGCRP is pursuing the development of a global change information system to leverage existing climate-related tools, services, and portals from federal agencies. In our April 2013 report, we concluded that the federal government could help state and local efforts to increase their resilience by (1) improving access to and use of available climate-related information, (2) providing officials with improved access to technical assistance, and (3) helping officials consider climate change in their planning processes. As a result, we recommended, among other things, that the Executive Director of USGCRP or other federal entity designated by the Executive Office of the President work with relevant agencies to identify for decision makers the "best available" climate-related information for infrastructure planning and update this information over time, and to clarify sources of local assistance for incorporating climate-related information and analysis into infrastructure planning, and communicate how such assistance will be provided over time. These entities have not directly responded to our recommendations, but the President's June 2013 Climate Action Plan and November 2013 Executive Order 13653 drew attention to the need for improved technical assistance. For example, the Executive Order directs numerous federal agencies, supported by USGCRP, to work together to develop and provide authoritative, easily accessible, usable, and timely data, information, and decision-support tools on climate preparedness and resilience. In addition, on July 16, 2014, the President announced a series of actions to help state, local, and tribal leaders prepare their communities for the impacts of climate change by developing more resilient infrastructure and rebuilding existing infrastructure stronger and smarter. We have work under way assessing the strengths and limitations of governmentwide options to meet the climate-related information needs of federal, state, local, and private sector decision makers. We also have work under way exploring, among other things, the risks extreme weather events and climate change pose to public health, agriculture, public transit systems, and federal insurance programs. This work may help identify other steps the federal government could take to limit its fiscal exposure and make our communities more resilient to extreme weather events. Chairman Murray, Ranking Member Sessions, and Members of the Committee, this concludes my prepared statement. I would be pleased to answer any questions you have at this time. If you or your staff members have any questions about this testimony, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Alfredo Gomez, Director; Michael Hix, Assistant Director; Jeanette Soares; Kiki Theodoropoulos; and Joseph Dean Thompson made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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.

Certain types of extreme weather events have become more frequent or intense according to the United States Global Change Research Program, including prolonged periods of heat, heavy downpours, and, in some regions, floods and droughts. While it is not possible to link any individual weather event to climate change, the impacts of these events affect many sectors of our economy, including the budgets of federal, state, and local governments. GAO focuses particular attention on government operations it identifies as posing a "high risk" to the American taxpayer and, in February 2013, added to its High Risk List the area Limiting the Federal Government's Fiscal Exposure by Better Managing Climate Change Risks . GAO's past work has identified a variety of fiscal exposures--responsibilities, programs, and activities that may explicitly or implicitly expose the federal government to future spending. This testimony is based on reports GAO issued from August 2007 to May 2014, and discusses (1) federal fiscal exposures resulting from climate-related and extreme weather impacts on critical infrastructure and federal lands, and (2) how improved federal technical assistance to all levels of government can help reduce climate-related fiscal exposures. GAO is not making new recommendations but has made numerous recommendations in prior reports on this topic, which are in varying states of implementation by the Executive Office of the President and federal agencies. Climate change and related extreme weather impacts on infrastructure and federal lands increase fiscal exposures that the federal budget does not fully reflect. Investing in resilience--actions to reduce potential future losses rather than waiting for an event to occur and paying for recovery afterward--can reduce the potential impacts of climate-related events. Implementing resilience measures creates additional up-front costs but could also confer benefits, such as a reduction in future damages from climate-related events. Key examples of vulnerable infrastructure and federal lands GAO has identified include: Department of Defense (DOD) facilities. DOD manages a global real-estate portfolio that includes over 555,000 facilities and 28 million acres of land with a replacement value DOD estimates at close to $850 billion. This infrastructure is vulnerable to the potential impacts of climate change and related extreme weather events. For example, in May 2014, GAO reported that a military base in the desert Southwest experienced a rain event in August 2013 in which about 1 year's worth of rain fell in 80 minutes. The flooding caused by the storm damaged more than 160 facilities, 8 roads, 1 bridge, and 11,000 linear feet of fencing, resulting in an estimated $64 million in damages. Other large federal facilities. The federal government owns and operates hundreds of thousands of other facilities that a changing climate could affect. For example, the National Aeronautics and Space Administration (NASA) manages more than 5,000 buildings and other structures. GAO reported in April 2013 that, in total, these NASA assets--many of which are in coastal areas vulnerable to storm surge and sea level rise--represent more than $32 billion in current replacement value. Federal lands. The federal government manages nearly 30 percent of the land in the United States--about 650 million acres of land--including 401 national park units and 155 national forests. GAO reported in May 2013 that these resources are vulnerable to changes in the climate, including the possibility of more frequent and severe droughts and wildfires. Appropriations for federal wildland fire management activities have tripled since 1999, averaging over $3 billion annually in recent years. GAO has reported that improved climate-related technical assistance to all levels of government can help limit federal fiscal exposures. The federal government invests tens of billions of dollars annually in infrastructure projects that state and local governments prioritize, such as roads and bridges. Total public spending on transportation and water infrastructure exceeds $300 billion annually, with about 25 percent coming from the federal government and the rest from state and local governments. GAO's April 2013 report on infrastructure adaptation concluded that the federal government could help state and local efforts to increase their resilience by (1) improving access to and use of available climate-related information, (2) providing officials with improved access to technical assistance, and (3) helping officials consider climate change in their planning processes.

Title XIX of the Social Security Act establishes Medicaid as a joint federal- state program to finance health care for certain low-income, aged, or disabled individuals. Medicaid is an open-ended entitlement program, under which the federal government is obligated to pay its share of expenditures for covered services provided to eligible individuals under each state's federally approved Medicaid plan. States operate their Medicaid programs by paying qualified health care providers for a range of covered services provided to eligible beneficiaries and then seeking reimbursement for the federal share of those payments. CMS has an important role in ensuring that states comply with certain statutory Medicaid payment principles when claiming federal reimbursements for payments made to institutional and other providers who serve Medicaid beneficiaries. For example, Medicaid payments by law must be "consistent with efficiency, economy, and quality care," and states must share in Medicaid costs in proportions established according to a statutory formula. Within broad federal requirements, each state administers and operates its Medicaid program in accordance with a state Medicaid plan, which must be approved by CMS. A state Medicaid plan details the populations a state's program serves, the services the program covers (such as physicians' services, nursing home care, and inpatient hospital care), and the rates of and methods for calculating payments to providers. State Medicaid plans generally do not detail the specific arrangements a state uses to finance the nonfederal share of program spending. Title XIX of the Social Security Act allows states to derive up to 60 percent of the nonfederal share from local governments, as long as the state itself contributes at least 40 percent. Over the last several years, CMS has taken a number of steps to help ensure the fiscal integrity of the Medicaid program. These include making internal organizational changes that centralize the review of states' Medicaid financing arrangements and hiring additional staff to review each state's Medicaid financing. The agency also published in May 2007 a final rule related to Medicaid payment and financing. This rule would, among other things, limit payments to government providers to their cost of providing Medicaid services. Congress has imposed a moratorium on this rule until May 25, 2008. From 1994 through 2005, we have reported numerous times on a number of financing arrangements that create the illusion of a valid state Medicaid expenditure to a health care provider. Payments under these arrangements have enabled states to claim federal matching funds regardless of whether the program services paid for had actually been provided. As various schemes have come to light, the Congress and CMS took several actions from 1987 through 2002, through law and regulation, to curtail them (see table 1). Many of these arrangements involve payment arrangements between the state and government-owned or government-operated providers, such as local government-operated nursing homes. They also involved supplemental payments--payments states made to these providers separate from and in addition to those made at a state's standard Medicaid payment rate. The supplemental payments connected with these arrangements were illusory, however, because states required these government providers to return part or all of the payments to the states. Because government entities were involved, all or a portion of the supplemental payments could be returned to the state through an IGT. Financing arrangements involving illusory payments to Medicaid providers have significant fiscal implications for the federal government and states. The exact amount of additional federal Medicaid funds generated through these arrangements is not known, but was in the billions of dollars. For example, a 2001 regulation to curtail states' misuse of the UPL for certain provider payments was estimated to have saved the federal government approximately $17 billion from fiscal year 2002 through fiscal year 2006. In 2003, we designated Medicaid to be a program at high risk of mismanagement, waste, and abuse, in part because of concerns about states' use of inappropriate financing arrangements. States' use of these creative financing mechanisms undermined the federal-state Medicaid partnership as well as the program's fiscal integrity in at least three ways. First, inappropriate state financing arrangements effectively increased the federal matching rate established under federal law by increasing federal expenditures while state contributions remain unchanged or even decrease. Figure 1 illustrates a state's arrangement in place in 2004 in which the state increased federal expenditures without a commensurate increase in state spending. In this case, the state made a $41 million supplemental payment to a local government hospital. Under its Medicaid matching formula, the state paid $10.5 million and CMS paid $30.5 million as the federal share of the supplemental payment. However, after receiving the supplemental payment the hospital transferred back to the state approximately $39 million of the $41 million payment, retaining just $2 million. Creating the illusion of a $41 million hospital payment when only $2 million was actually retained by the provider enabled the state to obtain additional federal reimbursements without effectively contributing a nonfederal share--in this case, the state actually netted $28.5 million as a result of the arrangement. Second, CMS had no assurance that these increased federal matching payments were retained by the providers and used to pay for Medicaid services. Federal Medicaid matching funds are intended for Medicaid- covered services for the Medicaid-eligible individuals on whose behalf payments are made. However, under these arrangements payments for such Medicaid-covered services were returned to the states, which could then use the returned funds at their own discretion. In 2004, we examined how six states with large supplemental payment financing arrangements involving nursing homes used the federal funds they generated. As in the past, some states deposited excessive funds from financing arrangements into their general funds, which may or may not be used for Medicaid purposes. Table 2 provides further information on how states used their funds from supplemental payment arrangements, as reported by the six states we reviewed in 2004. Third, these state financing arrangements undermined the fiscal integrity of the Medicaid program because they enabled states to make payments to government providers that could significantly exceed their costs. In our view, this practice was inconsistent with the statutory requirement that states ensure that Medicaid payments are economical and efficient. Our March 2007 report on a recent CMS oversight initiative to end certain financing arrangements where providers did not retain the payments provides context for CMS's May rule. Responding to concerns about states' continuing use of creative financing arrangements to shift costs to the federal government, CMS has taken steps starting in August 2003 to end inappropriate state financing arrangements by closely reviewing state plan amendments on a state-by-state basis. As a result of the CMS initiative, from August 2003 through August 2006, 29 states ended one or more arrangements for financing supplemental payments, because providers were not retaining the Medicaid payments for which states had received federal matching funds. We found CMS's actions under its oversight initiative to be consistent with Medicaid payment principles--for example, that payment for services be consistent with efficiency, economy, and quality of care. We also found, however, that CMS's initiative to end inappropriate financing arrangements lacked transparency, in that CMS had not issued written guidance about the specific approval standards for state financing arrangements. CMS's initiative was a departure from the agency's past oversight approach, which did not focus on whether individual providers were retaining the supplemental payments they received. In contacting the 29 states that ended a financing arrangement from August 2003 through August 2006 under the initiative, only 8 states reported that they had received any written guidance or clarification from CMS regarding appropriate and inappropriate financing arrangements. CMS had not used any of the means by which it typically provides information to states about the Medicaid program, such as its published state Medicaid manual, standard letters issued to all state Medicaid directors, or technical guidance manuals, to inform states about the specific standards it used for reviewing and approving states' financing arrangements. State officials told us that it was not always clear what financing arrangements CMS would allow and why arrangements approved in the past would no longer be approved. Twenty-four of 29 states reported that CMS had changed its policy regarding financing arrangements, and 1 state challenged CMS's disapproval of its state plan amendment, in part on the grounds that CMS changed its policy regarding payment arrangements and should have done so through rule making. The lack of transparency in CMS's review standards raised questions about the consistency with which states had been treated in ending their financing arrangements. We consequently recommended that CMS issue guidance to clarify allowable financing arrangements. Our recommendation for CMS to issue guidance for allowable financing arrangements paralleled a recommendation we had made in earlier work reviewing states' use of consultants on a contingency-fee basis to maximize federal Medicaid revenues. Problematic projects where claims for federal matching funds appeared to be inconsistent with CMS's policy or with federal law, or that--as with inappropriate supplemental payment arrangements--undermined Medicaid's fiscal integrity, involved Medicaid payments to government entities and categories of claims where federal requirements had been inconsistently applied, were evolving, or were not specific. We recommended that CMS establish or clarify and communicate its policies in these areas, including supplemental payment arrangements. CMS's responded that clarifying guidance was under development for targeted case management, rehabilitation services, and supplemental payment arrangements. We have ongoing work to examine the amount and distribution of states' Medicaid supplemental payments, but have not reported on the May 2007 rule or other rules related to Medicaid financing issued this year. Certain elements of the May 2007 rule relate to the concerns our past work has raised. Some aspects of the final rule appear to be responsive to recommendations from our past work, to the extent that its implementation could help ensure that Medicaid providers, on whose behalf states' receive federal matching funds, retain the payments made by the state. The extent to which the rule would address concerns about the transparency of CMS's initiative and review standards will depend on how CMS implements it. As the nation's health care safety net, the Medicaid program is of critical importance to beneficiaries and the providers that serve them. The federal government and states have a responsibility to administer the program in a manner that ensures that expenditures benefit those low-income people for whom benefits were intended. With annual expenditures totaling more than $300 billion per year accountability for the significant program expenditures is critical to providing those assurances. Ensuring the program's long-term fiscal sustainability is important for beneficiaries, providers, states, and the federal government. For more than a decade, we have reported on various methods that states have used to inappropriately maximize federal Medicaid reimbursement, and we have made recommendations to end these inappropriate financing arrangements. Supplemental payments involving government providers have resulted in billions of excess federal dollars for states, yet accountability for these payments--assurances that they are retained by providers of Medicaid services to Medicaid beneficiaries--has been lacking. CMS has taken important steps in recent years to improve its financial management of Medicaid, yet more can be done. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions that you or members of the subcommittee may have. For information regarding this testimony, please contact James Cosgrove 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 testimony. Katherine Iritani, Assistant Director; Carolyn Yocom, Assistant Director; Ted Burik; Tim Bushfield; Tom Moscovitch; and Terry Saiki also made key contributions to this testimony. Medicaid Financing: Long-Standing Concerns about Inappropriate State Arrangements Support Need for Improved Federal Oversight. GAO-08-255T. Washington, D.C.: November 1, 2007. Medicaid Financing: Federal Oversight Initiative Is Consistent with Medicaid Payment Principles but Needs Greater Transparency. GAO-07-214. Washington, D.C.: March 30, 2007. High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 2007. Medicaid Financial Management: Steps Taken to Improve Federal Oversight but Other Actions Needed to Sustain Efforts. GAO-06-705. Washington, D.C.: June 22, 2006. Medicaid: States' Efforts to Maximize Federal Reimbursements Highlight Need for Improved Federal Oversight. GAO-05-836T. Washington, D.C.: June 28, 2005. Medicaid Financing: States' Use of Contingency-Fee Consultants to Maximize Federal Reimbursements Highlights Need for Improved Federal Oversight. GAO-05-748. Washington, D.C.: June 28, 2005. Medicaid: Intergovernmental Transfers Have Facilitated State Financing Schemes. GAO-04-574T. Washington, D.C.: March 18, 2004. Medicaid: Improved Federal Oversight of State Financing Schemes Is Needed. GAO-04-228. Washington, D.C.: February 13, 2004. Major Management Challenges and Program Risks: Department of Health and Human Services. GAO-03-101. Washington, D.C.: January 2003. Medicaid: HCFA Reversed Its Position and Approved Additional State Financing Schemes. GAO-02-147. Washington, D.C.: October 30, 2001. Medicaid: State Financing Schemes Again Drive Up Federal Payments. GAO/T-HEHS-00-193. Washington, D.C.: September 6, 2000. Medicaid in Schools: Improper Payments Demand Improvements in HCFA Oversight. GAO/HEHS/OSI-00-69. Washington, D.C.: April 5, 2000. Medicaid in Schools: Poor Oversight and Improper Payments Compromise Potential Benefit. GAO/T-HEHS/OSI-00-87. Washington, D.C.: April 5, 2000. Medicaid: States Use Illusory Approaches to Shift Program Costs to Federal Government. GAO/HEHS-94-133. Washington, D.C.: August 1, 1994. 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.

Medicaid, a joint federal-state program, financed the health care for about 59 million low-income people in fiscal year 2006. States have considerable flexibility in deciding what medical services and individuals to cover and the amount to pay providers, and the federal government reimburses a portion of states' expenditures according to a formula established by law. The Centers for Medicare & Medicaid Services (CMS) is the federal agency responsible for overseeing Medicaid. Growing pressures on federal and state budgets have increased tensions between the federal government and states regarding this program, including concerns about whether states were appropriately financing their share of the program. GAO's testimony describes findings from prior work conducted from 1994 through March 2007 on (1) certain inappropriate state Medicaid financing arrangements and their implications for Medicaid's fiscal integrity and (2) outcomes and transparency of a CMS oversight initiative begun in 2003 to end such inappropriate arrangements. GAO has reported for more than a decade on varied financing arrangements that inappropriately increase federal Medicaid matching payments. In reports issued from 1994 through 2005, GAO found that some states had received federal matching funds by paying certain government providers, such as county-operated nursing homes, amounts that greatly exceeded established Medicaid rates. States would then bill CMS for the federal share of the payment. However, these large payments were often temporary, since some states required the providers to return most or all of the amount. States used the federal matching funds obtained in making these payments as they wished. Such financing arrangements had significant fiscal implications for the federal government and states. The exact amount of additional federal Medicaid funds generated through these arrangements is unknown, but was in the billions of dollars. Because such financing arrangements effectively increase the federal Medicaid share above what is established by law, they threaten the fiscal integrity of Medicaid's federal and state partnership. They shift costs inappropriately from the states to the federal government, and take funding intended for covered Medicaid costs from providers, who do not under these arrangements retain the full payments. In 2003, CMS began an oversight initiative that by August 2006 resulted in 29 states ending one or more inappropriate financing arrangements. Under the initiative, CMS sought satisfactory assurances that a state was ending financing arrangements that the agency found to be inappropriate. According to CMS, the arrangements had to be ended because the providers did not retain all payments made to them but returned all or a portion to the states. GAO reported in 2007 that although CMS's initiative was consistent with Medicaid payment principles, it was not transparent in implementation. CMS had not used any of the means by which it normally provides states with information about Medicaid program requirements, such as the published state Medicaid manual, standard letters issued to all state Medicaid directors, or technical guidance manuals. Such guidance could be helpful by informing states about the specific standards used for reviewing and approving states' financing arrangements. In May 2007, CMS issued a final rule that, if implemented, would, among other things, limit Medicaid payments to government providers' costs. We have not reviewed the substance of the May 2007 rule. The extent to which the May 2007 rule would respond to GAO's concerns about the transparency of CMS's initiative and review standards will depend on how CMS implements it.

The following information provides details about our agents' experiences and observations entering the United States from Mexico at border crossings in California and Texas and at two crossings in Arizona. California: On February 9, 2006, two agents entered California from Mexico on foot. One of the agents presented as identification a counterfeit West Virginia driver's license and the other presented a counterfeit Virginia driver's license. The CBP officers on duty asked both agents if they were U.S. citizens and both responded that they were. The officers also asked the agents if they were bringing anything into the United States from Mexico and both answered that they were not. The CBP officers did not request any other documents to prove citizenship, and allowed both agents to enter the United States. Texas: On February 23, 2006, two agents crossed the border from Mexico into Texas on foot. When the first agent arrived at the checkpoint, a CBP officer asked him for his citizenship information; the agent responded that he was from the United States. The officer also asked if the agent had brought back anything from Mexico. The agent responded that he had not, and the officer told him that he could enter the Unites States. At this point, the agent asked the CBP officer if he wished to see any identification. The officer replied "OK, that would be good." The agent began to remove his counterfeit Virginia driver's license from his wallet and the inspector said "That's fine, you can go." The CBP officer never looked at the driver's license. When the second agent reached the checkpoint, another CBP officer asked him for his citizenship information and he responded that he was from the United States. The CBP officer asked the agent if he had purchased anything in Mexico and the agent replied that he had not. He was then asked to show some form of identification and he produced a counterfeit West Virginia driver's license. The CBP inspector briefly looked at the driver's license and then told the agent he could enter the United States. Arizona, first crossing: On March 14, 2006, two agents arrived at the border crossing between Mexico and Arizona in a rental vehicle. Upon request, the agents gave the CBP officer a counterfeit West Virginia driver's license and counterfeit Virginia driver's license as identification. As the CBP officer reviewed the licenses, he asked the agents if they were U.S. citizens and they responded that they were. The officer also asked if the agents had purchased anything in Mexico and they said they had not. The CBP officer then requested that agents open the trunk of their vehicle. The agents heard the inspector tap on several parts of the side of the vehicle first with his hand and again with what appeared to be a wand. The officer closed the trunk of the vehicle, returned the agents' driver's licenses, and allowed them to enter the United States. Arizona, second crossing: On March 15, 2006, two agents again entered Arizona from Mexico on foot at a different location than the previous day. One of the agents carried a counterfeit West Virginia driver's license and a counterfeit West Virginia birth certificate. The other carried a counterfeit Virginia driver's license and a counterfeit New York birth certificate. As the agents were about to cross the border, another agent who had crossed the border earlier using his genuine identification phoned to inform them that the CBP officer on duty had swiped his Virginia driver's license through a scanner. Because the counterfeit driver's licenses the agents were carrying had fake magnetic strips, the agents decided that in the event they were questioned about their licenses, they would tell the CBP officers that the strips had become demagnetized. When the agents entered the checkpoint area, they saw that they were the only people crossing the border at that time. The agents observed three CBP officers on duty; one was manning the checkpoint and the other two were standing a short distance away. The officer manning the checkpoint was sitting at a cubicle with a computer and what appeared to be a card scanner. The agents engaged this officer in conversation to distract him from scanning their driver's licenses. After a few moments, the CBP officer asked the agents if they were both U.S. citizens and they said that they were. He then asked if they had purchased anything in Mexico and they said no. He then told them to have a nice day and allowed them to enter the United States. He never asked for any form of identification. The following information provides details about our agents' experiences and observations entering the United States from Canada at Michigan, New York, Idaho, and Washington border crossings. Michigan: On May 1, 2006, two agents drove in a rental vehicle to a border crossing in Michigan. When asked for identification by the CBP officer on duty, the agents presented a counterfeit West Virginia driver's license and a counterfeit Virginia driver's license. As the CBP officer examined the licenses, he asked the agents if they were U.S. citizens and they responded that they were. The CBP officer then asked if the agents had birth certificates. One agent presented a counterfeit New York birth certificate and the other presented a counterfeit West Virginia birth certificate. The agents observed that the CBP officer checked the birth certificates against the driver's licenses to see if the dates and names matched. The CBP officer then asked the agents if they had purchased anything in Canada and they responded that they had not. The officer also asked what the agents were doing in Canada and they responded that they had been visiting a casino in Canada. The CBP officer then returned the agents' documentation and allowed them to enter the United States. New York, first crossing: On May 3, 2006, two agents entered New York in a rental vehicle from Canada. The agents handed the CBP officer on duty counterfeit driver's licenses from West Virginia and Virginia. The CBP officer asked for the agents' country of citizenship and the agents responded that they were from the United States. The CBP officer also asked the agents why they had visited Canada. The agents responded that they had been gambling in the casinos. The CBP officer told the agents to have a nice day and allowed them to enter the United States. New York, second crossing: On the same date, the same two agents crossed back into Canada and re-entered New York at a different location. The agents handed the CBP officer at the checkpoint the same two counterfeit driver's licenses from West Virginia and Virginia. The officer asked the agents what they were doing in Canada and they replied that they been gambling at a casino. The officer then asked the agents how much money they were bringing back into the country and they told him they had approximately $325, combined. The officer next asked the agent driving the car to step out of the vehicle and open the trunk. As the agent complied, he noticed that the officer placed the two driver's licenses on the counter in his booth. The officer asked the agent whose car they were driving and the agent told him that it was a rental. A second officer then asked the agent to stand away from the vehicle and take his hands out of his pockets. The first officer inspected the trunk of the vehicle, which was empty. At this point, the officer handed back the two driver's licenses and told the agents to proceed into the United States. Idaho: On May 23, 2006, two agents drove in a rental vehicle to a border crossing in Idaho. The agents handed the CBP officer on duty a counterfeit West Virginia driver's license and a counterfeit Virginia driver's license. As the CBP officer examined the licenses, he asked the agents if they were U.S. citizens and they responded that they were. The CBP officer then asked if the agents had birth certificates. One agent presented a counterfeit New York birth certificate and the other presented a counterfeit West Virginia birth certificate. The agents observed that the CBP officer checked the birth certificates against the driver's licenses to see if the dates and names matched. The officer also asked what the agents were doing in Canada and they responded that they had been sightseeing. The CBP officer then returned the agents' documentation and allowed them to enter the United States. Washington: On May 24, 2006, two agents drove in a rental vehicle to a border crossing checkpoint in Washington. When the agents arrived at the border, they noticed that no one was at the checkpoint booth at the side of the road. Shortly thereafter, a CBP officer emerged from a building near the checkpoint booth and asked the agents to state their nationality. The agents responded that they were Americans. The CBP officer next asked the agents where they were born, and they responded New York and West Virginia. The agents then handed the CBP officers their counterfeit West Virginia and Virginia driver's licenses. The officer looked at the licenses briefly and asked the agents why they had visited Canada. The agents responded that they had a day off from a conference that they were attending in Washington and decided to do some sightseeing. The CBP officer returned the agents' identification and allowed them to enter the United States. We conducted a corrective action briefing with officials from CBP on June 9, 2006, about the results of our investigation. CBP agreed its officers are not able to identify all forms of counterfeit identification presented at land border crossings. CBP officials also stated that they fully support the newly promulgated Western Hemisphere Travel Initiative, which will require all travelers, including U.S. citizens, within the Western Hemisphere to have a passport or other secure identification deemed sufficient by the Secretary of Homeland Security to enter or reenter the United States. The current timeline proposes that the new requirements will apply to all land border crossings beginning on December 31, 2007. The proposed timeline was developed pursuant to the Intelligence Reform and Terrorism Prevention Act of 2004. The act requires the Secretary of Homeland Security, in consultation with the Secretary of State, to implement a plan no later than January 1, 2008, to strengthen the border screening process through the use of passports and other secure documentation in recognition of the fact that additional safeguards are needed to ensure that terrorists cannot enter the United States. However, the Senate recently passed a bill to extend the implementation deadline from January 1, 2008, to June 1, 2009. Additionally, the Senate bill would also authorize the Secretary of State, in consultation with the Secretary of Homeland Security, to develop a travel document known as a Passport Card to facilitate travel of U.S. citizens to Canada, Mexico, the countries located in the Caribbean, and Bermuda. We did not assess whether this initiative would be fully implemented by either the January 2008 or June 2009 deadline or whether it would be effective in preventing terrorists from entering the United States. The results of our current work indicate that (1) CBP officers at the nine land border crossings tested did not detect the counterfeit identification we used and (2) people who enter the United States via land crossings are not always asked to present identification. Furthermore, our periodic tests since 2002 clearly show that CBP officers are unable to effectively identify counterfeit driver's licenses, birth certificates, and other documents. This vulnerability potentially allows terrorists or others involved in criminal activity to pass freely into the United States from Canada or Mexico with little or no chance of being detected. It will be critical that the new initiative requiring travelers within the Western Hemisphere to present passports or other accepted documents to enter the United States address the vulnerabilities shown by our work. Mr. Chairman and Members of the Committee, this concludes my statement. I would be pleased to answer any questions that you may have at this time. For further information about this testimony, please contact 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.

Currently, U.S. citizens are not required to present a passport when entering the United States from countries in the Western Hemisphere. However, U.S. citizens are required to establish citizenship to a CBP officer's satisfaction. On its Web site, U.S. Customs and Border Protection (CBP) advises U.S. citizens that an officer may ask for identification documents as proof of citizenship, including birth certificates or baptismal records and a photo identification document. In 2003, we testified that CBP officers were not readily capable of identifying whether individuals seeking entry into the United States were using counterfeit identification to prove citizenship. Specifically, our agents were able to easily enter the United States from Canada and Mexico using fictitious names and counterfeit driver's licenses and birth certificates. Later in 2003 and 2004, we continued to be able to successfully enter the United States using counterfeit identification at land border crossings, but were denied entry on one occasion. Because of Congress's concerns that these weaknesses could possibly be exploited by terrorists or others involved in criminal activity, Congress requested that we assess the current status of security at the nation's borders. Specifically, Congress requested that we conduct a follow-up investigation to determine whether the vulnerabilities exposed in our prior work continue to exist. Agents successfully entered the United States using fictitious driver's licenses and other bogus documentation through nine land ports of entry on the northern and southern borders. CBP officers never questioned the authenticity of the counterfeit documents presented at any of the nine crossings. On three occasions--in California, Texas, and Arizona--agents crossed the border on foot. At two of these locations--Texas and Arizona--CBP allowed the agents entry into the United States without asking for or inspecting any identification documents. After completing our investigation, we briefed officials from CBP on June 9, 2006. CBP agreed that its officers are not able to identify all forms of counterfeit identification presented at land border crossings and fully supports a new initiative that will require all travelers to present a passport before entering the United States. We did not assess whether this initiative would be effective in preventing terrorists from entering the United States or whether it would fully address the vulnerabilites shown by our work.

Over the past two decades--from 1991 through 2012--there was a substantial increase in the number of FLSA lawsuits filed, with most of the increase occurring in the period from fiscal year 2001 through 2012. As shown in figure 1, in 1991, 1,327 lawsuits were filed; in 2012, that number had increased over 500 percent to 8,148. FLSA lawsuits can be filed by DOL on behalf of employees or by private individuals. Private FLSA lawsuits can either be filed by individuals or on behalf of a group of individuals in a type of lawsuit known as a "collective action". The court will generally certify whether a lawsuit meets the requirements to proceed as a collective action. The court may deny certification to a proposed collective action or decertify an existing collective action if the court determines that the plaintiffs are not "similarly situated" with respect to the factual and legal issues to be decided. In such cases, the court may permit the members to individually file private FLSA lawsuits. Collective actions can serve to reduce the burden on courts and protect plaintiffs by reducing costs for individuals and incentivizing attorneys to represent workers in pursuit of claims under the law. They may also protect employers from facing the burden of many individual lawsuits; however, they can also be costly to employers because they may result in large amounts of damages. For fiscal year 2012, we found that an estimated 58 percent of the FLSA lawsuits filed in federal district court were filed individually, and 40 percent were filed as collective actions. An estimated 16 percent of the FLSA lawsuits filed in fiscal year 2012 (about a quarter of all individually-filed lawsuits), however, were originally part of a collective action that was decertified (see fig. 2). Federal courts in most states experienced increases in the number of FLSA lawsuits filed between 1991 and 2012, but large increases were concentrated in a few states, including Florida, New York, and Alabama. Of all FLSA lawsuits filed since 2001, more than half were filed in these three states, and in 2012, about 43 percent of all FLSA lawsuits were filed in Florida (33 percent) or New York (10 percent). In both Florida and New York, growth in the number of FLSA lawsuits filed was generally steady, while changes in Alabama involved sharp increases in fiscal years 2007 and 2012 with far fewer lawsuits filed in other years (see fig. 3). Each spike in Alabama coincided with the decertification of at least one large collective action, which likely resulted in multiple individual lawsuits. For example, in fiscal year 2007, 2,496 FLSA lawsuits (about one-third of all FLSA lawsuits) were filed in Alabama, up from 48 FLSA lawsuits filed in Alabama in fiscal year 2006. In August 2006, a federal district court in Alabama decertified a collective action filed by managers of Dollar General stores. In its motion to decertify, the defendant estimated the collective to contain approximately 2,470 plaintiffs. In fiscal year 2012, an estimated 97 percent of FLSA lawsuits were filed against private sector employers, and an estimated 57 percent of FLSA lawsuits were filed against employers in four industry areas: accommodations and food services; manufacturing; construction; and "other services", which includes services such as laundry services, domestic work, and nail salons. Almost one-quarter of all FLSA lawsuits filed in fiscal year 2012 (an estimated 23 percent) were filed by workers in the accommodations and food service industry, which includes hotels, restaurants, and bars. At the same time, almost 20 percent of FLSA lawsuits filed in fiscal year 2012 were filed by workers in the manufacturing industry. In our sample, most of the lawsuits involving the manufacturing industry were filed by workers in the automobile manufacturing industry in Alabama, and most were individual lawsuits filed by workers who were originally part of one of two collective actions that had been decertified. FLSA lawsuits filed in fiscal year 2012 included a variety of different types of alleged FLSA violations and many included allegations of more than one type of violation. An estimated 95 percent of the FLSA lawsuits filed in fiscal year 2012 alleged violations of the FLSA's overtime provision, which requires certain types of workers to be paid at one and a half times their regular rate for any hours worked over 40 during a workweek. Almost one-third of the lawsuits contained allegations that the worker or workers were not paid the federal minimum wage. We also identified more specific allegations about how workers claimed their employers violated the FLSA. For example, nearly 30 percent of the lawsuits contained allegations that workers were required to work "off-the-clock" so that they would not need to be paid for that time. In addition, the majority of lawsuits contained other FLSA allegations, such as that the employer failed to keep proper records of hours worked by the employees, failed to post or provide information about the FLSA, as required, or violated requirements pertaining to tipped workers such as restaurant wait staff (see fig. 4). An estimated 14 percent of FLSA lawsuits filed in federal district court in fiscal year 2012 included an allegation of retaliation. limitations for filing an FLSA claim is 2 years (3 years if the violation is "willful"), New York state law provides a 6-year statute of limitations for filing state wage and hour lawsuits. A longer statute of limitations may increase potential financial damages in such cases because more pay periods are involved and because more workers may be involved. Adding a New York state wage and hour claim to an FLSA lawsuit in federal court could expand the potential damages, which, according to several stakeholders, may influence decisions about where and whether to file a lawsuit. In addition, according to multiple stakeholders we interviewed, because Florida lacks a state overtime law, those who wish to file a lawsuit seeking overtime compensation generally must do so under the FLSA. Ambiguity in applying the law and regulations. Ambiguity in applying the FLSA statute or regulations--particularly the exemption for executive, administrative, and professional workers--was cited as a factor by a number of stakeholders. In 2004, DOL issued a final rule updating and revising its regulations in an attempt to clarify this exemption and provided guidance about the changes, but a few stakeholders told us there is still significant confusion among employers about which workers should be classified as exempt under these categories. Industry trends. As mentioned previously, about one-quarter of FLSA lawsuits filed in fiscal year 2012 were filed by workers in the accommodations and food service industry. Nationally, service jobs, including those in the leisure and hospitality industry, increased from 2000 to 2010, while most other industries lost jobs during that period. Federal judges in New York and Florida attributed some of the concentration of such litigation in their districts to the large number of restaurants and other service industry jobs in which wage and hour violations are more common than in some other industries. An academic who focuses on labor and employment relations told us that changes in the management structure in the retail and restaurant industry may have contributed to the rise in FLSA lawsuits. For example, frontline managers who were once exempt have become nonexempt as their nonmanagerial duties have increased as a portion of their overall duties. We also reviewed DOL's annual process for determining how to target its enforcement and compliance assistance resources. The agency targets industries for enforcement that, according to its recent enforcement data, have a higher likelihood of FLSA violations, along with other factors. In addition, according to WHD internal guidance, the agency's annual enforcement plans should contain strategies to engage related stakeholders in preventing such violations. For example, if a WHD office plans to investigate restaurants to identify potential violations of the FLSA, it should also develop strategies to engage restaurant trade associations about FLSA-related issues so that these stakeholders can help bring about compliance in the industry. However, DOL does not compile and analyze relevant data, such as information on the subjects or the number of requests for assistance it receives from employers and workers, to help determine what additional or revised guidance employers may need to help them comply with the In developing its guidance on the FLSA, WHD does not use a FLSA.systematic approach that includes analyzing this type of data. In addition, WHD does not have a routine, data-based process for assessing the adequacy of its guidance. For example, WHD does not analyze trends in the types of FLSA-related questions it receives. This type of information could be used to develop new guidance or improve the guidance WHD provides to employers and workers on the requirements of the FLSA. Because of these issues, we recommended that WHD develop a systematic approach for identifying areas of confusion about the requirements of the FLSA that contribute to possible violations and improving the guidance it provides to employers and workers in those areas. This approach could include compiling and analyzing data on requests for guidance on issues related to the FLSA, and gathering and using input from FLSA stakeholders or other users of existing guidance through an advisory panel or other means. While improved DOL guidance on the FLSA might not affect the number of lawsuits filed, it could increase the efficiency and effectiveness of its efforts to help employers voluntarily comply with the FLSA. A clearer picture of the needs of employers and workers would allow WHD to more efficiently design and target its compliance assistance efforts, which may, in turn, result in fewer FLSA violations. WHD agreed with our recommendation that the agency develop a systematic approach for identifying and considering areas of confusion that contribute to possible FLSA violations to help inform the development and assessment of its guidance. WHD stated that it is in the process of developing systems to further analyze trends in communications received from stakeholders such as workers and employers and will include findings from this analysis as part of its process for developing new or revised guidance. In closing, while there has been a significant increase in FLSA lawsuits over the last decade, it is difficult to determine the reasons for the increase. It could suggest that FLSA violations have become more prevalent, that FLSA violations have been reported and pursued more frequently than before, or a combination of the two. It is also difficult to determine the effect that the increase in FLSA lawsuits has had on employers and their ability to hire workers. However, the ability of workers to bring such suits is an integral part of FLSA enforcement because of the limits on DOL's capacity to ensure that all employers are in compliance with the FLSA. Chairman Walberg, Ranking Member Courtney, and members of the Committee, this completes my prepared statement. I would be happy to respond to any questions you may have. For further information regarding this statement, please contact Andrew Sherrill at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony include Betty Ward-Zukerman (Assistant Director), Catherine Roark (Analyst in Charge), David Barish, James Bennett, Sarah Cornetto, Joel Green, Kathy Leslie, Ying Long, Sheila McCoy, Jean McSween, and Amber Yancey-Carroll. 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 FLSA sets federal minimum wage and overtime pay requirements applicable to millions of U.S. workers and allows workers to sue employers for violating these requirements. Questions have been raised about the effect of FLSA lawsuits on employers and workers and about WHD's enforcement and compliance assistance efforts as the number of lawsuits has increased. This statement examines what is known about the number of FLSA lawsuits filed and how WHD plans its FLSA enforcement and compliance assistance efforts. It is based on the results of a previous GAO report issued in December 2013. In conducting the earlier work, GAO analyzed federal district court data from fiscal years 1991 to 2012 and reviewed selected documents from a representative sample of lawsuits filed in federal district court in fiscal year 2012. GAO also reviewed DOL's planning and performance documents, interviewed DOL officials, as well as stakeholders, including federal judges, plaintiff and defense attorneys who specialize in FLSA cases, officials from organizations representing workers and employers, and academics. Substantial increases occurred over the last decade in the number of civil lawsuits filed in federal district court alleging violations of the Fair Labor Standards Act of 1938, as amended (FLSA). Federal courts in most states experienced increases in the number of FLSA lawsuits filed, but large increases were concentrated in a few states, including Florida and New York. Many factors may contribute to this general trend; however, the factor cited most often by stakeholders GAO interviewed--including attorneys and judges--was attorneys' increased willingness to take on such cases. In fiscal year 2012, an estimated 97 percent of FLSA lawsuits were filed against private sector employers, often from the accommodations and food services industry, and 95 percent of the lawsuits filed included allegations of overtime violations. The Department of Labor's Wage and Hour Division (WHD) has an annual process for planning how it will target its enforcement and compliance assistance resources to help prevent and identify potential FLSA violations. In planning its enforcement efforts, WHD targets industries that, according to its recent enforcement data, have a higher likelihood of FLSA violations. WHD, however, does not have a systematic approach that includes analyzing relevant data, such as the number of requests for assistance it receives from employers and workers, to develop its guidance, as recommended by best practices previously identified by GAO. In addition, WHD does not have a routine, data-based process for assessing the adequacy of its guidance. For example, WHD does not analyze trends in the types of FLSA-related questions it receives from employers or workers. According to plaintiff and defense attorneys GAO interviewed, more FLSA guidance from WHD would be helpful, such as guidance on how to determine whether certain types of workers are exempt from the overtime pay and other requirements of the FLSA. In its December 2013 report, GAO recommended that the Secretary of Labor direct the WHD Administrator to develop a systematic approach for identifying and considering areas of confusion that contribute to possible FLSA violations to help inform the development and assessment of its guidance. WHD agreed with the recommendation and described its plans to address it.

Under the DERP, DOD is authorized to identify, investigate and clean up environmental contamination and other hazards at FUDS as well as active installations. To that end, DOD has established restoration goals and identified over 31,000 sites that are eligible for cleanup, including more than 21,000 sites on active installations, more than 5,000 sites on installations identified for Base Realignment and Closure (BRAC), and 4,700 FUDS. The DERP was established by section 211 of the Superfund Amendments and Reauthorization Act of 1986 (SARA) which amended the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) of 1980. Under the DERP, DOD's activities addressing hazardous substances, pollutants or contaminants are required to be carried out consistent with section 120 of CERCLA. DOD delegated its authority for administering the cleanup of FUDS to the Army, which in turn delegated its execution to the Army Corps of Engineers (the Corps). Funding for cleanup activities comes from the Environmental Restoration and BRAC accounts. The Environmental Restoration account funds cleanup at active sites and FUDS properties and, of the $1.4 billion obligated in fiscal year 2007, FUDS property obligations totaled $116.5 million for addressing hazardous substances and $102.9 million for munitions response. To be eligible for FUDS cleanup, a property must have been owned by, leased to, possessed by, or otherwise controlled by DOD during the activities that led to the presence of hazards. These hazards may include unsafe buildings, structures, or debris, such as weakened load-bearing walls; hazardous, toxic, and radioactive substances, which includes contaminants such as arsenic, certain paints, some solvents, and petroleum; containerized hazardous, toxic, and radioactive waste, such as transformers and aboveground or underground storage tanks that contain petroleum, solvents, or other chemicals which have been released into the environment; and ordnance and explosive materials, such as military munitions and chemical warfare agents. To determine if a property is eligible for cleanup under the FUDS program, the Corps conducts a preliminary assessment of eligibility to determine whether the property was ever owned or controlled by DOD and if hazards caused by DOD's use may be present. If the Corps determines that the property was owned or controlled by DOD but does not find evidence of any hazards caused by DOD, it designates the property as "no DOD action indicated" (NDAI). If however, the Corps determines that a DOD-caused hazard may be present, the Corps begins to further study and/or clean up the hazard, consistent with CERCLA. The CERCLA process generally includes the following phases: preliminary assessment, site inspection, remedial investigation/feasibility study, remedial design/remedial action, and long- term monitoring. To address the release of hazardous substances, pollutants, or contaminants resulting from past practices that pose environmental health and safety risks on both active sites and FUDS, DOD established the Installation Restoration Program (IRP) in 1985 under the DERP. In fiscal year 2007, the Corps had 2,612 FUDS in the IRP. Performance metrics and comprehensive goals have been developed by DOD to assess progress toward the agency's IRP goals. These goals include progress in reaching a CERCLA cleanup phase at the site level, progress toward achieving a "remedy in place" or "response complete" status at the installation level, and progress in achieving overall relative-risk reduction. Specific targets are included in DOD's annual report to Congress. To better focus its munitions cleanup activities on both active sites and FUDS, DOD established the Military Munitions Response Program (MMRP) in September 2001, as part of the DERP, specifically to address potential explosive and environmental hazards associated with munitions. The objectives of the program include compiling a comprehensive inventory of military munitions sites, establishing a prioritization protocol for sequencing work at these sites, and establishing program goals and performance measures to evaluate progress. In December 2001, shortly after DOD established the program, the Congress passed the National Defense Authorization Act for fiscal year 2002, which, among other things, required DOD to develop an initial inventory of defense sites, other than military ranges still in operation, that are known or suspected to contain military munitions by May 31, 2003, and to provide annual updates thereafter. DOD provides these updates as part of its annual report to Congress on Defense environmental programs; in its 2007 report DOD had identified 3,537 sites suspected or known to have munitions contamination, an increase of 221 sites from fiscal year 2006. Table 1 provides a summary of DOD performance goals for MMRP and IRP. The principal government entities involved in the Spring Valley cleanup include the Corps, the Environmental Protection Agency (EPA), and the District of Columbia. The Corps has led the effort of identifying, investigating, and cleaning up contamination at the site, whereas EPA primarily consulted with and provided technical assistance to the Corps and the District of Columbia. The District of Columbia's Department of Health has monitored the cleanup's status and adequacy, conducting such actions as, according to the Department, assessing the human health risks associated with any exposure to remaining hazards at Spring Valley. Additionally, advisory entities were created to further facilitate decision- making on technical topics. In 2002, we reported that cleanup progress included the identification and removal of a large number of hazards, including buried ordnance, chemical warfare agents in glass containers, and arsenic-contaminated soil. By April 2002 the Corps had identified and removed 5,623 cubic yards of arsenic-contaminated soil from 3 properties and removed 667 pieces of ordnance-- 25 of which were chemical munitions-- and 101 bottles of chemicals. A March 2009 project overview report by the Corps indicated that, in 2004, the Corps excavated 474 drums of soil and recovered more than 800 items, such as construction debris, ordnance scrap, and laboratory glassware and ceramic pieces. The report also indicated that, by 2006, the Corps removed 5,500 cubic yards of soil, 117 munitions debris items, 6 intact munitions items, and 31 intact containers in addition, the excavation, backfilling, and restoration of the debris field that contained these materials was completed. We reported in 2002 that the primary health risks that influenced cleanup activities were (1) the possibility of injury or death from exploding or leaking ordnance and containers of chemical warfare agents; and (2) potential long-term health problems, such as cancers and other health conditions, from exposure to arsenic-contaminated soil. A study by the Department of Health and Human Services' Agency for Toxic Substances and Disease Registry found no evidence of significant exposure to arsenic in the individuals tested in 2002. In 2003, the Corps discovered perchlorate in groundwater at the site, and installed at least 38 monitoring wells for sampling. Sampling results identified elevated levels of perchlorate in the project area. Further investigation is underway with more wells and sampling planned in 2009. In April 2002, the Army estimated that the remaining cleanup activities at Spring Valley would take 5 years to complete. Total costs for the project were estimated at $145.9 million in fiscal year 2002; by fiscal year 2007, the estimated total costs increased to $173.7 million. Figure 1 presents information on the annual cost to complete and annual amounts spent to date from 2003 to the present at the Spring Valley site. When we reviewed the Spring Valley cleanup in 2002, we found that the Army determined that there was no evidence of large-scale burials of hazards remaining at Spring Valley before it received all technical input. For example, while the Army's Toxic and Hazardous Materials Agency reviewed work done by American University and documentation from additional sources, it also contracted with EPA's Environmental Photographic Interpretation Center to review available aerial photographs of the site taken during the World War I era. However, the photographs were not received or reviewed prior to 1993, according to EPA officials. Despite never having received technical input from EPA on the aerial photographs, in 1986 the Army concluded that if any materials were buried in the vicinity of the university, the amounts were probably limited to small quantities and no further action was needed. However, as we now know, subsequent investigations by the Army discovered additional ordnance in large burial pits and widespread arsenic-contaminated soil. The experience at Spring Valley is by no means a unique occurrence. Our review of other FUDS nationwide found significant shortcomings in the Corps' use of available information and guidance for making decisions relating to cleanup of contamination at these sites. For example, in 2002, we reported that the Corps did not have a sound basis for determining that about 1,468 of 3,840 FUDS properties--38 percent--did not need further study or cleanup action. Specifically, we found No evidence that the Corps reviewed or obtained information that would allow it to identify all the potential hazards at these properties or that it took sufficient steps to assess the presence of potential hazards. That for about 74 percent of all NDAI properties, the site assessment files were incomplete--i.e., the files lacked information such as site maps or photos that would show facilities, such as ammunition storage facilities, that could indicate the presence of hazards (e.g. unexploded ordnance). That for about 60 percent of all NDAI properties the Corps may not have contacted all the current owners to obtain information about potential hazards present on the site. The Corps appeared to have overlooked or dismissed information in its possession that indicated hazards might be present. For example, at a nearly 1,900 acre site previously used as an airfield by both the Army and the Navy, the file included a map showing bomb and fuse storage units on the site that would suggest the possible presence of ordnance-related hazards; however, we found no evidence that the Corps searched for such hazards. The files contained no evidence that the Corps took sufficient steps to assess the presence of potential hazards. For example, although Corps guidance calls for a site visit to look for signs of potential hazards, we estimated that the Corps did not conduct the required site visit for 686 or about 18 percent of all NDAI properties. We found that these problems occurred in part because the Corps' guidance did not specify (1) what documents or level of detail the agency should obtain when looking for information on the prior uses of and the facilities located at FUDS properties to identify potential hazards or (2) how to assess the presence of potential hazards. For example, some Corps district staff stated that there was no guidance showing the types of hazard normally found at certain types of facilities. We concluded that, since many properties may have not been properly assessed, the Corps did not know the number of additional properties that may require cleanup, the hazards that were present at those properties, the risk associated with these hazards, the length of time needed for cleanup, or the cost to clean up the properties. To address these problems, we recommended that the Corps develop more specific guidelines and procedures for identifying and assessing potential hazards at FUDS and to use them to review NDAI files and determine which properties should be reassessed. DOD told us that it has implemented this recommendation; however, according to one major association of state regulators, problems persist in how the Corps makes NDAI determinations in many cases. In 2008, the association published a fact sheet indicating, among other things, that the evidence collected is not adequate for making determinations. We will be reviewing some aspects of this decision making process as part of our ongoing work on FUDS and MMRP. At Spring Valley, the Corps' estimate of the cost to complete cleanup of the site increased by about six fold--from about $21 million to about $124 million--from fiscal year 1997 through 2001. Factors such as the future discovery of hazards made it inherently challenging for the Corps to estimate the costs for completing cleanup activities at the site. Future estimates of the cost to complete cleanup of the site also depend on assumptions about how many properties require the removal of arsenic- contaminated soil and how many properties need to be surveyed and excavated to remove possible buried hazards. As these assumptions have changed, the cost to cleanup Spring Valley has continued to rise where the most recent estimate for fiscal year 2007 is $173.7 million. The challenges of estimating the costs of the Spring Valley cleanup are common to many FUDS, and our past work has shown that incomplete data on site conditions and emerging contaminants can interfere with the development of accurate cost and schedule estimates. For example, in 2004, we evaluated DOD's MMRP program and found several weaknesses in preliminary cost estimates for numerous sites. We found that a variety of factors, including the modeling tool used to compile cost estimates, contributed to these weaknesses. Specifically, when detailed, site-specific information was not available for all sites, we found that DOD used estimates, including assumptions about the amount of acreage known or suspected of containing military munitions when preparing its cost projections. As a result, the cost estimates varied widely during the life of some cleanup projects. For example, the Corps confirmed the presence of unexploded ordnance at Camp Maxey in Texas, and in 2000, estimated cleanup costs at $45 million. In its fiscal year 2002 annual report, DOD reported that the estimated total cost had tripled and grown to $130 million, and then in June 2003, the estimate decreased to about $73 million--still 62 percent more than the original cost estimate. The main factors behind these shifting cost estimates, according to the project manager, were changes in the acreage requiring underground removal of ordnance and changes in the amount of ordnance found. To address the challenges of estimating costs, schedules, and other aspects of munitions response, we made a number of recommendations related to various elements of DOD's comprehensive plan for identifying, assessing and cleaning up military munitions at potentially contaminated sites. In its response to our 2004 report and recommendations, DOD said that it was working on developing better cost estimates, and that the Corps would designate 84 percent of its environmental restoration budget in fiscal year 2007 for investigations and cleanup actions. According to DOD, this funding would help the Corps gather more site specific information, which in turn could be used for better determining the expected cost to complete cleanup at FUDS. We found that these concerns are also not limited to just FUDS but also affect operational ranges as well. When we reviewed the development of DOD's cost estimates for addressing potential liabilities associated with unexploded ordnance, discarded military munitions, and munitions constituents on operational ranges, we found that DOD's cost estimates for cleanup were questionable because the estimates were based on inconsistent data and invalidated assumptions. The presence of newly identified contaminants at sites needing cleanup further complicates DOD's efforts to develop reliable cost estimates. In 2004, we found that DOD does not have a comprehensive policy requiring sampling or cleanup of the more than 200 chemical contaminants associated with military munitions on operational ranges. Of these 200 contaminants, 20 are of great concern to DOD due to their widespread use and potential environmental impact--including perchlorate. According to our 2005 report, perchlorate has been found in the drinking water, groundwater, surface water, or soil in 35 states, the District of Columbia (including the Spring Valley site), and 2 commonwealths of the United States. In its 2007 Annual Report to Congress, DOD indicated that new requirements to address emerging contaminants like perchlorate will drive its investments in cleanup, and require modifications in plans and programs, and adjustments to total cleanup and cost to complete estimates. However, there is limited information on the potential costs of addressing these emerging contaminants and how their cleanup may affect overall site cleanup schedules. This is partly because none of these munitions constituents are currently regulated by a federal drinking water standard under the Safe Drinking Water Act, although perchlorate, for example, is the subject of a federal interim health advisory and several state drinking water standards. Our 2004 report recommended that DOD provide specific funding for comprehensive sampling for perchlorate at sites where no sampling had been conducted; although DOD disagreed at the time, it recently took action to sample hundreds of locations nationwide. Spring Valley has received priority funding due to its proximity to the nation's capitol and high visibility; however, our past work shows that this is not the case with most FUDS. Over the past 10 years DOD has invested nearly $42 billion in its environmental programs, which include compliance, restoration, natural resources conservation, and pollution prevention activities. In fiscal year 2007, DOD obligated approximately $4 billion for environmental activities, but only $1.4 billion of this total was utilized for DERP environmental restoration activities at active installations and FUDS. Of this amount, $1.2 billion funded cleanup of hazardous substances, pollutants and contaminants from past DOD activities through the Installation Restoration Program (IRP) and $215.8 million funded activities to address unexploded ordnance, discarded military munitions and munitions constituents through the Military Munitions Response Program (MMRP). Figure 2 shows expenditures through fiscal year 2007, DOD's estimated costs to complete, and the fiscal year 2007 obligations for the IRP and MMRP at active sites and FUDS. DOD requests separate funding amounts for active sites and FUDS cleanup programs based on specific DERP restoration goals and the total number of sites in each program's inventory. Goals are set separately for the IRP and MMRP; target dates for cleanup of high priority sites are different for these programs. Furthermore, while DOD has established Department- wide goals, each service has its own goals, which may differ, and determines the allocation of funds between IRP and MMRP. Specifically, for the IRP, the DOD goal is to have a remedy in place or response complete for all active sites and FUDS by fiscal year 2020. However, DOD has requested much greater budgets for active sites than for FUDS. For example, DOD requested $257.8 million for FUDS or only one-fifth of the amount requested for active sites for fiscal year 2009. Similarly, obligations in fiscal year 2007 totaled $969.8 million for active sites, whereas FUDS obligations only totaled $219.4 million. According to the most recent annual report to Congress, DOD does not expect to complete the IRP goal for FUDS until fiscal year 2060. DOD is aiming to complete cleanup of IRP sites much earlier than MMRP sites, even if higher-risk MMRP sites have not yet been addressed. For MMRP, DOD's first goal was to complete preliminary assessments for FUDS as well as active sites, by the end of fiscal year 2007. DOD reported that it has reached this goal for 96 percent of MMRP sites. However, it is not clear if this percentage includes sites recently added to the site inventory. DOD also has an MMRP goal of completing all site inspections by the end of fiscal year 2010, but has not yet set a goal for achieving remedy in place or response complete. Our ongoing reviews of the FUDS and MMRP programs will include more in-depth analyses of the prioritization processes used by DOD for active sites and FUDS. In our 2002 report on Spring Valley, we reported that the Corps, EPA and the District of Columbia had made progress on site cleanup by adopting a partnership approach for making cleanup decisions. Importantly, they established a systematic means of communicating information to, and receiving input from, the residents of Spring Valley and other interested members of the public. While the entities did not agree on all cleanup decisions, officials of all three entities--the Corps, the District of Columbia, and EPA--stated that the partnership had been working effectively. However, we have found that this kind of cooperation and coordination does not always occur at other sites nationwide. For example: In 2003, we conducted a survey to determine how the Corps coordinates with state regulators during the assessment and cleanup of FUDS. We found that the Corps did not involve the states consistently, and that EPA had little involvement in the cleanup of most FUDS. We found that the Corps informed states of upcoming work at hazardous waste projects 53 percent of the time and requested states' input and participation 50 percent of the time. We reported that federal and state regulators believed that better coordination with the Corps regarding cleanup at FUDS would increase public confidence in the cleanups and improve their effectiveness. Some state regulators told us that inadequate Corps coordination has made it more difficult for them to carry out their regulatory responsibilities at FUDS properties and that, because of their lack of involvement, they have frequently questioned Corps cleanup decisions at FUDS. Conversely, when Corps coordination has occurred, states have been more likely to agree with Corps decisions. Several states also told us that they would like to see EPA become more involved in the cleanup process, for example, by participating in preliminary assessments of eligibility or providing states with funds to review Corps work. EPA also believed that a better-coordinated effort among all parties would improve the effectiveness of cleanup at FUDS and increase public confidence in the actions taken at these sites, but emphasized it did not expect its involvement to be consistent across all phases of work; rather, that it would increase its involvement at a site when conditions warranted--for example, if there were "imminent and substantial endangerment" or if it had concerns about the appropriateness of the cleanup. We also found that EPA and DOD disagreed on EPA's role in the FUDS program. Although EPA is the primary regulator for the FUDS that are on the National Priorities List, the states are typically the primary regulatory agency involved for all other FUDS. EPA told us that its role at some of these unlisted FUDS should be greater because it believes it can help improve the effectiveness of the cleanups and increase public confidence in the program. DOD and some states disagreed with this position because they do not believe there is a need for additional EPA oversight of DOD's work at unlisted FUDS properties where the state is the lead regulator. We concluded in 2003 that the lack of a good working relationship between two federal cleanup agencies may hamper efforts to properly assess properties for cleanup and may, in some cases, result in some duplication of effort. We also concluded in this 2003 report that a factor behind the historical lack of consistency in the Corps coordination with regulators could be that DOD and Corps guidance does not offer specific requirements that describe exactly how the Corps should involve regulators. To address these shortcomings, we recommended that DOD and the Corps develop clear and specific guidance that explicitly includes, among other things, what coordination should take place during preliminary assessments of eligibility on projects involving ordnance and explosive waste. We also recommended that DOD and the Corps assess recent efforts to improve coordination at the national as well as district level and promote wider distribution of best practices; and work with EPA to clarify their respective roles in the cleanup of former defense sites that are not on the National Priorities List. DOD, representing the Corps and DOD, generally agreed with our recommendations and has since implemented additional changes to improve its coordination with regulators, including revising its guidance to include step-by-step procedures for regulatory coordination at each phase of FUDS cleanup. However, we have not reassessed DOD's efforts or reviewed its coordination efforts since our 2003 report. In addition to better coordination with regulators, our past work has shown that the Corps frequently did not notify property owners of its determinations that the properties did not need further action, as called for in its guidance, or instruct the owners to contact the Corps if evidence of DOD-caused hazards was found later. In 2002, we estimated that the Corps failed to notify current owners of its determinations for about 72 percent of the properties that the Corps determined did not need further study or cleanup action. Even when the Corps notified the owners of its determinations, we estimated that for 91 percent of these properties it did not instruct the owners to contact the Corps if evidence of potential hazards was found later. In some cases, several years elapsed before the Corps notified owners of its determinations. We concluded that this lack of communication with property owners hindered the Corps' ability to reconsider, when appropriate, its determinations that no further study or cleanup action was necessary. As a result of our findings, we recommended that the Corps consistently implement procedures to ensure that owners are notified of NDAI determinations and its policy of reconsidering its determinations if evidence of DOD-caused hazards is found later. DOD has implemented this recommendation although we have not reviewed its implementation. In conclusion, Mr. Chairman, as we move forward on the cleanup of the Spring Valley site, we believe that the lessons learned from DOD's national environmental cleanup programs provides valuable insights that could guide decision-making and also inform the oversight process. The experience at the national level tells us that while not all the information that DOD needs is always available, it is imperative that the information that is available should be duly considered when developing cleanup plans and estimates. Moreover, involving regulators and property owners can also better ensure that DOD has the best information on which to make its decisions. Finally, it is important to recognize that emerging and unexpected situations can cause significant changes in both cost and time schedules and this could have funding implications as well for specific cleanup sites. This concludes my prepared statement. I will be happy to respond to any questions from you or other Members of the Subcommittee. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. For further information about this testimony, please contact Anu Mittal at (202) 512- 3841 or [email protected]. Key contributors to this testimony were Diane Raynes, Elizabeth Beardsley, Alison O'Neill, Justin Mausel, and Amanda Leisoo. 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.

Under the Defense Environmental Restoration Program (DERP), the Department of Defense (DOD) has charged the Army Corps of Engineers (the Corps) with cleaning up 4,700 formerly used defense sites (FUDS) and active sites that were under its jurisdiction when they were initially contaminated. The 661-acre Spring Valley site in Washington, D.C is one such site. Like many other FUDS, the U.S. Army used the Spring Valley site during World War I for research and testing of chemical agents, equipment, and munitions. Most of the site is now privately owned and includes private residences, a hospital, and several commercial properties. The primary threats at the site are buried munitions, elevated arsenic in site soils, and laboratory waste; perchlorate was also found onsite. This testimony discusses GAO's past work relating to remediation efforts at FUDS and military munitions sites to provide context for issues at Spring Valley. Specifically, it addresses: (1) the impact that shortcomings in information and guidance can have on decision-making; (2) the impact that incomplete data can have on cost estimates and schedules; (3) how funding for a particular site may be influenced by overall program goals; and (4) how better coordination can increase public confidence in cleanups and facilitate effective decision-making. GAO has made several prior recommendations that address these issues, with which, in most cases, the agency concurred. GAO's past work has found significant shortcomings in the Corps' use of available information and guidance for making decisions relating to cleanup of FUDS. For example, in 2002, GAO found that the Army determined that there was no evidence of large-scale burials of hazards remaining at Spring Valley before it had received all technical input. This experience is not unique. In a 2002 national study, GAO reported that the Corps did not have a sound basis for determining that about 1,468 of 3,840 FUDS properties--38 percent--did not need further study or cleanup action. GAO attributed these shortcomings to limitations in the Corps guidance that did not specify what documents or level of detail the agency should obtain to identify potential hazards at FUDS or how to assess the presence of potential hazards. GAO's past work has also shown that incomplete data on site conditions and emerging contaminants can interfere with the development of accurate cost and schedule estimates. At Spring Valley, the Corps' estimates of cleanup costs increased by about six fold, from about $21 million to about $124 million from fiscal year 1997 through fiscal year 2001. As assumptions about site conditions changed and new hazards were discovered, the estimates continued to rise and currently stand at about $174 million. Again, these problems are not unique. In 2004, GAO evaluated DOD's cleanup of sites with military munitions and found several similar weaknesses in preliminary cost estimates for numerous sites across the country. GAO's past work has shown that funding available for specific sites may be influenced by overall program goals and other priorities. Spring Valley has received priority funding due to its proximity to a major metropolitan area and high visibility; however, GAO's past work shows that this is usually not the case with most FUDS sites. Over the past 10 years DOD has invested nearly $42 billion in its environmental programs, but it typically requests and receives a relatively smaller amount of funding for environmental restoration activities at FUDS sites compared to funding available for active sites. GAO's past work has found that better coordination and communication with regulators and property owners can increase public confidence and facilitate effective decision-making for contaminated sites. With regard to Spring Valley, GAO reported in 2002 that the Corps, the Environmental Protection Agency (EPA) and the District of Columbia had made progress because they had adopted a partnership approach to cleanup decisions. However, this kind of cooperation and coordination does not always occur nationwide. For example, in 2003, GAO reported that the Corps only informed states of upcoming work and requested input from them about half of the time. Similarly, GAO found that the Corps did not always communicate with property owners about the decisions it makes regarding contamination at FUDS sites and more often than not did not inform property owners about how to contact the Corps in the event that further hazardous substances were identified at the site.

Major real property-holding agencies and OMB have made progress toward strategically managing federal real property. In April 2007, we found that in response to the President's Management Agenda (PMA) real property initiative and a related executive order, agencies covered under the executive order had, among other things, designated senior real property officers, established asset management plans, standardized real property data reporting, and adopted various performance measures to track progress. The administration had also established a Federal Real Property Council (FRPC) that guides reform efforts. Under the real property initiative, OMB has been evaluating the status and progress of agencies' real property management improvement efforts since the third quarter of fiscal year 2004 using a quarterly scorecard that color codes agencies' progress--green for success, yellow for mixed results, and red for unsatisfactory. As Figure 1 shows, according to OMB's analysis, many of these agencies have made progress in accurately accounting for, maintaining, and managing their real property assets so as to efficiently meet their goals and objectives. As of the first quarter of 2009, 10 of the 15 agencies evaluated had achieved green status. According to OMB, the agencies achieving green status have established 3-year timelines for meeting the goals identified in their asset management plans; provided evidence that they are implementing their asset management plans; used real property inventory information and performance measures in decision making; and managed their real property in accordance with their strategic plan, asset management plan, and performance measures. (For more information on the criteria OMB uses to evaluate agencies' efforts, see app. I.) OMB has also taken some additional steps to improve real property management governmentwide. According to OMB, the federal government disposed of excess real property valued at $1 billion in fiscal year 2008, bringing the total to over $8 billion since fiscal year 2004. OMB also reported success in developing a comprehensive database of federal real property assets, the Federal Real Property Profile (FRPP). OMB recently took further action to improve the reliability of FRPP data by implementing a recommendation we made in April 2007 to develop framework that agencies can use to better ensure the validity and usefulness of key real property data in the FRPP. According to OMB officials, OMB now requires agency-specific validation and verification plans and has developed a FRPP validation protocol to certify agency data. These actions are positive steps towards eventually developing a database that can be used to improve real property management governmentwide. However, it may take some time for these actions to result in consistently reliable data, and, as described later in this testimony, in recent work we have continued to find problems with the reliability and usefulness of FRPP data. Furthermore, our work over the past year has found some other posi steps that some agencies have taken to address ongoing challenges. Specifically: In September 2008, we found that from fiscal year 2005 through 2007, VA made significant progress in reducing underutilized space (space not used to full capacity) in its buildings from 15.4 million square feet to 5.6 million square feet. We also found that VA's use of various legal authorities, suc h as its enhanced use lease authority (EUL), which allows it to enter into long-term agreements with public and private entities for the use of VA property in exchange for cash or in-kind consideration, likely contrib to its overall reduction of underutilized space since fiscal year 2005. However, our work also shows that VA does not track it s use of these authorities or of the space reductions. In spite of some progress made by OMB and agencies in managing their real property portfolios, our recent work has found that agencies continue to struggle with the long-standing problems that led us to identify federal real property as high-risk: an over-reliance on costly leasing--and challenges GSA faces in its leasing contracting; unreliable data; underutilized and excess property and repair and maintenance backlogs; and ongoing security challenges faced by agencies and, in particular, by the Federal Protective Service (FPS), which is charged with protecting GSA buildings. One of the major reasons for our designation of federal real property as a high-risk area in January 2003 was the government's overreliance on costly leasing. Under certain conditions, such as fulfilling short-term space needs, leasing may be a lower-cost option than ownership. However, our work over the years has shown that building ownership often costs less than operating leases, especially for long-term space needs. In January 2008, we reported that federal agencies' extensive reliance on leasing has continued, and that federal agencies occupied about 398 million square feet of leased building space domestically in fiscal year 2006, according to FRPP data. GSA, USPS, and USDA leased about 71 percent of this space, mostly for offices, and the military services leased another 17 percent. For fiscal year 2008, GSA reported that for the first time, it leased more space than it owned. In 10 GSA and USPS leases that we examined in the January 2008 report, decisions to lease space that would be more cost-effective to own were driven by the limited availability of capital for building ownership and other considerations, such as operational efficiency and security. For example, for four of seven GSA leases we analyzed, leasing was more costly over time than construction--by an estimated $83.3 million over 30 years. Although ownership through construction is often the least expensive option, federal budget scorekeeping rules require the full cost of this option to be recorded up front in the budget, whereas only the annual lease payment and cancellation costs need to be recorded for operating leases, reducing the up-front commitment even though the leases are generally more costly over time. USPS is not subject to the scorekeeping rules and cited operational efficiency and limited capital as its main reasons for leasing. While OMB made progress in addressing long-standing real property problems, efforts to address the leasing challenge have been limited. We have raised this issue for almost 20 years. Several alternative approaches have been discussed by various stakeholders, including scoring operating leases the same as ownership, but none have been implemented. In our 2008 report, we recommended that OMB, in consultation with the Federal Real Property Council and key stakeholders, develop a strategy to reduce agencies' reliance on leased space for long-term needs when ownership would be less costly. OMB agreed with our recommendation. According to OMB officials, in response to this recommendation, an OMB working group conducted an analysis of lease performance. OMB is currently using this analysis as it works with officials of the new administration to assess overall real property priorities in order to establish a roadmap for further action. With GSA's ongoing reliance on leasing, it is critical that GSA manage its in-house and contracted leasing activities effectively. However, in January 2007, we identified numerous areas in GSA's implementation of four contracts for national broker services that warranted improvement. Our findings were particularly significant since, over time, GSA expects to outsource the vast majority of its expiring lease workload. At one time, GSA performed lease acquisition, management, and administration functions entirely in-house. In 1997, however, GSA started entering into contracts for real estate services to carry out a portion of its leasing program, and in October 2004, GSA awarded four contracts to perform broker services nationwide (national broker services), with contract performance beginning on April 1, 2005. GSA awarded two of the four contracts to dual-agency brokerage firms--firms that represent both building owners and tenants (in this case, GSA acting on behalf of a tenant agency). The other two awardees were tenant-only brokerage firms--firms that represent only the tenant in real estate transactions. Because using a dual-agency brokerage firm creates an increased potential for conflicts of interest, federal contracting requirements ordinarily would prohibit federal agencies from using dual-agency brokers, but GSA waived the requirements, as allowed, to increase competition for the leasing contracts. When the contracts were awarded, GSA planned to shift at least 50 percent of its expiring lease workload to the four awardees in the first year of the contracts and to increase their share of GSA's expiring leases to approximately 90 percent by 2010--the fifth and final year of the contracts. As of May 30, 2009, GSA estimated that the total value of the four contracts was $485.6 million. We reviewed GSA's administration of the four national broker services contracts (i.e., the national broker services program) for the first year of the contracts which ended March 31, 2006. In our January 2007 report, we identified a wide variety of issues related to GSA's early implementation of these contracts. Problems included inadequate controls to (1) prevent conflicts of interest and (2) ensure compliance with federal requirements for safeguarding federal information and information systems used on behalf of GSA by the four national brokers. We also reported, among other matters, that GSA had not developed a method for quantifying what, if any, savings had resulted from the contracts or for distributing work to the brokers on the basis of their performance, as it had planned. We made 11 recommendations designed to improve GSA's overall management of the national broker services program. As figure 2 shows, GSA has implemented 7 of these 11 recommendations; has taken action to implement another recommendation; and, after consideration, has decided not to implement the remaining 3. (For more details on the issues we reported in January 2007 and GSA's actions to address our recommendations, see app. II). We are encouraged by GSA's actions on our recommendations but have not evaluated their impact. Quality governmentwide and agency-specific data are critical for addressing the wide range of problems facing the government in the real property area, including excess and unneeded property, deterioration, and security concerns. In April 2007, we reported that although some agencies have made progress in collecting and reporting standardized real property data for FRPP, data reliability is still a challenge at some of the agencies, and agencies lacked a standard framework for data validation. We are pleased that OMB has implemented our recommendation to develop a framework that agencies can use to better ensure the validity and usefulness of key real property data in the FRPP, as noted earlier. However, in the past 2 years, we have found the following problems with FRPP data: In our January 2008 report on agencies' leasing, we found that, while FRPP data were generally reliable for describing the leased inventory, data quality concerns, such as missing data, would limit the usefulness of FRPP for other purposes, such as strategic decision making. In our October 2008 report on federal agencies' repair and maintenance backlogs, we found that the way six agencies define and estimate their repair needs or backlogs varies. We also found that, according to OMB officials, FRPP's definition of repair needs was purposefully vague so agencies could use their existing data collection and reporting process. Moreover, we found that condition indexes, which agencies report to FRPP, cannot be compared across agencies because their repair estimates are not comparable. As a result, these condition indexes cannot be used to understand the relative condition or management of agencies' assets. Thus, they should not be used to inform or prioritize funding decisions between agencies. In this report, we recommended that OMB, in consultation with the Federal Accounting Standards Advisory Board, explore the potential for adding a uniform reporting requirement to FRPP to capture the government's fiscal exposure related to real property repair and maintenance. OMB agreed with our recommendation. In our February 2009 report on agencies' authorities to retain proceeds from the sale of real property, we found that, because of inconsistent and unreliable reporting, governmentwide data reported to FRPP were not sufficiently reliable to analyze the extent to which the six agencies with authority to sell real property and retain the proceeds from such sales actually sold real property. Such data weaknesses reduce the effectiveness of the FRPP as a tool to enable governmentwide comparisons of real property efforts, such as the effort to reduce the government's portfolio of unneeded property. Furthermore, although USPS is not required to submit data to FRPP, in December 2007, we found reliability issues with USPS data that also compromised the usefulness of the data for examining USPS's real property performance. Specifically, we found that USPS's Facility Database--developed in 2003 to capture and maintain facility data--has numerous reliability problems and is not used as a centralized source for facility data, in part because of its reliability problems. Moreover, even if the data in the Facility Database were reliable, the database would not help USPS measure facility management performance because it does not track performance indicators nor does it archive data for tracking trends. In April 2007, we reported that among the problems with real property management that agencies continued to face were excess and underutilized property, deteriorating facilities, and maintenance and repair backlogs. We reported some federal agencies maintain a significant amount of excess and underutilized property. For example, we found that Energy, DHS, and NASA reported that over 10 percent of their facilities were excess or underutilized. Agencies may also underestimate their underutilized property if their data are not reliable. For example, in 2007, we found during limited site visits to USPS facilities that six of the facilities we visited had vacant space that local employees said could be leased, but these facilities were not listed as having vacant, leasable space in USPS's Facilities Database (see fig. 3). At that time, USPS officials acknowledged the vacancies we cited and noted that local officials have few incentives to report facilities' vacant, leasable space in the database. Underutilized properties present significant potential risks to federal agencies because they are costly to maintain and could be put to more cost-beneficial uses or sold to generate revenue for the government. In 2007, we also reported that addressing the needs of aging and deteriorating federal facilities remains a problem for major real property- holding agencies, and that according to recent estimates, tens of billions of dollars will be needed to repair or restore these assets so that they are fully functional. In October 2008, we reported that agency repair backlog estimates are not comparable and do not accurately capture the government's fiscal exposure. We found that the six agencies we reviewed had different processes in place to periodically assess the condition of their assets and that they also generally used these processes to identify repair and maintenance backlogs for their assets. Five agencies identified repair needs of between $2.3 billion (NASA) and $12 billion (DOI). GSA reported $7 billion in repair needs. The sixth agency, DOD, did not report on its repair needs. Table 1 provides a summary of each agency's estimate of repair needs. In addition to other ongoing real property management challenges, the threat of terrorism has increased the emphasis on physical security for federal real property assets. In 2007, we reported that all nine major real property-holding agencies reported using risk-based approaches to prioritize security needs, as we have suggested, but cited a lack of resources for security enhancements as an ongoing problem. For example, according to GSA officials, obtaining funding for security countermeasures, both security fixtures and equipment, is a challenge not only within GSA but for GSA's tenant agencies as well. Moreover, last week we testified before the Senate Committee on Homeland Security and Governmental Affairs that preliminary results show that the Federal Protective Service's (FPS) ability to protect federal facilities is hampered by weaknesses in its contract security guard program. We found that FPS does not fully ensure that its contract security guards have the training and certifications required to be deployed to a federal facility and has limited assurance that its guards are complying with post orders. For example, FPS does not have specific national guidance on when and how guard inspections should be performed; and FPS's inspections of guard posts at federal facilities are inconsistent, and the quality varied in the six regions we visited. Moreover, we identified substantial security vulnerabilities related to FPS's guard program. GAO investigators carrying the components for an improvised explosive device successfully passed undetected through security checkpoints monitored by FPS's guards at each of the 10 level IV federal facilities where we conducted covert testing. Once GAO investigators passed the control access points, they assembled the explosive device and walked freely around several floors of these level IV facilities with the device in a briefcase. In response to our briefing on these findings, FPS has recently taken some actions including increasing the frequency of intrusion testing and guard inspections. However, implementing these changes may be challenging, according to FPS. We previously testified before this subcommittee in 2008 that FPS faces operational challenges, funding challenges, and limitations with performance measures to assess the effectiveness of its efforts to protect federal facilities. We recommended, among other things, that the Secretary of DHS direct the Director of FPS to develop and implement a strategic approach to better manage its staffing resources, evaluate current and alternative funding mechanisms, and develop appropriate performance measures. DHS agreed with the recommendations. According to FPS officials, FPS is working on implementing these recommendations. As GAO has reported in the past, real property management problems have been exacerbated by deep-rooted obstacles that include competing stakeholder interests, various legal and budget-related limitations, and weaknesses in agencies' capital planning. While reforms to date are positive, the new administration and Congress will be challenged to sustain reform momentum and reach consensus on how the obstacles should be addressed. In 2007, we found that some major real property-holding agencies reported that competing local, state, and political interests often impede their ability to make real property management decisions, such as decisions about disposing of unneeded property and acquiring real property. For example, we found that USPS was no longer pursuing a 2002 goal of reducing the number of "redundant, low-value" retail facilities, in part, because of legal restrictions on and political pressures against closing them. To close a post office, USPS is required to, among other things, formally announce its intention to close the facility, analyze the impact of the closure on the community, and solicit comments from the community. Similarly, VA officials reported that disposal is often not an option for most properties because of political stakeholders and constituencies, including historic building advocates or local communities that want to maintain their relationship with VA. In addition, Interior officials reported that the department faces significant challenges in balancing the needs and concerns of local and state governments, historical preservation offices, political interests, and others, particularly when coupled with budget constraints. If the interests of competing stakeholders are not appropriately addressed early in the planning stage, they can adversely affect the cost, schedule and scope of a project. Despite its significance, the obstacle of competing stakeholder interests has gone unaddressed in the real property initiative. It is important to note that there is precedent for lessening the impact of competing stakeholder interests. Base Realignment and Closure Act (BRAC) decisions, by design, are intended to be removed from the political process, and Congress approves all BRAC decisions as a whole. OMB staff said they recognize the significance of the obstacle and told us that FRPC would begin to address the issue after the inventory is established and other reforms are initiated. But until this issue is addressed, less than optimal decisions based on factors other than what is best for the government as a whole may continue. As discussed earlier, budgetary limitations that hinder agencies' ability to fund ownership leads agencies to rely on costly leased space to meet new space needs. Furthermore, the administrative complexity and costs of disposing of federal property continue to hamper efforts by some agencies to address their excess and underutilized real property problems. Federal agencies are required by law to assess and pay for any environmental cleanup that may be needed before disposing of a property--a process that may require years of study and result in significant costs. As valuable as these legal requirements are, their administrative complexity and the associated costs of complying with them create disincentives to the disposal of excess property. For example, we reported that VA, like all federal agencies, must comply with federal laws and regulations governing property disposal that are intended to protect subsequent users of the property from environmental hazards and to preserve historically significant sites, among other purposes. We have reported that some VA managers have retained excess property because the administrative complexity and costs of complying with these requirements were disincentives to disposal. Additionally, some agencies reported that the costs of cleanup and demolition sometimes exceed the costs of continuing to maintain a property that has been shut down. In such cases, in the short run, it can be more beneficial economically to retain the asset in a shut- down status. Some federal agencies have been granted authorities to enter into EULs or to retain proceeds from the sale of real property. Recently, in February 2009, we reported that the 10 largest real property-holding agencies have different authorities for entering into EULs and retaining proceeds from the sale of real property, including whether the agency can use any retained proceeds without further congressional action such as an annual appropriation act, as shown in table 2. Officials at five of the six agencies with the authority to retain proceeds from the sale of real property, (the Forest Service, GSA, State, USPS, and VA) said this authority is a strong incentive to sell real property. Officials at the five agencies that do not have the authority to retain proceeds from the sale of real property (DOE; DOI; DOJ; NASA; and USDA except for the Forest Service) said they would like to have such expanded authorities to help manage their real property portfolios. However, officials at two of those agencies said that, because of challenges such as the security needs or remote locations of most of their properties, it was unlikely that they would sell many properties. We have previously found that, for agencies which are required to fund the costs of preparing property for disposal, the inability to retain any of the proceeds acts as an additional disincentive to disposing of real property. As we have testified previously, it seems reasonable to allow agencies to retain enough of the proceeds to recoup the costs of disposal, and it may make sense to permit agencies to retain additional proceeds for reinvestment in real property where a need exists. However, in considering whether to allow federal agencies to retain proceeds from real property transactions, it is important for Congress to ensure that it maintains appropriate control and oversight over these funds, including the ability to redistribute the funds to accommodate changing needs. Two current initiatives relate to these issues. The administration's 2010 budget includes a real property legislative proposal that, among other things, would permit agencies to retain the net proceeds from the transfer or sale of real property subject to further Congressional action. On May 19, 2009, H.R. 2495, the Federal Real Property Disposal Enhancement Act of 2009, was introduced in the House of Representatives, and this bill, like the administration's legislative proposal, would authorize federal agencies to retain net proceeds from the transfer or sale of real property subject to further congressional action. Additionally, both the administration's legislative proposal and H.R. 2497 would establish a pilot program for the expedited disposal of federal real property. Over the years, we have reported that prudent capital planning can help agencies to make the most of limited resources, and failure to make timely and effective capital acquisitions can result in acquisitions that cost more than anticipated, fall behind schedule, and fail to meet mission needs and goals. In addition, Congress and OMB have acknowledged the need to improve federal decision making in the area of capital investment. A number of laws enacted in the 1990s placed increased emphasis on improving capital decision-making practices and OMB's Capital Programming Guide and its revisions to Circular A-11 have attempted to address the government's shortcomings in this area. However, we have continued to find limitations in OMB's efforts to improve capital planning governmentwide. For example, real property is one of the major types of capital assets that agencies acquire, and therefore shortcomings in the capital planning and decision-making area have clear implications for the administration's real property initiative. However, while OMB staff said that agency asset management plans are supposed to align with their capital plans, OMB does not assess whether the plans are aligned. Moreover, we found that guidance for the asset management plans does not discuss how these plans should be linked with agencies' broader capital planning efforts outlined in the Capital Programming Guide. Without a clear linkage or crosswalk between the guidance for the two documents, agencies may not link them. Furthermore, the relationship between real property goals specified in the asset management plans and longer-term capital plans may not be clear. In April 2007, we recommended that OMB, in conjunction with the FRPC, should establish a clearer link between agencies' efforts under the real property initiative and broader capital planning guidance. According to OMB officials, OMB is currently considering options to strengthen agencies' application of the capital planning process as part of Circular A-11, with a focus on preventing cost overruns and schedule delays. In 2007, we concluded that the executive order on real property management and the addition of real property to PMA provided a good foundation for strategically managing federal real property and addressing long-standing problems. These efforts directly addressed the concerns we had raised in past high-risk reports about the lack of a governmentwide focus on real property management problems and generally constitute what we envisioned as a transformation strategy for this area. However, we found that these efforts were in the early stages of implementation, and the problems that led to our high-risk designation--excess property, repair backlogs, data issues, reliance on costly leasing, and security challenges-- still existed. As a result, this area remains high risk until agencies show significant results in eliminating the problems by, for example, reducing inventories of excess facilities and making headway in addressing the repair backlog. While the prior administration took several steps to overcome some obstacles in the real property area, the obstacles posed by competing local, state, and political interests went largely unaddressed, and the linkage between the real property initiative and broader agency capital planning efforts is not clear. In 2007, we recommended that OMB, in conjunction with the FRPC, develop an action plan for how the FRPC will address these key problems. According to OMB officials, these key problems are among those being considered as OMB works with administration officials to assess overall real property priorities in order to establish a roadmap for further action. While reforms to date are positive, the new administration and Congress will be challenged to sustain reform momentum and reach consensus on how the ongoing obstacles should be addressed. Madam Chair, 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 Mark Goldstein on (202) 512-2834 or by email at [email protected]. Key contributions to this testimony were also made by Keith Cunningham, Dwayne Curry, Susan Michal-Smith, Steven Rabinowitz, Kathleen Turner, and Alwynne Wilbur. In April 2007, we found that adding real property asset management to the President's Management Agenda (PMA) had increased its visibility as a key management challenge and focused greater attention on real property issues across the government. As part of this effort, the Office of Management and Budget (OMB) identified goals for agencies to achieve in right-sizing their real property portfolios. To achieve these goals and gauge an agency's success in accurately accounting for, maintaining, and managing its real property assets so as to efficiently meet its goals and objectives, the administration established the real property scorecard in the third quarter of fiscal year 2004. The scorecard consists of 13 standards that agencies must meet to achieve the highest status--green-- as shown in figure 1. These 13 standards include 8 standards needed to achieve yellow status, plus 5 additional standards. An agency reaches green or yellow status if it meets all of the standards for success listed in the corresponding column in figure 1 and red status if it has any of the shortcomings listed in the column for red standards.

In January 2003, GAO designated federal real property as a high-risk area because of long-standing problems with excess and underutilized property, deteriorating facilities, unreliable real property data, over-reliance on costly leasing, and security challenges. In January 2009, GAO found that agencies have taken some positive steps to address real property issues but that some of the core problems that led to the designation of this area as high risk persist. This testimony focuses on (1) progress made by major real property-holding agencies to strategically manage real property, (2) ongoing problems GAO has identified in recent work regarding agencies' efforts to address real property issues, and (3) underlying obstacles GAO has identified through prior work as hampering agencies' real property reform efforts governmentwide. OMB and real property-holding agencies have made progress in strategically managing real property. In response to an administration reform initiative and related executive order, agencies have, among other things, established asset management plans, standardized data, and adopted performance measures. According to OMB, the federal government disposed of excess real property valued at $1 billion in fiscal year 2008, bringing the total to over $8 billion since fiscal year 2004. OMB also reported success in developing a comprehensive database of federal real property assets and implemented a GAO recommendation to improve the reliability of the data in this database by developing a framework to validate these data. GAO also found that the Veterans Administration has made significant progress in reducing underutilized space. In another report, GAO found that six agencies reviewed have processes in place to prioritize maintenance and repair items. While these actions represent positive steps, some of the long-standing problems that led GAO to designate this area as high risk persist. Although GAO's work over the years has shown that building ownership often costs less than operating leases, especially for long term space needs, in 2008, the General Services Administration (GSA), which acts as the government's leasing agent, leased more property than it owned for the first time. Given GSA's ongoing reliance on leasing, it is critical that GSA manage its leasing activities effectively. However, in January 2007, GAO identified numerous areas that warranted improvement in GSA's implementation of four contracts for national broker services for its leasing program. GSA has implemented 7 of GAO's 11 recommendations to improve these contracting efforts. Although GAO is encouraged by GSA's actions on these recommendations, GAO has not evaluated their impact. Moreover, in more recent work, GAO has continued to find that the government's real property data are not always reliable and agencies continue to retain excess property and face challenges from repair and maintenance backlogs. Regarding security, GAO testified on July 8, 2009, that preliminary results show that the ability of the Federal Protective Service (FPS), which provides security services for about 9,000 GSA facilities, to protect federal facilities is hampered by weaknesses in its contract security guard program. Among other things, GAO investigators carrying the components for an improvised explosive device successfully passed undetected through security checkpoints monitored by FPS's guards at each of the 10 federal facilities where GAO conducted covert testing. As GAO has reported in the past, real property management problems have been exacerbated by deep-rooted obstacles that include competing stakeholder interests, various budgetary and legal limitations, and weaknesses in agencies' capital planning. While reforms to date are positive, the new administration and Congress will be challenged to sustain reform momentum and reach consensus on how such obstacles should be addressed.

TRICARE has three options for its eligible beneficiaries: TRICARE Prime, a program in which beneficiaries enroll and receive care in a managed network similar to a health maintenance organization (HMO); TRICARE Extra, a program in which beneficiaries receive care from a network of preferred providers; and TRICARE Standard, a fee-for-service program that requires no network use. The programs vary according to the amount beneficiaries must contribute towards the cost of their care and according to the choices beneficiaries have in selecting providers. In TRICARE Prime, the program in which active duty personnel must enroll, the beneficiaries must select a primary care manager (PCM) who either provides care or authorizes referrals to specialists. Most beneficiaries who enroll in TRICARE Prime select their primary care providers from MTFs, while other enrollees select their PCMs from the civilian network. Regardless of their status--military or civilian--PCMs may refer Prime beneficiaries to providers in either MTFs or TRICARE's civilian provider network. Both TRICARE Extra and TRICARE Standard require co-payments, but beneficiaries do not enroll with or have their care managed by PCMs. Beneficiaries choosing TRICARE Extra use the same civilian provider network available to those in TRICARE Prime, and beneficiaries choosing TRICARE Standard are not required to use providers in any network. For these beneficiaries, care can be provided at an MTF when space is available. DOD employs four civilian health care companies or managed care support contractors (contractors) that are responsible for developing and maintaining the civilian provider network that complements the care delivered by MTFs. The contractors recruit civilian providers into a network of PCMs and specialists who provide care to beneficiaries enrolled in TRICARE Prime. This network also serves as the network of preferred providers for beneficiaries who use TRICARE Extra. In 2002, contractors reported that the civilian network included about 37,000 PCMs and 134,000 specialists. The contractors are also responsible for ensuring adequate access to health care, referring and authorizing beneficiaries for health care, educating providers and beneficiaries about TRICARE benefits, ensuring providers are credentialed, and processing claims. In their network agreements with civilian providers, contractors establish reimbursement rates and certain requirements for submitting claims. Reimbursement rates cannot be greater than Medicare rates unless DOD authorizes a higher rate. DOD's four contractors manage the delivery of care to beneficiaries in 11 TRICARE regions. DOD is currently analyzing proposals to award new civilian health care contracts, and when they are awarded in 2003, DOD will reorganize the 11 regions into 3--North, South, and West--with a single contract for each region. Contractors will be responsible for developing a new civilian provider network that will become operational in April 2004. Under these new contracts DOD will continue to emphasize maximizing the role of MTFs in providing care. The Office of the Assistant Secretary of Defense for Health Affairs (Health Affairs) establishes TRICARE policy and has overall responsibility for the program. The TRICARE Management Activity (TMA), under Health Affairs, is responsible for awarding and administering the TRICARE contracts. DOD has delegated oversight of the provider network to the local level through the regional TRICARE lead agent. The lead agent for each region coordinates the services provided by MTFs and civilian network providers. The lead agents respond to direction from Health Affairs, but report directly to their respective Surgeons General. In overseeing the network, lead agents have staff assigned to MTFs to provide the local interaction with contractor representatives and respond to beneficiary complaints as needed and report back to the lead agent. DOD's contracts for civilian health care are intended to enhance and support MTF capabilities in providing care to millions of TRICARE beneficiaries. Contractors are required to establish and maintain the network of civilian providers in the following locations: for all catchment areas, base realignment and closure sites, in other contract-specified areas, and in noncatchment areas where a contractor deems it cost- effective. In the remaining areas, a network is not required. DOD requires that contractors have a sufficient number and mix of providers, both primary care and specialists, necessary to satisfy the needs of beneficiaries enrolled in the Prime option. Specifically, it is the responsibility of the contractors to ensure that the network has at least one full-time equivalent PCM for every 2,000 TRICARE Prime enrollees and one full-time equivalent provider (both PCMs and specialists) for every 1,200 TRICARE Prime enrollees. In addition, DOD has access-to-care standards that are designed to ensure that Prime beneficiaries receive timely care. The access standards require the following: appointment wait times shall not exceed 24 hours for urgent care, 1 week for routine care, or 4 weeks for well-patient and specialty care; office wait times shall not exceed 30 minutes for nonemergency care; and travel times shall not exceed 30 minutes for routine care and 1 hour for specialty care. DOD does not specify access standards for eligible beneficiaries who do not enroll in TRICARE Prime. However, DOD requires that contractors provide information and/or assist all beneficiaries--regardless of which option they choose--in finding a participating provider in their area. DOD has delegated oversight of the civilian provider network to the regional TRICARE lead agents. The lead agents told us they use the following tools and information to oversee the network. Network Adequacy Reporting--Contractors are required to provide reports quarterly to the lead agents. The reports contain information on the status of the network--such as the number and type of specialists, a list of primary care managers, and data on adherence to the access standards. The reports may also contain information on steps the contractors have taken to address any network inadequacies. Beneficiary Complaints--The complaints come directly from beneficiaries and through other sources, such as the contractor or MTFs. In addition to these tools, lead agents periodically monitor contractor compliance by reviewing performance related to specific contract requirements, including requirements related to network adequacy. Lead agents also told us they periodically schedule reviews of special issues related to network adequacy, such as conducting telephone surveys of providers to determine whether they are accepting TRICARE patients. In addition, lead agents stated they meet regularly with MTF and contractor representatives to discuss network adequacy and access to care. If the lead agents determine that a network is inadequate, they have formal enforcement actions they may use to correct deficiencies. However, lead agents told us that few of the actions have been issued. They said they prefer to address deficiencies informally rather than take formal actions, particularly in areas where they do not believe the contractor can correct the deficiency because of local market conditions. For example, rather than taking a formal enforcement action, one lead agent worked with the contractor to arrange for a specialist from one area to travel to another area periodically. DOD's ability to effectively oversee--and thus guarantee the adequacy of--the TRICARE civilian provider network is hindered by (1) flaws in its required provider-to-beneficiary ratios, (2) incomplete reporting on beneficiaries' access to providers, and (3) the absence of a systematic assessment of complaints. Although DOD has required its network to meet established ratios of providers to beneficiaries, the ratios may underestimate the number of providers needed in an area. Similarly, although DOD has certain requirements governing beneficiary access to available providers, the information reported to DOD on this access is often incomplete--making it difficult to assess compliance with the requirements. Finally, when beneficiaries complain about availability or access in their network, these complaints can be directed to different DOD entities, with no guarantee that the complaints will be compiled and analyzed in the aggregate to identify possible trends or patterns and correct network problems. In some cases, the provider-to-beneficiary ratios underestimate the number of providers, particularly specialists, needed in an area. This underestimation occurs because in calculating the ratios, the contractors do not always include the total number of Prime enrollees within the area. Instead, they base their ratio calculations on the total number of beneficiaries enrolled with civilian PCMs and do not count beneficiaries enrolled with PCMs in MTFs. The ratio is most likely to result in an underestimation of the need for providers in areas in which the MTF is a clinic or small hospital with a limited availability of specialists. Moreover, in reporting whether their network meets the established ratios, different contractors make assumptions about the level of participation on the part of civilian network providers. These assumptions may or may not be accurate, and the assumptions have a significant effect on the number of providers required in the network. Contractors generally assume that between 10 to 20 percent of their providers' practices are dedicated to TRICARE Prime beneficiaries. Therefore, if a contractor assumes 20 percent of all providers' practices are dedicated to TRICARE Prime rather than 10 percent, the contractor will need half as many providers in the network in order to meet the prescribed ratio standard. In the network adequacy reports we reviewed, managed care support contractors did not always report all the information required by DOD to assess compliance with the access standards. Specifically, for the network adequacy reports we reviewed from 5 of the 11 TRICARE regions, we found that contractors reported less than half of the required information on access standards for appointment wait, office wait, and travel times. Some contractors reported more information than others, but none reported all the required access information. Contractors said they had difficulties in capturing and reporting information to demonstrate compliance with the access standards. Additionally, two contractors collected some access information, but the lead agents chose not to use it. Most of the DOD lead agents we interviewed told us that because information on access standards is not fully reported, they monitor compliance with the access standards by reviewing beneficiary complaints. Beneficiaries can complain about access to care either orally or in writing to the relevant contractor, their local MTF, or the regional lead agent. Because beneficiary complaints are received through numerous venues, often handled informally on a case-by-case basis, and not centrally evaluated, it is difficult for DOD to assess the extent of any systemic access problems. TMA has a central database of complaints it has received, but complaints directed to MTFs, lead agents, or contractors may not be directed to this database. While contractor and lead agent officials told us they have received few complaints about network problems, this small number of complaints could indicate either an overall satisfaction with care or a general lack of knowledge about how or to whom to complain. Additionally, a small number of complaints, particularly when spread among many sources, limits DOD's ability to identify any specific trends of systemic problems related to network adequacy within TRICARE. DOD and contractors have reported three factors that may contribute to network inadequacy: geographic location, low reimbursement rates, and administrative requirements. While reimbursement rates and administrative requirements may have created dissatisfaction among providers, it is not clear how much these factors have affected network adequacy because the information the contractors provide to DOD is not sufficient to reliably measure network adequacy. DOD and contractors have reported regional shortages for certain types of specialists in rural areas. For example, they reported shortages for endocrinology in the Upper Peninsula of Michigan and dermatology in New Mexico. Additionally, in some instances, TRICARE officials and contractors have reported difficulties in recruiting providers into the TRICARE Prime network because in some areas providers will not join managed care programs. For example, contractor network data indicate that there have been long-standing provider shortages in TRICARE in areas such as eastern New Mexico, where the lead agent stated that the providers in that area have repeatedly refused to join any network. According to contractor officials, TRICARE Prime providers have expressed concerns about decreasing reimbursement rates. In addition, there have been reported instances in which groups of providers have banded together and refused to accept TRICARE patients due to their concerns with low reimbursement rates. One contractor identified low reimbursement rates as the most frequent cause of provider dissatisfaction. In addition to provider complaints, beneficiary advocacy groups, such as the Military Officers Association of America (MOAA), have cited numerous instances of providers refusing care to beneficiaries because of low reimbursement rates. By statute, DOD cannot generally pay TRICARE providers more than they would be paid under the Medicare fee schedule. In certain situations, DOD has the authority to pay up to 115 percent of the Medicare fee to network providers. DOD's authority is limited to instances in which it has determined that access to health care is severely impaired within a locality. In 2000, DOD increased reimbursement rates in rural Alaska in an attempt to entice more providers to join the network, but the new rates did not increase provider participation. In 2002, DOD increased reimbursement rates to 115 percent of the Medicare rate for the rest of Alaska. In 2003, DOD increased the rates for selected specialists in Idaho to address documented network shortcomings. In 1997, DOD also increased reimbursement rates for obstetrical care. These cases represent the only instances in which DOD has used its authority to pay above the Medicare rate. Because Medicare fees declined in 2002, and there is a potential for future reductions, some contractors are concerned that reimbursement rates may undermine the TRICARE network. Contractors also report that providers have expressed dissatisfaction with some TRICARE administrative requirements, such as credentialing and preauthorizations and referrals. For example, many providers have complained about TRICARE's credentialing requirements. In TRICARE, a provider must get recredentialed every 2 years, compared to every 3 years for the private sector. Providers have said that this places cumbersome administrative requirements on them. Another widely reported concern about TRICARE administrative requirements relates to preauthorization and referral requirements. Civilian PCM providers are required to get preauthorizations from MTFs before referring patients for specialized care. While preauthorization is a standard managed care practice, providers complain that obtaining preauthorization adversely affects the quality of care provided to beneficiaries because it takes too much time. In addition, civilian PCMs have expressed concern that they cannot refer beneficiaries to the specialist of their choice because of MTFs' "right of first refusal" that gives an MTF discretion to care for the beneficiary or refer the care to a civilian provider. Nevertheless, there are not direct data confirming that low reimbursement rates or administrative burdens translate into widespread network inadequacies. We found that out of the 2,156 providers who left one contractor's network during a 1-year period, 900 providers cited reasons for leaving. Only 10 percent of these providers identified low reimbursement rates as a factor and only 1 percent cited administrative burdens. DOD's new contracts for providing civilian health care, called TNEX, may address some network concerns raised by providers and beneficiaries, but may create other areas of concern. Because the new contracts are not expected to be finalized until June 2003, the specific mechanisms DOD and the contractors will use to ensure network adequacy are not known. DOD plans to retain the access standards for appointment and office wait times, as well as travel-time standards. However, instead of using provider-to- beneficiary ratios to measure network adequacy, TNEX requires that the network complement the clinical services provided by MTFs and promote access, quality, beneficiary satisfaction, and best value health care for the government. However, TNEX does not specify how this will be measured. TNEX may reduce administrative burden related to provider credentialing and patient referrals. Currently, TRICARE providers must follow TRICARE-specific requirements for credentialing. In contrast, TNEX will allow for network providers to be credentialed through a nationally recognized accrediting organization. DOD officials stated this approach is more in line with industry practices. Patient referral procedures will also change under TNEX. Referral requirements will be reduced, but the MTFs will still retain the "right of first refusal." On the other hand, TNEX may be creating a new administrative concern for contractors and providers by requiring that 100 percent of network claims submitted by providers be filed electronically. In fiscal year 2002, only 25 percent of processed claims were submitted electronically. Contractors stated that such a requirement could discourage providers from joining or staying in their network. However, DOD states that electronic filing will cut claims-processing costs and save money.

During 2002, in testimony to the House Armed Services Committee, Subcommittee on Personnel, beneficiary groups described problems with access to care from TRICARE's civilian providers, and providers testified about their dissatisfaction with the TRICARE program, specifying low reimbursement rates and administrative burdens. The Bob Stump National Defense Authorization Act of 2003 required that GAO review DOD's oversight of TRICARE's network adequacy. In response, GAO is (1) describing how DOD oversees the adequacy of the civilian provider network, (2) assessing DOD's oversight of the adequacy of the civilian provider network, (3) describing the factors that may contribute to potential network inadequacy or instability, and (4) describing how the new contracts, expected to be awarded in June 2003, might affect network adequacy. GAO's analysis focused on TRICARE Prime--the managed care component of the TRICARE health care delivery system. This testimony summarizes GAO's findings to date. A full report will be issued later this year. To oversee the adequacy of the civilian network, DOD has established standards that are designed to ensure that its network has a sufficient number and mix of providers, both primary care and specialists, necessary to satisfy TRICARE Prime beneficiaries' needs. In addition, DOD has standards for appointment wait, office wait, and travel times that are designed to ensure that TRICARE Prime beneficiaries have adequate access to care. DOD has delegated oversight of the civilian provider network to lead agents, who are responsible for ensuring that these standards have been met. DOD's ability to effectively oversee--and thus guarantee the adequacy of--the TRICARE civilian provider network is hindered in several ways. First, the measurement used to determine if there is a sufficient number of providers for the beneficiaries in an area does not account for the actual number of beneficiaries who may seek care or the availability of providers. In some cases, this may result in an underestimation of the number of providers needed in an area. Second, incomplete contractor reporting on access to care makes it difficult for DOD to assess compliance with this standard. Finally, DOD does not systematically collect and analyze beneficiary complaints, which might assist in identifying inadequacies in the TRICARE civilian provider network. DOD and its contractors have reported three factors that may contribute to potential network inadequacy: geographic location, low reimbursement rates, and administrative requirements. However, the information the contractors provide to DOD is not sufficient to measure the extent to which the TRICARE civilian provider network is inadequate. While reimbursement rates and administrative requirements may have created dissatisfaction among providers, it is not clear that these factors have resulted in insufficient numbers of providers in the network. The new contracts, which are expected to be awarded in June 2003, may result in improved network participation by addressing some network providers' concerns about administrative requirements. For example, the new contracts may simplify requirements for provider credentialing and referrals, two administrative procedures providers have complained about. However, according to contractors, the new contracts may also create requirements that could discourage provider participation, such as the new requirement that 100 percent of network claims submitted by providers be filed electronically. Currently, only about 25 percent of such claims are submitted electronically.

Many categories of legal immigrants are currently eligible for SSI and AFDC benefits. SSI provides benefits to three groups of needy individuals: aged (65 years old and older), blind, and disabled. AFDC provides benefits to needy families with children. Immigrants eligible for assistance include those classified by the Immigration and Naturalization Service (INS) as lawful permanent residents. Also eligible for benefits are certain other legally admitted immigrants, classified by public assistance programs as permanently residing in the United States under color of law (PRUCOL).Under the SSI and AFDC programs, the PRUCOL category includes immigrants, such as refugees, asylees and certain others whose deportation INS does not plan to enforce. (See glossary.) However, a few small categories of immigrants considered as PRUCOL are not uniform between the two programs. Some legal immigrants are admitted into the country under the financial sponsorship of a U.S. resident. The Immigration and Nationality Act of 1952, as amended, provides for the exclusion of any alien who is likely to become a public charge. Aliens can show prospective self-sufficiency through (1) proof of sufficient personal resources, (2) an offer of a job with adequate compensation, (3) posting of a public charge bond, or (4) an affidavit of support submitted on their behalf by a sponsor who preferably is a U.S. citizen or permanent resident. By signing the affidavit of support, sponsors attest to their ability and willingness to provide financial assistance to the immigrant. However, several courts have ruled that these affidavits of support are not legally binding. Concerned about the number of sponsored immigrants receiving public assistance, the Congress amended program statutes to include a sponsor-to-alien deeming period; that is, if a sponsored immigrant applies for public assistance before a certain time period, a portion of the sponsor's income and resources are deemed or assumed to be available for the immigrant's use (whether or not they are available in fact). This deeming provision is used to determine eligibility as well as benefit amount. For the AFDC program, this period is 3 years after admission to the United States as a permanent resident. In 1993, the deeming period for the SSI program was temporarily extended from 3 to 5 years, starting in January 1994 through September 1996. The deeming provisions do not apply if an immigrant becomes blind or disabled after admission to the United States as a permanent resident. Affidavits of support were amended so sponsors currently agree to provide financial support to the immigrant for 3 years. The Responsibility and Empowerment Support Program Providing Employment, Child Care and Training Act of 1994, reintroduced as H.R. 4, the Personal Responsibility Act of 1995, introduced by a group of Republicans during the 104th Congress as part of their "Contract With America," would eliminate most legal immigrants' eligibility for SSI and AFDC, as well as food stamps, Medicaid, foster care and adoption assistance, education programs and numerous other public assistance programs. Two groups would remain eligible: (1) refugees in the country fewer than 6 years and (2) lawful permanent residents who are 75 years old and older and who have been in the country 5 years or more. The provisions of this proposal would go into effect 1 year after enactment with no grandfathering provision. In contrast, the administration's proposal would increase the time period that sponsors' incomes would be deemed available to immigrants receiving AFDC, SSI, or food stamps to 5 years. After the fifth year, sponsored immigrants would still receive benefits if their sponsor's income was below the U.S. median income. The proposal would become effective as of October 1995 and contains a grandfather clause protecting current recipients. Table 1 provides more detailed information on these two proposals. To determine the number and characteristics of immigrants receiving SSI and AFDC benefits, we analyzed data from SSI and AFDC administrative files, as well as published data from INS and the Bureau of the Census. To identify trends in immigrant and citizen use of SSI and AFDC, we reviewed published administrative data from 1983 through 1993. We used published data from INS's 1992 and 1993 Statistical Yearbooks and the March 1994 Supplement of the Census Bureau's Current Population Survey (CPS) to provide background on overall immigration. The March 1994 CPS reports recipiency data for 1993. To identify the characteristics of immigrant recipients who could lose benefits under the proposals, we reviewed current SSI and AFDC policies and four key welfare reform proposals. We also analyzed 1993 AFDC administrative data and SSI administrative data for December 1993. In addition, we reviewed a published study by the Social Security Administration (SSA) that included information about immigrants' use of SSI's aged, blind, and disabled benefits. INS defines immigrants as lawful permanent residents. For the purposes of this report, we also included as immigrants other categories of noncitizens who are eligible for SSI or AFDC: refugees, asylees, aliens granted stay of deportation by INS, and other PRUCOL individuals. We analyzed immigrant recipients' immigration status, length of time in the United States, and age--key characteristics in determining eligibility under the welfare reform proposals. To determine the impact of restricting or eliminating benefits for immigrants, we reviewed four key welfare reform proposals. We used H.R. 4 and the administration's proposal as examples of the range of options available. To assess the impact of the proposals on immigrants and their families, we interviewed officials from the SSI and AFDC programs and from INS, researchers from public policy groups, and state and local government officials with information about immigrants' utilization of assistance programs. Overall, immigrants as a group are more likely than citizens to be receiving SSI or AFDC benefits. Based on CPS data, immigrants receiving SSI or AFDC represented about 6 percent of all immigrants in 1993; in contrast, about 3.4 percent of citizens received such assistance. However, the total number of immigrants receiving SSI or AFDC is much lower than the number of citizens because legal immigrants represent only about 6 percent of the U.S. population. Based on 1993 administrative data, an estimated 18.6 million citizens received SSI or AFDC, compared with an estimated 1.4 million legal immigrants. Much of the difference in recipiency rates between immigrants and citizens can be explained by differences in their demographic characteristics and household composition. Immigrants are much more likely than citizens to be poor. In 1993, about 29 percent of immigrant households reported incomes below the poverty line, compared with 14 percent of citizen households. Researchers have noted that immigrant households have larger numbers of small children and elderly or disabled persons and contain more members with relatively little schooling and low skill levels. These are all characteristics that increase the likelihood of welfare recipiency. Public policy has also played a role in immigrants' receipt of public assistance. Refugees and asylees are categories of immigrants who are much more likely to be on welfare than citizens or other immigrants. By virtue of their refugee or asylee status alone, they qualify immediately for assistance programs that may be restricted to other immigrants. Almost 83 percent of all immigrants receiving SSI or AFDC in 1993 resided in four states: California, New York, Florida, and Texas. This is not surprising given that over 68 percent of all immigrants resided in these states. Over one-half of the immigrants receiving these benefits lived in California. (See table 2.) As a percentage of all SSI recipients, immigrants receiving SSI benefits have increased dramatically. The percentage of SSI recipients who were immigrants nearly tripled between 1983 and 1993, rising from 3.9 to 11.5 percent. This rise occurred because the number of immigrants receiving SSI grew at a much faster rate than the number of citizen recipients. The number of immigrants receiving SSI increased from 151,207 to 683,178 while the number of citizen recipients increased from approximately 3,750,300 to 5,301,200. In total, immigrants received an estimated $3.3 billion in SSI benefits in 1993. Between 1983 and 1993, the number of immigrants receiving aged benefits quadrupled (106,600 to 416,420), while the number of citizens receiving aged benefits decreased by 25 percent (1,408,800 to 1,058,432). Consequently, aged immigrant recipients grew from 7.0 to 28.2 percent of all aged recipients. Over the same time period, the number of immigrants receiving disabled benefits increased six-fold (44,600 to 266,730), while the number of citizens receiving disabled benefits increased by 81 percent (approximately 2,341,500 to 4,242,800). As a result, the percentage of disabled immigrants more than tripled, rising from 1.9 to 5.9 percent of all disabled recipients. (See fig. 1.) Immigrants as a percentage of all AFDC recipients grew at a lower rate than immigrants receiving SSI benefits. Adult immigrants receiving AFDC increased from 5.5 to 10.8 percent between 1983 and 1993. In 1993, almost 722,000 immigrants, including adults and children, received an estimated $1.2 billion in AFDC benefits. The characteristics of immigrants receiving SSI and AFDC differ, but data limitations prevent a complete analysis. Available data show that SSI immigrant recipients are more likely than citizens to be 75 years old or older--the age that H.R. 4 uses to determine eligibility. Most AFDC families containing immigrant recipients also contain citizen recipients. Only the immigrants in these families would lose benefits under some of the proposals--the citizen members of these families would remain eligible. Compared with SSI recipients, AFDC recipients are more likely to be refugees. However, available data provide an incomplete picture of immigrant recipients, and even less is known about their sponsors. As noted earlier, immigrants account for an increasingly greater percentage of the SSI aged program. Moreover, immigrant recipients are more likely than citizen recipients to be 75 years old or older. In 1993, 26 percent of immigrants on SSI aged benefits were 75 years old or older; in contrast, 15.3 percent of citizen SSI recipients were 75 years old or older. Most immigrants receiving SSI are lawful permanent residents, and many have been in the country for over 5 years. Among immigrants receiving SSI benefits in 1993, over 76 percent were lawful permanent residents, 18 percent were refugees or asylees, and 6 percent were other PRUCOL immigrants. (See fig. 2.) Of lawful permanent residents, over 56 percent had been in the country for 5 years or longer. About 10 percent of lawful permanent residents were 75 years old or older and had been in the country for 5 years or longer. Over 14 percent of refugees had been in the country for 6 years or longer. Questions have been raised about the growing numbers of elderly immigrants receiving SSI and the extent to which these immigrants entered the United States with a financial sponsor. While we cannot determine the extent to which immigrants receiving SSI are sponsored, SSA's data suggest that some immigrants apply for SSI benefits shortly after a deeming period would have expired. Analyses by SSA researchers indicate that about 25 percent of lawful permanent residents who applied for SSI benefits since 1980 applied soon after 3 years of U.S. residency; that is, soon after the sponsor's promise of support would have expired. Discussing the immigration status of AFDC recipients is complicated because AFDC is a family-based benefit, and each family member could have a different immigration status. Most AFDC households containing at least one immigrant also contain a citizen. Of AFDC households with at least one immigrant recipient, only about 19 percent contained no citizen (that is, all members of the household were immigrants). For example, over 64 percent were headed by an immigrant adult with at least one citizen child. In about 9 percent of the households containing immigrants, at least one adult is a citizen and at least one child is a citizen. (See fig. 3.) Most immigrants receiving AFDC were either lawful permanent residents or refugees or asylees. Data on all immigrant recipients showed that 65.3 percent--over 471,000--were lawful permanent residents and almost 32.5 percent--over 234,000--were refugees or asylees. The remaining immigrant recipients fall into other PRUCOL categories. (See fig. 4.) No one source provides all the data needed to fully describe the characteristics of immigrants receiving benefits or of their sponsors. Administrative data from the SSI and AFDC programs may not have a recipient's current immigration status if an immigrant's status changed and the immigrant did not notify the agency. For example, lawful permanent residents can become citizens after 5 years of residing in the United States and meeting other INS criteria, and refugees and asylees can become lawful permanent residents after a 1-year residency in the United States. Further, AFDC administrative data do not contain information on how long an immigrant recipient has resided in the United States. Additionally, computerized data on sponsors, their incomes, the amount of financial support they provide, and the number of immigrants they are sponsoring are not available from administrative sources or the INS. SSI's new automated application system collects information on sponsors but it cannot currently aggregate the data for national analyses. The AFDC program does not have any computerized data on sponsors of immigrant recipients. INS collects this information when an immigrant first enters the country but the data are not computerized. Given these data limitations, we were unable to assess the extent to which immigrants are relying on sponsors for financial assistance or determine sponsors' ability to support sponsored immigrants. The estimated number of immigrants affected by welfare reform proposals varies. H.R. 4, which eliminates eligibility for certain categories of immigrants, would eliminate benefits to the largest number of immigrant recipients. The impact of the administration's proposal, which would increase the sponsor's responsibility for supporting immigrants, is difficult to determine. Last year, CBO estimated cost savings for these two proposals. If these proposals were enacted, immigrants might change their behavior by, for example, applying for state-funded public assistance, naturalizing more quickly, or changing their immigration patterns. Under H.R. 4, only two groups of immigrants would remain eligible for benefits--refugees residing in the country fewer than 6 years and lawful permanent residents 75 years old or older who have resided in the United States for at least 5 years. An estimated 522,000 immigrants receiving SSI and an estimated 492,000 immigrants receiving AFDC--mostly lawful permanent residents--are in categories that lose eligibility under this proposal. In addition, some of the approximately 230,000 refugee recipients may no longer be eligible if they had resided in the United States for 6 years or longer. CBO estimated that federal savings from this proposal for the SSI and AFDC programs would be $9.2 billion and $1 billion, respectively, over the period 1996-99. Adjusting administrative data to account for naturalizations, CBO estimated that 390,000 immigrants receiving SSI and 400,000 immigrants receiving AFDC would lose eligibility under this proposal. Greater federal savings are expected from the SSI program because SSI (1) provides a higher average monthly benefit per person--$407 for SSI immigrants, compared with $133 for AFDC; and (2) SSI benefits are solely a federal expenditure, while AFDC costs are shared between the federal government and the states. CBO estimated federal savings of $21.7 billion from all the public assistance programs affected by this proposal including the SSI, AFDC, Food Stamp, and Medicaid programs. Determining the impact of extending the amount of time a sponsor's income is deemed available for the immigrant is difficult because of a lack of computerized data on sponsors, their income, and the number of immigrants they are sponsoring. Recognizing these limitations, CBO estimated that the administration's proposal would save nearly $2.9 billion in SSI, Medicaid, and AFDC benefits over the next 4 years. CBO estimated that more than 80 percent of these savings would come from the SSI program. An additional $400 million over 4 years would be saved by tightening SSI, Medicaid, and AFDC eligibility standards for immigrants to conform with stricter Food Stamp program criteria. While determining exactly how immigrant recipients will be affected by the various welfare reform proposals is difficult, these changes may have some effect on immigrants' behavior. No studies have quantified these effects; however, experts have suggested a number of possible outcomes. For example, some immigrants who lose eligibility may find themselves financially worse off. Other immigrants may find ways to increase their income by increasing their work effort or relying more heavily on their sponsors (if they have one) for financial support. Also, immigrants may supplement their incomes by applying for state-funded public assistance or seek changes in their naturalization status that would result in the reinstatement of their benefits. Immigrants who lose eligibility for federal welfare programs may turn to state-funded public assistance programs, thus shifting costs to the states. State general assistance programs would be unable to restrict benefits to legal immigrants losing federal eligibility. According to the 1971 Supreme Court ruling in Graham v. Richardson, states cannot categorically restrict legal immigrants from receiving state benefits. As of 1992, state- or county-funded public assistance programs were operating in 42 states. California and New York, two states with high concentrations of immigrants on public assistance and which operate state general assistance programs, could be greatly affected. As a result, the possible savings that states would accrue from their reduced share of AFDC benefits to immigrants could be offset by increased costs for state-funded general assistance. Immigrants may also change their naturalization and immigration patterns. Eliminating or restricting benefit eligibility may prompt more immigrants to become citizens to retain their eligibility, according to an Urban Institute study. CBO's $21.7 billion cost-savings estimate takes into account higher naturalization rates. However, the impact of the proposal on naturalization rates is difficult to predict. Even higher naturalization rates could lower actual program savings. Restricting legal immigrants' eligibility for benefits may also have longer-term effects on the number and composition of immigrants entering this country. Eliminating benefits for most legal immigrants could prompt some prospective immigrants to reconsider their decision to seek residence in this country. In addition, potential sponsors of immigrants may reconsider whether they would assist others in entering this country if doing so may result in additional financial responsibility on the part of the sponsor, according to an INS official. As agreed with your office, we did not obtain written agency comments but we did discuss the report with program officials at HHS, SSA, and INS. We also discussed the contents of the report with the Congressional Research Service, CBO, and other relevant research organizations. The officials generally agreed with the contents of this report but made some technical comments that we incorporated as appropriate. We are sending copies of this report to appropriate congressional committees, the Secretary of Health and Human Services, the Commissioner of the Social Security Administration, the Commissioner of INS, and other interested parties. If your or your staff have any questions concerning this report, please call me on (202) 512-7215. Other GAO contacts and staff acknowledgments are listed in appendix I. In addition to those named above, the following individuals made important contributions to this report: John Vocino, Senior Evaluator; Alicia Puente Cackley, Senior Economist; C. Robert DeRoy, Assistant Director (Computer Science); Paula A. Bonin, Senior Computer Specialist; Vanessa R. Taylor, Senior Evaluator (Computer Science); Steven R. Machlin, Senior Statistician. Signed by a sponsor for an immigrant as an assurance that the immigrant will not become a public charge. Aliens found likely to become a public charge may not be admitted into the United States under the Immigration and Nationality Act. The AFDC program provides cash welfare payments for (1) needy children who have been deprived of parental support or care because their father or mother is absent from the home continuously, incapacitated, deceased, or unemployed; and (2) certain others in the household of a child recipient. Benefits may also be provided to needy women in the third trimester of their pregnancy. States define need, set their own benefit levels, establish income and resource limits, and supervise or administer the program. Federal funds pay from 50 to about 80 percent of the AFDC benefit costs in a state and 50 percent of administration costs. INS defines an asylee as an alien in the United States or at a port of entry, who is unable or unwilling to return to his or her country of nationality because of persecution or a well-founded fear of persecution. Persecution or the fear thereof may be based on the alien's race, religion, nationality, membership in a particular social group, or political opinion. Asylees apply for status after entering the United States, and are eligible to adjust to lawful permanent resident status after 1 year of continuous presence in the United States. If a sponsored immigrant applies for public assistance, the income and resources of the sponsor will be considered or deemed to also be available to the sponsored immigrant, regardless of whether they are in fact available to the immigrant. State and locally funded programs designed to provide basic benefits to low-income people who are not eligible for federally funded cash assistance. States, counties, or other local governmental units determine general assistance benefit levels, eligibility criteria, and length of eligibility. INS defines lawful permanent residents as persons lawfully accorded the privilege of residing permanently in the United States. They may be issued immigrant visas by the Department of State overseas or adjusted to permanent resident status by the INS in the United States. Generally, a lawful permanent resident can apply for naturalization to become a U.S. citizen after living in the United States continuously for 5 years. INS defines naturalization as the conferring, by any means, of citizenship upon a person after birth. Immigrants must meet certain requirements to be eligible to become naturalized citizens. Generally, they must be at least 18 years old, have been lawfully admitted for permanent residence, and have resided in the United States continuously for at least 5 years. They must also be able to speak, read, and write the English language; demonstrate a knowledge of U.S. government and history; and have good moral character. This term refers to immigrants who are considered "permanently residing under color of law." PRUCOL is not an immigration status provided by INS; rather, it is a term used to indicate many alien statuses and is used for the purpose of determining eligibility for AFDC, SSI, and Medicaid. INS defines a refugee as any person who is outside his or her country of nationality and unable or unwilling to return to that country because of persecution or a well-founded fear of persecution. Persecution or the fear thereof may be based on the alien's race, religion, nationality, membership in a particular social group, or political opinion. Refugees apply for status outside the United States; they are eligible to adjust to lawful permanent resident status after 1 year of continuous presence in the United States. The SSI program is a means-tested, federally administered income assistance program authorized by title XVI of the Social Security Act. Begun in 1974, SSI provides monthly cash payments in accordance with uniform, nationwide eligibility requirements to needy aged, blind, and disabled persons. The aged are defined as persons 65 years old and older. The blind are individuals with 20/200 vision or less with the use of a correcting lens in the person's better eye or those with tunnel vision of 20 degrees or less. Disabled individuals are those unable to engage in any substantial gainful activity by reason of a medically determined physical or mental impairment expected to result in death or that has lasted or can be expected to last for a continuous period of at least 12 months. Some states supplement federal SSI payments with state funds. A sponsor is a person who has signed an affidavit of support on behalf of an alien seeking permanent residence in the United States. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO reviewed the effect of proposed welfare reform legislation on legal immigrant welfare recipients, focusing on: (1) legal immigrants' and citizens' use of the Supplemental Security Income (SSI) and Aid to Families with Dependent Children (AFDC) programs; (2) the numbers of legal immigrants receiving SSI or AFDC benefits; (3) the immigrant recipients that could lose benefits under the welfare reform proposals; and (4) the possible impacts of restricting immigrants' SSI and AFDC benefits on federal welfare programs. GAO found that: (1) a greater percentage of legal immigrants receive SSI or AFDC benefits than do citizens; (2) immigrants tend to be poorer than citizens and have more small children, more elderly or disabled family members, and more family members with minimal education and skill levels; (3) the number of immigrants receiving SSI benefits more than quadrupled between 1983 and 1993 and these immigrants now comprise over 11 percent of all SSI recipients; (4) legal immigrants received an estimated $1.2 billion in AFDC benefits in 1993; (5) most immigrant recipients are lawful permanent residents or refugees and are 75 years old or older; (6) one welfare reform proposal would save $9.2 billion in SSI benefits and $1 billion in AFDC benefits over 4 years by dropping about 500,000 immigrant recipients from each program; (7) the Administration's proposal would affect fewer immigrants and extend the length of sponsorship and tighten eligibility standards; (8) the two welfare reform proposals could save between $3.3 billion and $21.7 billion over 4 years; and (9) the loss of benefits could cause immigrants to change their immigration, work, and naturalization patterns or to turn to state welfare programs for support.

In the 124 years since the first national park, Yellowstone, was created, the national park system has grown to include 369 park units. In all, these units cover more than 80 million acres of land, an area larger than the state of Colorado. The mix of park units is highly diverse and includes more than 20 types; these range from natural resource preserves encompassing vast tracts of wilderness to historic sites and buildings in large urban areas. The Park Service's mission is twofold: to provide for the public's enjoyment of these parks and to protect the resources so that they will remain unimpaired for the enjoyment of future generations. The Park Service's 1980 survey of threats found not only that the parks' resources were being harmed but also that improvements were needed in determining what cultural and natural resources existed in each park, what their condition was, and how and to what extent they were being threatened. In response, the Park Service called for the development of resource management plans to identify the condition of each park's resources and the problems with managing them, including significant threats. Three times since 1987, we have reported that the Park Service has made limited progress in meeting the information and monitoring needs it had identified in 1980. Our findings included incomplete, out-of-date, or missing resource management plans and an incomplete inventory of threats, their sources, or mitigating actions. In 1994, after examining the external threats to the parks, we recommended that the Park Service revise its resource management planning system to identify, inventory, categorize, and assign priorities to these threats; describe the actions that could be taken to mitigate them; and monitor the status of the actions that had been taken. Such an inventory has not been implemented, according to Park Service headquarters officials, because of funding and hiring freezes that have prevented the completion of needed changes to the planning system's guidelines and software. In commenting on a draft of this report, the Park Service said that implementing this recommendation is no longer appropriate. The Park Service's comments and our evaluation are presented in the agency comments section of this report. For internal, as for external threats, the Park Service has limited systemwide information. It does not have a national inventory of internal threats that integrates information it already has, and many of its individual units do not have a readily available database on the extent and severity of the threats arising within their borders. However, in commenting on this report, Park Service officials told us that headquarters has the systemwide information it needs to make decisions and that many decisions are made at the park level, where the superintendents decide what information is needed. They added that rather than developing a database of threats to resources, they need better data on the condition of resources to allow park managers to identify those that are the most threatened. According to headquarters officials, the Park Service has developed systems focused on particular categories of resources. Park managers and headquarters staff use these systems to identify, track, or assess problems, resource conditions, or threats. An overview of these systems follows: The Museum Collections Preservation and Protection Program requires parks to complete a checklist every 4 years on the deficiencies in the preservation, protection, and documentation of their cultural and natural resource collections. An automated system is being developed to collect these data. The data are used to make funding decisions. Another system for monitoring the condition of a cultural resource is the List of Classified Structures, which inventories and gives general information on historic structures in the parks. Headquarters officials said that the list is not complete because of insufficient funding. Headquarters rangers report that automated systems are in place to track illegal activities in parks, such as looting, poaching, and vandalism, that affect cultural and natural resources. Headquarters officials report that the inventory and information on the condition of archeological resources, enthnographic resources, and cultural landscapes are poor at present but that there are plans to develop improved systems, if staffing and funding allow. Although the Park Service's guidance requires the parks to develop resource management plans, it does not require the plans to include specific information on the internal and external threats facing the parks. Such information would assist managers of the national park system in identifying the major threats facing parks on a systemwide basis, and it would give the managers of individual parks an objective basis for management decisions. At the eight parks studied, the managers identified 127 internal threats that directly affected natural and cultural resources. Most of these threats fell into one of five broad categories: the impact of private inholdings or commercial development within the parks, the results of encroachment by nonnative wildlife or plants, the damage caused by illegal activities, the adverse effects of normal visits to the parks, and the unintended adverse effects of the agency's or park managers' actions (see fig. 1). The majority of the threats affected natural resources, such as plants and wildlife, while the remainder threatened cultural resources, such as artifacts, historic sites, or historic buildings. (See app. I for a summary of the threats in each category at each of the eight parks.) Overall, the park managers we visited said that the most serious threats facing the parks were shortages in staffing, funding, and resource knowledge. The managers identified 48 additional threats in these categories. We classified these as indirect threats to cultural and natural resources because, according to the managers, the shortages in these areas were responsible for many of the conditions that directly threaten park resources. (See app. II for a list of these threats at the eight parks.) In addition, the managers identified other threats in such categories as laws or regulations, agency policies, and park boundaries. After reviewing the information about these threats provided by park managers in documents and interviews, we decided that the threats were indirect and should not be listed among the direct threats. In gathering data for each park, we also identified threats to services for visitors. Our analysis showed that many of these threats also appeared as threats to cultural and natural resources. We did not compile a list of threats to services for visitors because this report focuses on cultural and natural resources. Private inholdings and commercial development within park boundaries accounted for the largest number of specific threats. The managers of seven of the eight parks we reviewed identified at least one threat in this category. For example, at Olympic National Park in Washington State, the managers said that the homes situated on inholdings along two of the park's largest lakes threatened groundwater systems and the lake's water quality. At Lake Meredith National Recreation Area in Texas, the managers were concerned about the impact of the frequent repair and production problems at about 170 active oil and gas sites (see fig. 2) and the development of additional sites. At the Minute Man National Historical Park, the long, linear park is bisected by roads serving approximately 20,000 cars per day. The traffic affects cultural resources, such as nearby historic structures; natural resources, such as populations of small terrestrial vertebrates (e.g., the spotted salamander and spotted turtle); and visitors' enjoyment of the park (see fig. 3). Encroachment by nonnative wildlife and plants--such as mountain goats, trout introduced into parks' lakes and streams, and nonnative grasses and other plants--accounted for the second largest number of reported threats. The managers at all of the parks we reviewed identified at least one threat in this category. At Arches National Park in Utah, for example, the managers cited the invasion by a plant called tamarisk in some riverbanks and natural spring areas. In its prime growing season, a mature tamarisk plant consumes about 200 gallons of water a day and chokes out native vegetation. At Olympic National Park, nonnative mountain goats introduced decades ago have caused significant damage to the park's native vegetation. The goats' activity eliminated or threatened the survival of many rare plant species, including some found nowhere else. Controlling the goat population reduced the damage over 5 years, as the contrast between figures 4a and 4b shows. Illegal activities, such as poaching, constituted the third main category of threats. The managers at the eight parks reported that such activities threatened resources. For example, at Crater Lake National Park in Oregon, the managers believe that poaching is a serious threat to the park's wildlife. Species known to be taken include elk, deer, and black bear. At both Crater Lake and Olympic national parks, mushrooms are harvested illegally, according to the managers. The commercial sale of mushrooms has increased significantly, according to a park manger. He expressed concern that this multimillion-dollar, largely unregulated industry could damage forest ecosystems through extensive raking or other disruption of the natural ground cover to harvest mushrooms. Similar concern was expressed about the illegal harvesting of other plant species, such as moss and small berry shrubs called salal (see fig. 5). About 30 percent of the internal threats identified by park managers fell into two categories--the adverse effects of (1) people's visits to the parks and (2) the Park Service's own management actions. The number of recreational visits to the Park Service's 369 units rose by about 5 percent over the past 5 years to about 270 million visits in 1995. Park managers cited the effects of visitation, such as traffic congestion, the deterioration of vegetation off established trails, and trail erosion. The threats created unintentionally by the Park Service's own management decisions at the national or the park level included poor coordination among park operations, policies calling for the suppression of naturally caused fires that do not threaten human life or property, and changes in funding or funding priorities that do not allow certain internal threats to parks' resources to be addressed. For example, at Gettysburg National Military Park, none of the park's 105 historic buildings have internal fire suppression systems or access to external hydrants because of higher-priority funding needs. Park managers estimated that about 82 percent of the direct threats they identified in the eight parks we reviewed have caused more than minor damage to the parks' resources. We found evidence of such damage at each of the eight parks. According to the managers, permanent damage to cultural resources has occurred, for example, at Indiana Dunes National Lakeshore in Indiana and at Arches National Park in Utah. Such damage has included looting at archeological sites, bullets fired at historic rock art, the deterioration of historic structures, and vandalism at historic cemeteries. (See figs. 6 and 7.) At both of these parks, the managers also cited damage to natural resources, including damage to vegetation and highly fragile desert soil from visitors venturing off established trails and damage to native plants from the illegal use of off-road vehicles. At Gettysburg National Military Park, the damage included the deterioration of historic structures and cultural landscapes, looting of Civil War era archeological sites, destruction of native plants, and deterioration of park documents estimated to be about 100 years old, which contain information on the early administrative history of the park. Figure 8 shows these documents, which are improperly stored in the park historian's office. Nearly one-fourth of the identified direct threats had caused irreversible damage, according to park managers (see fig. 9). Slightly more than one-fourth of the threats had caused extensive but repairable damage. About half of the threats had caused less extensive damage. Some/minor or no damage (can be repaired) Extensive damage (can be repaired) The damage to cultural resources was more likely to be permanent than the damage to natural resources, according to park managers (see fig. 10). Over 25 percent of the threats to cultural resources had caused irreversible damage, whereas 20 percent of the threats to natural resources had produced permanent effects. A Park Service manager explained that cultural resources--such as rock art, prehistoric sites and structures, or other historic properties--are more susceptible to permanent damage than natural resources because they are nonrenewable. Natural resources, such as native wildlife, can in some cases be reintroduced in an area where they have been destroyed. Generally, park managers said they based their judgments about the severity of damage on observation and judgment rather than on scientific study or research. In most cases, scientific information about the extent of the damage was not available. For some types of damage, such as the defacement of archeological sites, observation and judgment may provide ample information to substantiate the extent of the damage. But observation alone does not usually provide enough information to substantiate the damage from an internal threat. Scientific research will generally provide more concrete evidence identifying the number and types of threats, the types and relative severity of damage, and any trends in the severity of the threat. Scientific research also generally provides a more reliable guide for mitigating threats. In their comments on this report, Park Service officials agreed, stating that there is a need for scientific inventorying and monitoring of resource conditions to help park managers identify the resources most threatened. At all eight parks, internal threats are more of a problem than they were 10 years ago, according to the park managers. They believed that about 61 percent of the threats had worsened during the past decade, 27 percent were about the same, and only 11 percent had grown less severe (see fig. 11). At seven of the eight parks, the managers emphasized that one of the trends that concerned them most was the increase in visitation. They said the increasing numbers of visitors, combined with the increased concentration of visitors in certain areas of many parks, had resulted in increased off-trail hiking, severe wear at campgrounds, and more law enforcement problems. At Arches National Park, for example, where visitation has increased more than 130 percent since 1985, greater wear and tear poses particular problems for the cryptobiotic soil. This soil may take as long as 250 years to recover after being trampled by hikers straying off established trails, according to park managers. Another increasing threat noted by managers from parks having large natural areas (such as Crater Lake, Olympic, and Lake Meredith) is the possibility that undergrowth, which has built up under the Park Service's protection, may cause more serious fires. According to the managers, the Park Service's long-standing policy of suppressing all park fires--rather than allowing naturally occurring fires to burn--has been the cause of this threat. Although the park managers believed that most threats were increasing in severity, they acknowledged that a lack of specific information hindered their ability to assess trends reliably. The lack of baseline data on resource conditions is a common and significant problem limiting park managers' ability to document and assess trends. They said that such data are needed to monitor trends in resource conditions as well as threats to those resources. Park managers said that they believed some action had been taken in response to about 82 percent of the direct threats identified (see fig. 12). However, the Park Service does not monitor the parks' progress in mitigating internal threats. Various actions had been taken, but many were limited to studying what might be done. Only two actions to mitigate an identified threat have been completed in the eight parks, according to the managers. However, they noted that in many cases, steps have been taken toward mitigation, but completing these steps was often hampered by insufficient funding and staffing. At Arches National Park, actions ranged from taking steps to remediate some threats to studying how to deal with others. To reduce erosion and other damage to sensitive soils, park managers installed rails and ropes along some hiking trails and erected signs along others explaining what damage would result from off-trail walking. Managers are also studying ways to establish a "carrying capacity" for some of the frequently visited attractions. This initiative by the Park Service stemmed from visitors' comments about the need to preserve the relative solitude at the Delicate Arch (see fig. 13). According to park managers, about 600 visitors each day take the 1-1/2-mile trail to reach the arch. At Lake Meredith, to reduce the impact of vandalism, park managers are now replacing wooden picnic tables and benches with solid plastic ones. Although initially more expensive, the plastic ones last longer and cost less over time because they are more resistant to fire or other forms of vandalism. Lake Meredith has also closed certain areas for 9 months of the year to minimize the looting of archeological sites. At Saguaro National Park, the park managers closed many trails passing through archeological sites and revoked the permit of two horseback tour operators for refusing to keep horses on designated trails. The natural and cultural resources of our national parks are being threatened not only by sources external to the parks but also by activities originating within the parks' borders. Without systemwide data on these threats to the parks' resources, the Park Service is not fully equipped to meet its mission of preserving and protecting these resources. In times of austere budgets and multibillion-dollar needs, it is critical for the agency to have this information in order to identify and inventory the threats and set priorities for mitigating them so that the greatest threats can be addressed first. In our 1994 report on external threats to the parks' resources, we recommended that the National Park Service revise its resource management planning system to (1) identify the number, types, and sources of the external threats; establish an inventory of threats; and set priorities for mitigating the threats; (2) prepare a project statement for each external threat describing the actions that can be taken to mitigate it; and (3) monitor the status of actions and revise them as needed. If the Park Service fully implements the spirit of our 1994 recommendations, it should improve its management of the parks' internal threats. We therefore encourage the Park Service to complete this work. Not until this effort is completed will the Park Service be able to systematically identify, mitigate, and monitor internal threats to the parks' resources. We provided a draft of this report to the Department of the Interior for its review and comment. We met with Park Service officials--including the Associate Director for Budget and Administration, the Deputy Associate Director for Natural Resources Stewardship and Science, and the Chief Archeologist--to obtain their comments. The officials generally agreed with the factual content of the report and provided several technical corrections to it, which have been incorporated as appropriate. The Park Service stated that it would not implement the recommendations cited from our 1994 report. However, we continue to believe that this information, or data similar to it, is necessary on a systemwide level to meet the Park Service's mission of preserving and protecting resources. Park Service officials stated that obtaining an inventory of and information on the condition of the parks' resources was a greater priority for the agency than tracking the number and types of threats to the parks' resources, as our previous report recommended. They said that headquarters has the necessary systemwide information to make decisions but added that better data on the condition of resources are needed to allow the park managers to better identify the most threatened resources. They stated that the Park Service is trying to develop a better inventory and monitor the condition of resources as staffing and funding allow. Park Service officials also cited a number of reasons why implementing our past recommendations to improve the resource management planning system's information on threats is no longer appropriate. Their reasons included the implementation of the Government Performance and Results Act, which requires a new mechanism for setting priorities and evaluating progress; the Park Service-wide budget database that is used to allocate funds to the parks; the existing databases that provide information on resources and workload; and the decentralization of the Park Service, which delegates authority to the park superintendents to determine what information is needed to manage their parks. We continue to believe that information on threats to resources, gathered on a systemwide basis, would be helpful to set priorities so that the greatest threats can be addressed first. The Park Service's guidelines for resource management plans emphasize the need to know about the condition of resources as well as threats to their preservation. This knowledge includes the nature, severity, and sources of the major threats to the parks' resources. We believe that knowing more about both internal and external threats is necessary for any park having significant cultural and natural resources and is important in any systemwide planning or allocation of funds to investigate or mitigate such threats. We agree that the number and types of threats are not the only information needed for decision-making and have added statements to the report to describe the Park Service's efforts to gather data on the condition of resources. In addition, the Park Service commented that a mere count and compilation of threats to resources would not be useful. However, our suggestion is intended to go beyond a surface-level count and to use the resource management plan (or other vehicle) to delineate the types, sources, priorities, and mitigation actions needed to address the threats on a national basis. We believe that the Park Service's comment that it needs a more complete resource inventory and more complete data on resources' condition is consistent with our suggestion. As agreed with your office, we conducted case studies of eight parks because we had determined at Park Service headquarters that no database of internal threats existed centrally or at individual parks. At each park, we interviewed the managers, asking them to identify the types of internal threats to the park's natural and cultural resources and indicate how well these threats were documented. We also asked the managers to assess the extent of the damage caused by the threats, identify trends in the threats, and indicate what actions were being taken to mitigate the threats. Whenever possible, we obtained copies of any studies or other documentation on which their answers were based. Given an open-ended opportunity to identify threats, a number of managers listed limitations on funding, staffing, and resource knowledge among the top threats to their parks. For example, the park managers we visited indicated that insufficient funds for annual personnel cost increases diminished their ability to address threats to resources. Although we did not minimize the importance of funding and staffing limitations in developing this report, we did not consider them as direct threats to the resources described in appendix I. These indirect threats are listed in appendix II. We performed our review from August 1995 through July 1996 in accordance with generally accepted government auditing standards. We are sending copies of this report to interested congressional committees and Members of Congress; the Secretary of the Interior; the Director, National Park Service; and other interested parties. We will make copies available to others on request. Please call me at (202) 512-3841 if you or your staff have any questions. Major contributors to this report are listed in appendix III. On the basis of our analysis of the data, we determined that the following threats affect cultural and natural resources directly. Threats in the three other categories of staffing, funding, and resource knowledge are listed for the eight parks in appendix II. Minute Man National Historical Park (continued) Minute Man National Historical Park (continued) In addition to the direct threats to natural and cultural resources listed in appendix I, park managers of these resources also cited the following indirect threats that, in their opinion, significantly affected their ability to identify, assess, and mitigate direct threats to resources. Brent L. Hutchison Paul E. Staley, Jr. Stanley G. Stenersen The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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Pursuant to a congressional request, GAO reviewed internal threats to the national parks' resources, focusing on the: (1) National Park Service's (NPS) information on the number and types of internal threats; (2) damage these threats have caused; (3) change in the severity of these threats over the past decade; and (4) NPS actions to mitigate these threats. GAO found that: (1) because NPS does not have a national inventory of internal threats to the park system, it is not fully equipped to meet its mission of preserving and protecting park resources; (2) park managers at the eight parks studied have identified 127 internal threats to their parks' natural and cultural resources; (3) most of these threats are due to the impact of private inholdings or commercial development within the parks, the impact of nonnative wildlife or plants, damage caused by illegal activities, increased visitation, and unintended adverse effects of management actions; (4) park managers believe the parks' most serious threats are caused by shortages in staffing, funding, and resource knowledge; (5) 82 percent of the internal threats have already caused more than minor damage, and cultural or archeological resources have suffered more permanent damage than natural resources in many parks; (6) 61 percent of internal threats, particularly those from increased visitation and serious fires, have worsened over the past decade, 27 percent have stayed about the same, and 11 percent have diminished; (7) park managers lack baseline data needed to judge trends in the severity of internal threats; and (8) some parks are closing trails to reduce erosion, installing more rugged equipment to reduce vandalism, revoking uncooperative operators' permits, and posting signs to inform visitors of the damage from their inappropriate activities.

Medicare, the federal health insurance program that serves the nation's elderly, certain disabled individuals and individuals with end-stage renal disease, had total program expenditures of $565 billion in 2011, making it one of the largest federal programs. The Medicare program is administered by CMS and consists of four parts: A, B, C, and D. Medicare parts A and B are also referred to as fee-for-service programs. Part A covers hospital and other inpatient stays, hospice, and home health service; and Part B covers hospital outpatient, physician, and other services. The Medicare card is used as proof of eligibility for both of these programs. Part C is Medicare Advantage, under which beneficiaries receive benefits through private health plans. Part D is the Medicare outpatient prescription drug benefit. CMS requires that cards issued by Part C and Part D health plans do not display an SSN. For most individuals, SSA determines eligibility for Medicare and assigns the individual's HICN. However, for the approximately 550,000 Railroad Retirement beneficiaries and their dependents, the RRB determines Medicare eligibility and assigns this number. CMS or RRB mails paper cards to all beneficiaries, which display the individual's full name, gender, eligibility status (Part A and/or Part B), their effective date of eligibility, and the SSN-based HICN, referred to on the card as the Medicare Claim Number. (See fig. 1.) The HICN is constructed using the 9-digit SSN of the primary wage earner whose work history qualifies an individual for Medicare, followed by a 1- or 2-character code, referred to as the beneficiary identification code, that specifies the relationship of the card holder to the individual who makes the beneficiary eligible for benefits. In most cases, the SSN on the card is the card holder's own; however, approximately 14 percent of Medicare beneficiaries have cards that contain the SSN of the family member whose work history makes the beneficiary eligible for Medicare benefits. A unique identifier is an essential component for administering health insurance. Such an identifier is used by providers to identify beneficiaries and submit claims for payment. As Medicare's primary unique identifier, the HICN is used by beneficiaries, providers, and CMS and its contractors. State Medicaid programs, which are jointly funded federal- state health care programs that cover certain low-income individuals, use the HICN to coordinate payments for dual-eligible beneficiaries-- individuals who are enrolled in both Medicare and Medicaid. (See table 1 for examples of various interactions that require the HICN). Beneficiaries must use their HICN when interacting with CMS, such as when they log into the Medicare website or call 1-800-MEDICARE for assistance. Using their issued card, beneficiaries also provide this information to providers at the time of service, and providers use this information to confirm eligibility and submit claims to receive payment for services. CMS and its contractors operate approximately 50 information technology (IT) systems, many of which are interdependent, that use this information in some manner to process beneficiary services and claims and conduct a number of other activities related to payment and program-integrity efforts. These IT systems vary considerably in terms of age and interoperability, making them difficult to change. In its November 2011 report, CMS proposed three options for removing SSNs from Medicare cards. One option would involve altering the display of the SSN through truncation, and the other two options would involve the development of a new identifier. All three options would vary with regard to the type of identifier displayed on the card and the actions providers and beneficiaries would need to take in order to use the identifier for needed services. CMS officials told us that they limited their options to those retaining the basic format of the current paper card, and did not consider other options that they believed were outside the scope of the congressional request. For example, CMS did not consider using machine-readable technologies, such as bar codes or magnetic stripes. Option 1: Truncating the SSN: Under this option, the first five digits of the SSN would be replaced with 'X's (e.g., XXX-XX-1234) for display on the card. However, the full SSN would continue to be used for all Medicare business processes. As a result, when interacting with CMS, beneficiaries would need to recall the full SSN or provide additional personally identifiable information in order for CMS to match the beneficiary with his or her records. To interact with CMS, providers would also need to obtain the complete SSN using an existing resource. This would involve querying an existing database, calling a CMS help line, or asking the beneficiary for the complete SSN or other personally identifiable information. Option 2: Developing a New Identifier for Beneficiary Use: Under this option, the SSN would be replaced by a new identifier not based on the SSN that would be displayed on the card, similar to private health insurance cards. CMS refers to this new identifier as the Medicare Beneficiary Identifier (MBI). This number would be used by beneficiaries when interacting with CMS. Providers, however, would be required to continue to use the SSN when interacting with CMS and conducting their business processes. To obtain this information, providers would be expected to electronically request it from CMS using the new identifier. CMS said it would need to create a new database for this purpose. Option 3: Developing a New Identifier for Beneficiary and Provider Use: Under this option, the SSN would be replaced by a new identifier not based on the SSN, which would be displayed on the card. As in option 2, CMS referred to this number as the MBI. In contrast to option 2, however, this new number would be used by both beneficiaries and providers for all interactions with CMS. Under this option, the SSN would no longer be used by beneficiaries or providers when interacting with CMS, which could eliminate the need for providers to collect or keep the SSN on file. CMS and its contractors would continue to use the SSN for internal data purposes, such as claims processing. Table 2 summarizes the characteristics of the CMS options. CMS, SSA, and RRB reported that all three options would generally require similar efforts, including coordinating with stakeholders; converting IT systems; conducting provider and beneficiary outreach and education; conducting training of business partners; and issuing new cards. However, the level and type of modifications required to IT systems vary under each option. These systems are responsible for various business functions that perform claims processing, eligibility verification, health plan enrollment, coordination of benefits, program integrity, and research efforts. According to CMS, between 40 and 48 of its IT systems would require modifications, depending on the option selected. The truncated SSN option would require modifications to 40 systems; the option that uses a new identifier for beneficiary use would require modifications to 44 systems; and the option that uses a new identifier for beneficiary and provider use would require modifications to 48 systems. In its 2011 report, CMS estimated that any of the 3 proposed options would likely take up to 4 years to implement. During the first 3 years, CMS would coordinate with stakeholders; complete necessary IT system conversions; conduct provider and beneficiary outreach and education; and conduct training of business partners. In the fourth year, CMS would issue new Medicare cards to all beneficiaries over a 12-month period. CMS officials stated that the agency could not implement any of the options without additional funding from Congress. In its report, CMS noted that the actual time needed for implementation could vary due to changing resources or program requirements. Similar to its 2006 report, CMS has not taken action needed to implement any of the options for removing the SSN it presented in its report. DOD has taken steps to remove the SSN from display on the approximately 9.6 million military identification cards that are used by active-duty and retired military personnel and their dependents to access health care services. DOD is replacing the SSNs previously displayed on these cards with two different unique identifiers not based on the SSN. In 2008, DOD began its SSN removal effort by removing dependents' SSNs from display on their military identification cards, but retained the sponsor's SSN and left SSNs embedded in the cards' bar codes. The dependents' cards did not display any unique identifier. On June 1, 2011, DOD discontinued issuing any military identification card that displayed an SSN and began issuing cards that displayed two different unique identifiers; however, SSNs continued to be embedded in the cards' bar codes. Starting December 1, 2012, DOD will discontinue embedding the SSN in the cards' bar codes. With the exception of cards issued to retired military personnel, DOD anticipates that the SSNs will be completely removed from all military identification cards by December 2016.contain the SSN as an identifier, and because some contractors providing DOD officials reported that because retirees' cards may still health care services may continue to use the SSN for eligibility purposes and processing claims, DOD's IT systems will continue to support multiple identifiers, including the SSN, until such time as all SSNs have been replaced with the two new unique identifiers. DOD cards issued to active- duty military personnel also contain a smart chip, which is used for accessing facilities and IT systems, and may be used to access health care services in some facilities. Cardholders' SSNs are concealed in the smart chip. VA has also taken steps to remove the SSN from display on its identification and health care cards. The Veterans Identification Card (VIC) is issued by VA to enrollees and can be used by veterans to access health care services from VA facilities and private providers. In 2011, 8.6 million veterans were eligible to receive health care services and, according to VA officials, about 363,000 dependents of veterans were VA eligible to receive care through VA's dependent-care programs. began removing SSNs from display on the VIC in 2004, but the SSN continues to be embedded in the cards' magnetic stripes and bar codes. Since that time, VA officials report that the department has issued approximately 7.7 million VICs. VA officials also stated that, in the first quarter of fiscal year 2013, VA will start issuing new VICs that will display a new unique identifier for the veteran and embed the new identifier in the card's magnetic stripe and bar code, replacing the SSN. VA also removed SSNs from display on the cards issued to beneficiaries in VA dependent-care programs without replacing it with a new identifier, and beneficiaries in these programs now provide their SSN verbally at the time of service. Representatives from a national organization representing private health insurers told us that, to their knowledge, all private health insurers have removed the SSN from display on insurance cards and replaced it with a unique identifier not based on the SSN. Private insurers use these new identifiers for all beneficiary and provider interactions, including determining eligibility and processing claims. According to these officials, private health insurers took those steps to comply with state laws and protect beneficiaries from identity theft. Consistent with this, representatives from the private health insurers we interviewed reported removing SSNs from their cards' display and issuing beneficiaries new identifiers not based on the SSN, which are now used in all beneficiary and provider interactions. Officials we interviewed from DOD, VA, and private health insurers all reported that the process to remove the SSN from cards and replace the SSN with a different unique identifier is taking or took several years to implement and required considerable planning. During their transition periods, DOD, VA, and private health insurers reported that they made modifications to IT systems; collaborated with providers and contractors; and educated providers and beneficiaries about the change. One private health insurer we interviewed reported that it allowed for a transition period during which providers could verify eligibility or submit claims using either the SSN or the new unique identifier. This health insurer noted that this allowance, along with the education and outreach it provided to both beneficiaries and providers, resulted in a successful transition. Another health insurer reported that it is providing IT support for both the SSN and the new unique identifier indefinitely in case providers mistakenly use the SSN when submitting claims. Replacing the SSN with a new identifier for use by beneficiaries and providers offers beneficiaries the greatest protection against identity theft relative to the other options CMS presented in its report. (See fig. 2.) Under this option, only the new identifier would be used by beneficiaries and providers. This option would lessen beneficiaries' risk of identity theft in the event that their card was lost or stolen, as the SSN would no longer be printed on the card. Additionally, because providers would not need to collect a beneficiary's SSN or maintain that information in their files, beneficiaries' vulnerability to identity theft would be reduced in the event of a provider data breach. The other two options CMS presented in its 2011 report provide less protection against identity theft. For example, replacing the SSN with a new number just for beneficiary use would offer some protection against identity theft for beneficiaries because no portion of the SSN would be visible on the Medicare card. This would reduce the likelihood of identity theft with the SSN if a card is lost or stolen. However, providers would still need to collect and store the SSN, leaving beneficiaries vulnerable to identity theft in the event of a provider data breach. CMS's truncated SSN option would provide even less protection against identity theft. This option would eliminate full visibility of the SSN on the Medicare card, making it more difficult to use for identity theft. However, we have previously reported that the lack of standards for truncation mean that identity thieves can still construct a full SSN fairly easily using truncated SSNs from various electronic and hard copy records. In addition, under this option, providers would still store the SSN in their files, thereby making beneficiaries vulnerable to identity theft in the event of a provider data breach. We found that CMS's option to replace the SSN with a new identifier for use by beneficiaries and providers presents fewer burdens for beneficiaries and providers relative to the other options presented in CMS's 2011 report. (See fig. 3.) Under this option, the new identifier would be printed on the card, and beneficiaries would use this identifier when interacting with CMS, eliminating the need for beneficiaries to memorize their SSN or store it elsewhere as they might do under other options. This option may also present fewer burdens for providers, as they would not have to query databases or make phone calls to obtain a Private health insurers we beneficiary's information to submit claims.interviewed all reported using a similar approach to remove SSNs from their insurance cards. Representatives from these insurers reported that while there was some initial confusion and issues with claims submission during the transition period, proactive outreach efforts to educate providers about this change, as well as having a grace period during which the SSN or new identifier could be used by providers to submit claims, minimized issues and resulted in a relatively smooth transition. provider use) (Beneficiary use only) The other two options CMS presented in its 2011 report would create additional burdens for beneficiaries and providers. Beneficiaries may experience difficulties under the truncated SSN option, as they may need to recall their SSN, which could be their own SSN or that of a family member. CMS officials stated that the age of Medicare beneficiaries and the fact that their current identification number may be based on another family member's SSN could make it difficult for beneficiaries to remember the number. In addition, about 31 percent of Medicare beneficiaries residing in the community have a known cognitive or mental impairment, making recalling their number by memory potentially difficult. Under both of these remaining options, providers would need to perform additional tasks, such as querying a CMS database or calling CMS, to obtain the full SSN to verify eligibility and submit claims. Regardless of option, the burdens experienced by CMS would likely be similar because the agency would need to conduct many of the same activities and would incur many of the same costs. For example, it would need to reissue Medicare cards to current beneficiaries; conduct outreach and education to beneficiaries and providers; and conduct training for business partners. CMS would also likely see increased call volume to its 1-800-Medicare line with questions about the changes. In addition, there would likely be costs associated with changes to state Medicaid IT systems. However, according to CMS officials, the option that calls for replacing the SSN with a new identifier to be used by beneficiaries and providers would have additional burdens because of the more extensive changes required to CMS's IT systems compared to the other options. This option, however, would also potentially provide an additional benefit to CMS, as the agency would be able to completely "turn off" the identification number and replace it with a new one in the event that a beneficiary's number is compromised, something that is not possible with the SSN. CMS did not consider in its 2011 report how machine readable technologies--such as bar codes, magnetic stripes, or smart chips-- could assist in the effort to remove SSNs from Medicare cards. Machine- readable technologies have been implemented to varying degrees by DOD and VA. According to DOD and VA officials, DOD is using a smart chip and barcode to store the cardholder's personally identifiable information, and VA is issuing cards in which such information and other identifiers are stored in magnetic stripes and bar codes. Machine- readable technologies may provide additional benefits, such as increased efficiency for providers and beneficiaries. Furthermore, machine readable technologies provide some additional protection against identity theft, but officials we spoke with stated that the widespread availability of devices to read magnetic stripes and bar codes have made these technologies less secure. Because of this, both DOD and VA have plans to remove SSNs that are stored in these technologies on their cards. If CMS were to use machine-readable technologies, they could present significant challenges to providers. For example, providers could experience difficulties due to the lack of standardization across these technologies. Representatives from one private health insurer we interviewed stated that while the use of cards with magnetic stripes worked well within a small region where they have large market- penetration, implementing such an effort in regions where providers contract with multiple insurers would be more difficult due to this lack of standardization. In addition, use of machine-readable cards would likely require providers to purchase additional equipment and could be problematic for providers that lack the necessary infrastructure, such as high-speed internet connections, to make machine-readable technologies feasible. According to CMS officials, implementing machine-readable technologies may also require cards that cost more than the paper Medicare card currently in use. Removing the SSN from the Medicare card and not replacing it with a new identifier, an option also not considered in CMS's report to Congress, could reduce beneficiaries' vulnerability to identity theft, but would create burdens for beneficiaries, providers, and CMS. Complete removal of the SSN from the Medicare card would protect beneficiaries from identity theft in the event that a card is lost or stolen. However, like the truncation option, beneficiaries may have difficulty recalling their SSN at the time of service or when interacting with CMS. This could also be difficult because the SSN needed to show eligibility may not be the beneficiary's own. In addition, providers would likely need to change their administrative processes to obtain the needed information either by querying a database, calling CMS, or obtaining it directly from the beneficiary. Finally, because providers would still need to collect and store the SSN for eligibility verification and claims submission, beneficiaries would remain vulnerable to identity theft in the event of a provider data breach. The VA used this approach to remove SSNs from the approximately 363,000 dependent care program cards, and officials stated that it requires providers to obtain the SSN at the time of service. However, Medicare covers over 48 million beneficiaries who receive services from 1.4 million providers, making such a change more burdensome. In addition, CMS would still encounter similar burdens as in the options presented in its 2011 report to Congress, including the need to educate beneficiaries and providers, and issue new cards, though the extent of the necessary changes to CMS IT systems under such an option is unknown. In its 2011 report to Congress, CMS, in conjunction with SSA and RRB, developed cost estimates for the three options to alter the display of the SSN on Medicare cards or replace the SSN with a different unique identifier. CMS projected that altering or removing the SSN would cost between $803 million and $845 million. CMS's costs represent the majority of these costs (approximately 85 percent); while SSA and RRB's costs represent approximately 12 percent and 0.2 percent, respectively. (See table 3.) Approximately two-thirds of the total estimated costs (between $512 million and $554 million depending on the option) are associated with modifications to existing state Medicaid IT systems and CMS's IT system conversions. While modifications to existing state Medicaid IT systems and related costs are projected to cost the same across all three options, the estimated costs for CMS's IT system conversions vary. This variation is due to the differences in the number of systems affected and the costs for modifying affected systems for the different options. CMS would incur costs related to modifying 40 IT systems under the truncated SSN option, 44 systems under the new identifier for beneficiary use option, and 48 systems under the new identifier for beneficiary and provider use option. In addition, the cost associated with changes to specific systems varied depending on the option. CMS's estimates for all non-IT related cost areas are constant across the options. Other significant cost areas for CMS include reissuing the Medicare card, conducting outreach and education to beneficiaries about the change to the identifier, and responding to beneficiary inquires related to the new card. Both SSA and RRB would also incur costs under each of the options described in CMS's 2011 report. SSA estimated that implementing any of the three options presented in the 2011 report would cost the agency $95 million. SSA's primary costs included $62 million for responding to inquiries and requests for new Medicare cards from beneficiaries and $28 million for processing new cards mailed by CMS that are returned as undeliverable. SSA officials told us that even though CMS would be responsible for distributing new Medicare cards, SSA anticipated that about 13 percent of the beneficiary population would contact SSA with questions. RRB's costs totaled between $1.1 million and $1.3 million. Between 21 and 34 percent of RRB's total costs were related to IT system updates and changes, depending on the option. The rest of RRB's costs were related to business functions, such as printing and mailing new cards; user costs related to system and procedure changes; and education and outreach. The cost estimates included in CMS's 2011 report were as much as 2.5 times higher than those estimated in its 2006 report to Congress. CMS attributed these increases to the inclusion of costs not included in the 2006 report, such as those associated with changes to state Medicaid systems and changes to its IT systems related to Part D, as well as a more thorough accounting of costs associated with many of the other cost areas, including SSA costs. In addition, CMS said in its 2006 report that phasing in a new identifier for beneficiaries over a 5- to 10-year period would reduce costs. However, in its 2011 report, CMS stated that such an option would be cost prohibitive because it would require running two parallel IT systems for an extended period of time. There are several key concerns regarding the methods and assumptions CMS used to develop its cost estimates that raise questions about the reliability of its overall cost estimates. First, CMS did not use any cost estimating guidance when developing its estimates. GAO's Cost Estimating and Assessment Guide identifies a number of best practices designed to ensure a cost estimate is reliable. However, CMS officials acknowledged that the agency did not rely on any specific cost-estimating guidance, such as GAO's cost-estimating guidance, during the development of the cost estimates presented in the agency's report to Congress. The agency also did not conduct a complete life-cycle cost estimate on relevant costs, such as those associated with IT system conversions. CMS officials told us they did not conduct a full life-cycle cost estimate for each option because this was a hypothetical analysis, and doing so would have been too resource intensive for the purpose of addressing policy options. Second, the procedures used to develop estimates for the two largest cost categories--changes to existing state Medicaid IT systems and CMS's IT system conversions--are questionable and not well documented. For each of CMS's options, the agency estimated Medicaid Given the size of this cost category, IT changes would cost $290 million. we have concerns about the age of the data, the number of states used to generalize these estimates, as well as the completeness of the information CMS collected. For example, CMS's estimates for costs associated with its proposed changes were based on data collected in 2008, at which time the agency had not developed all of the options In addition, while CMS asked for cost data presented in its 2011 report.from all states in 2008, it received data from only five states--Minnesota, Montana, Oklahoma, Rhode Island, and Texas--and we were unable to determine whether these states are representative of the IT system changes required by all states. CMS extrapolated national cost estimates based on the size of these states, determined by the number of Medicare eligible beneficiaries in them. However, the cost of IT modifications to Medicaid systems would likely depend more on the specific IT systems and their configurations in use by the state than on the number of Medicare beneficiaries in the state. CMS was unable to provide documentation about the data it requested from states related to its cost projections, or documentation of the responses it received from states on the specific modifications to Medicaid IT systems that would be required. CMS officials also acknowledged that each state is different and their IT systems would require different modifications. For the CMS IT-system conversion costs, officials told us that CMS derived its IT-system conversion cost estimates by asking its IT system owners for costs associated with changes to the systems affected under each of the three options. However, CMS provided us with limited documentation related to the information it supplied to its system owners when collecting cost data to develop its estimates, and no supporting documentation for the data it received from system owners. The documentation CMS provided asked system owners to provide the basis for their estimates (including, for example, costs related to labor and hardware, and software changes and additions), and laid out general assumptions for system owners to consider. However, because CMS asked for estimates for broad cost categories, the data it received were general in nature and not a detailed accounting of specific projected costs. CMS officials also told us that system requirements changed over the course of their work; however, they provided no documentation related to how these changes were communicated to system owners. In addition, CMS officials told us that they generally did not attempt to verify estimates submitted by system owners. CMS could not explain how or why a number of the systems the agency believed would require modifications would be affected under its three options, or the variance in the costs to modify these systems across the options. Moreover, CMS's cost estimates for the IT-related costs in its 2011 report were approximately three times higher than the estimate in the agency's 2006 report. That report stated that the majority of changes necessary to replace the existing number with a non-SSN-based identifier would affect only two systems; however, the agency estimated in its 2011 report that up to 48 systems would require modification, depending on the option selected. Furthermore, CMS's 2006 report stated that the 2 primary IT systems affected--the Medicare Beneficiary Database and the Enrollment Database--account for $70 million, or 85 percent, of the IT-related costs. However, in the 2011 report, these 2 systems accounted for 5 percent or less of the IT-related costs, depending on the option implemented. CMS officials we interviewed were unable to explain the differences in the number of systems affected, or the costs of required modifications to IT systems between the 2006 and 2011 reports. Third, there are inconsistencies in some assumptions used by CMS and SSA in the development of the estimates. For example, CMS and SSA used different assumptions regarding the number of Medicare beneficiaries that would require new Medicare cards. According to CMS officials, the agency based its cost estimates on the number of Medicare beneficiaries at the time the report was prepared (47 million), whereas SSA officials told us the agency based its estimates on the expected number of beneficiaries in 2015 (55 million), the year they estimated the new card would likely be issued. In addition, nearly 30 percent of SSA's costs were related to processing newly-issued Medicare cards that are returned as undeliverable. However, SSA officials told us that they were not aware that CMS's cost estimates included plans to conduct an address-verification mailing at a cost of over $45 million prior to issuing new cards. Such a mailing could reduce the number of cards returned as undeliverable, and thus SSA's costs associated with processing such cards. Finally, CMS did not take into account other factors when developing its cost estimates, including related IT modernization efforts or potential savings from removing the SSN from Medicare cards. In developing its estimates, CMS did not consider ways to integrate IT requirements for removing the SSN from Medicare cards with those necessitated by other IT modernization plans to realize possible efficiencies. DOD and a private health insurer we interviewed reported that when removing SSNs from their cards, they updated their systems to accommodate this change in conjunction with other unrelated system upgrades. CMS officials told us that because many of the agency's other IT modernization plans are unfunded, the agency does not know when or if these efforts will be undertaken. As a result, the agency is unable to coordinate the SSN removal effort or to estimate savings from combining such efforts. In its report, CMS also acknowledged that if the agency switched to a new identifier used by both beneficiaries and providers, there would likely be some savings due to improved program integrity and reduced need to monitor SSNs that may be stolen and used fraudulently. However, in developing its estimates, CMS did not include any potential savings the agency might accrue as a result of removing the SSN from Medicare cards. Nearly six years have passed since CMS first issued a report to Congress that explored options to remove the SSN from the Medicare card, and five years have elapsed since the Office of Management and Budget directed federal agencies to reduce the unnecessary use of the SSN. While CMS has identified various options for removing the SSN from Medicare cards, CMS has not committed to a plan to remove them. The agency lags behind other federal agencies and the private sector in reducing the use of the SSN. DOD, VA, and private health insurers have taken significant steps to eliminate the SSN from display on identification and health insurance cards, and reduce its role in operations. Of the options presented by CMS, the option that calls for developing a new identifier for use by beneficiaries and providers offers the best protection against identity theft and presents fewer burdens for beneficiaries and providers than the other two. Consistent with the approach taken by private health insurers, this option would eliminate the use and display of the SSN for Medicare processes conducted by beneficiaries and providers. While CMS reported that this option is somewhat more costly than the other options, the methods and assumptions CMS used to develop its estimates do not provide enough certainty that those estimates are credible. Moreover, because CMS did not have well-documented cost estimates, the reliability of its estimates cannot be assessed. Use of standard cost-estimating procedures, such as GAO's estimating guidance, would help ensure that CMS cost estimates are comprehensive, well documented, accurate and credible. Moving forward, CMS could also explore whether the use of magnetic stripes, bar codes, or smart chips could offer other benefits such as increased efficiencies. Absent a reliable cost estimate, however, Congress and CMS cannot know the costs associated with this option and how to prioritize it relative to other CMS initiatives. Lack of action on this key initiative leaves Medicare beneficiaries exposed to the possibility of identity theft. In order for CMS to implement an option for removing SSNs from Medicare cards, we recommend that the Administrator of CMS select an approach for removing the SSN from the Medicare card that best protects beneficiaries from identity theft and minimizes burdens for providers, beneficiaries, and CMS, and develop an accurate, well-documented cost estimate for such an option using standard cost-estimating procedures. We provided a draft of this report to CMS, DOD, RRB, SSA, and VA for review and comment. CMS and RRB provided written comments which are reproduced in appendixes II and III. DOD, SSA, and VA provided comments by e-mail. CMS concurred with our first recommendation to select an approach for removing the SSN from Medicare cards that best protects beneficiaries from identity theft and minimizes burdens for providers, beneficiaries, and CMS. The agency noted that such an approach could protect beneficiaries from identity theft resulting from loss or theft of the card and would allow CMS a useful tool in combating Medicare fraud and medical identity theft. CMS also concurred with our second recommendation that CMS develop an accurate, well-documented cost estimate using standard cost-estimating procedures for an option that best protects beneficiaries from identity theft and minimizes burdens for providers, beneficiaries, and CMS. CMS noted that a more rigorous and detailed analysis of a selected option would be necessary in order for Congress to appropriate funding sufficient for implementation, and that it will utilize our suggestions to strengthen its estimating methodology for such an estimate. DOD had no comments and did not comment on the report's recommendations. RRB stated that the report accurately reflected its input and had no additional comment. SSA provided only one technical comment, which we incorporated as appropriate, but did not comment on the report's recommendations. VA concurred with our findings, but provided no additional comments. We are sending copies to the Secretaries of HHS, DOD and VA, the Administrator of CMS, the Commissioner of SSA, the Chairman of RRB, interested congressional committees, and others. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have questions about this report, you may contact us at: Kathleen King, (202) 512-7114 or [email protected] or Daniel Bertoni, (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. Appendix I: Burdens of CMS's Proposed Options for Removal of SSN from Medicare Card (Accessible Text) provider use) (beneficiary use only) Social Security number (SSN) While any change to the beneficiary identifier could cause initial confusion for beneficiaries, this option creates no additional burden for the beneficiary because the number on the card would be used to receive services and interact with CMS. While any change for the beneficiary identifier could cause initial confusion for beneficiaries, this option creates no additional burdens to the beneficiary because the number on the card would be used to receive services and interact with CMS. While any change to the beneficiary identifier could cause initial confusion among providers, this option would not create additional burdens for the provider, as the provider would be able to obtain the number from the card provided by the beneficiary. Kathleen King, (202) 512-7114 or [email protected] or Daniel Bertoni, (202) 512-7215 or [email protected]. In addition to the contacts named above, the following individuals made key contributions to this report: Lori Rectanus, Assistant Director; Thomas Walke, Assistant Director; David Barish; James Bennett; Carrie Davidson; Sarah Harvey; Drew Long; and Andrea E. Richardson.

More than 48 million Medicare cards display the SSN, which increases Medicare beneficiaries' vulnerability to identity theft. GAO was asked to review the options and associated costs for removing SSNs from the Medicare card. This report (1) describes the various options for removing the SSN from Medicare cards; (2) examines the potential benefits and burdens associated with different options; and (3) examines CMS's cost estimates for removing SSNs from Medicare cards. To do this work, GAO reviewed CMS's report, cost estimates, and relevant supporting documentation. GAO also interviewed officials from CMS and other agencies that perform Medicare related activities (the Social Security Administration and Railroad Retirement Board), as well as officials from DOD and VA, which have undertaken SSN removal efforts. GAO also interviewed private health insurance companies and relevant stakeholder groups. The Centers for Medicare & Medicaid Services' (CMS) 2011 report to Congress proposed three options for removing Social Security numbers (SSN) from Medicare cards. One option would truncate the SSN displayed on the card, but beneficiaries and providers would continue to rely on the SSN. The other two options would replace the SSN with a new identifier that would be displayed on the card and either be used only by beneficiaries, or by both beneficiaries and those who provide Medicare services. CMS, however, has not selected or committed to implementing any of these options. The Departments of Defense (DOD) and Veterans Affairs (VA), and private insurers have already removed or taken steps to remove SSNs from display on their identification or health insurance cards. CMS's option to replace the SSN with a new identifier for use by both beneficiaries and providers offers the greatest protection against identity theft. Beneficiaries' vulnerability to identity theft would be reduced because the card would no longer display the SSN and providers would not need the SSN to provide services or submit claims (negating the need for providers to store the SSN). This option would also pose fewer burdens than the other two options because beneficiaries would not have to remember an SSN to receive services or to interact with CMS. Providers also would not need to conduct additional activities, such as querying a CMS database, to obtain the SSN. The burdens for CMS would generally be similar across all the options, but CMS reported that this option would require more information technology (IT) system modifications. CMS reported that each of the three options would cost over $800 million to implement, and that the option to replace the SSN with a new identifier for use by both beneficiaries and providers would be somewhat more expensive, largely because of the IT modifications. However, the methodology and assumptions CMS used to develop its estimates raise questions about their reliability. For example, CMS did not use appropriate guidance, such as GAO's cost-estimating guidance, when preparing the estimates to ensure their reliability. Additionally, CMS could provide only limited documentation related to how it developed the estimates for the two largest cost areas, both of which involve modifications to IT systems. GAO recommends that CMS (1) select an approach for removing SSNs from Medicare cards that best protects beneficiaries from identity theft and minimizes burdens for providers, beneficiaries, and CMS and (2) develop an accurate, well-documented cost estimate for such an option. CMS concurred with our recommendations. VA, DOD, and RRB had no substantive comments. SSA had a technical comment.

Medicaid enrollees across various eligibility categories may have access to private health insurance for a number of reasons. For example, some adults may be covered by employer-sponsored private health insurance even though they also qualify for Medicaid. Children similarly may be eligible for Medicaid while also being covered as a dependent on a parent's private health plan. Individuals age 65 and older may receive private coverage from a former employer or purchase such coverage to supplement their Medicare coverage. Medicaid benefits and costs may vary depending on an enrollee's eligibility category. CMS requires states to provide for the identification of Medicaid enrollees' other sources of health coverage, verification of the extent of the other sources' liability for services, avoidance of payment for services in most circumstances where the state believes a third party is liable, and recovery of reimbursement from liable third parties after Medicaid payment, if the state can reasonably expect to recover more than it spends in seeking Specifically, states must provide that the following steps 1. Coverage identification. To identify enrollees with third-party health coverage, states are required to request coverage information from potential Medicaid enrollees at the time of any determination or redetermination of eligibility for Medicaid. States are also required to obtain and use information pertaining to third-party liability, for example by conducting data matches with state wage information agencies, Social Security Administration wage and earning files, state motor vehicle accident report files, or state workers compensation files. 2. Coverage verification. When other health coverage is identified, states need to verify the information, including the services covered through the other insurance and the dates of eligibility. 3. Cost avoidance. Cost avoidance occurs when states do not pay providers for services until any other coverage has paid to the extent of its liability, rather than paying up front and recovering costs later. After a state has verified other coverage, it must generally seek to ensure that health care providers' claims are directed to the responsible party.of the cost savings associated with third-party liability. The cost-avoidance process accounts for the bulk 4. Payment recovery. When states have already paid providers for submitted claims for which a third party is liable, they must seek reimbursement from the third party, if it is cost effective to do so. States have flexibility in determining specific approaches to achieve these ends. For example, states are increasingly contracting with managed care plans to deliver services to Medicaid enrollees (such plans are hereafter referred to as Medicaid managed care plans), and may delegate TPL responsibilities to such plans. Both states and Medicaid managed care plans may obtain the services of a contractor to identify third-party coverage by conducting electronic data matches and to conduct other TPL responsibilities, such as payment recovery. Ensuring compliance with Medicaid TPL requirements has long been challenging for states. The McCarran-Ferguson Act affirms the authority of states to regulate the business of insurance in the state, without interference from federal regulation, unless federal law specifically provides otherwise. Thus, states generally regulate private health insurers operating in the state. However, states may not have authority over private insurers that are not licensed to do business in the state but still provide coverage to state residents. For example, some individuals work and receive health insurance through employment in one state but live in a neighboring state. In addition, states are preempted by the Employee Retirement Income Security Act of 1974 (ERISA) from regulating employer-sponsored health benefit plans that self-insure coverage rather than purchase coverage from an insurer. Due to the bifurcated nature of private health insurance regulation, both federal and state legislation has been required to allow states to enforce TPL requirements. For example, the Omnibus Budget Reconciliation Act of 1993 required all states to enact laws prohibiting insurers from taking Medicaid status into account in enrollment or payment for benefits and to enact laws giving the state rights to payments by liable third parties. In addition, the Deficit Reduction Act of 2005 (DRA) contained provisions affecting state authority to verify coverage and recoup payments from liable health insurers. Under the DRA, states must attest that they have laws in place to require health insurers to, among other requirements, provide information necessary to identify Medicaid enrollees with third- party coverage and, within specified time limits, respond to inquiries from the state regarding claims, as well as to agree not to deny claims solely because of the date the claim was submitted, the form that was used, or the failure to properly document coverage at the point of service. The 2013 HHS OIG report on TPL cost savings and challenges concluded that the DRA provisions likely had a positive effect on states' ability to avoid costs and recover payments from private health insurers, in part through improvements in states' identification of enrollees with insurance. States also credited process improvements, such as online verification of coverage and electronic data matching agreements with private insurers, as well as contractor assistance. However, the study reported that states continue to face key challenges working with private insurers, including the following: 96 percent of states reported challenges with insurers denying claims for procedural reasons. 90 percent of states reported challenges with insurer willingness to release coverage information to states. 86 percent of states reported challenges with insurers providing incomplete or confusing information in response to attempts to verify coverage. 84 percent of states reported problems with pharmacy benefit managers--entities which administer pharmacy benefits on behalf of insurers or employers--such as pharmacy benefit managers not providing coverage information or claiming a lack of authority to pay claims to Medicaid agencies. Based on responses to the U.S. Census Bureau's ACS, we estimate that 7.6 million Medicaid enrollees--13.4 percent--also had a private source of health insurance in 2012. However, the prevalence of private health insurance varied among four Medicaid eligibility categories that we analyzed--children, adults, disabled, and aged. For example, according to our estimates, 34.6 percent of aged Medicaid enrollees also had private health insurance, compared to 12.4 percent of adult Medicaid enrollees and 8.4 percent of children. (See fig. 1 and see app. II, table 1, for more detailed estimates). The number of Medicaid enrollees who also have private health insurance is expected to increase beyond the estimated 7.6 million with the expansion of Medicaid; however, the extent of the increase is uncertain. The Congressional Budget Office projected that approximately 7 million nonelderly individuals would enroll in Medicaid in 2014 as a result of the While some newly Medicaid expansion and other PPACA provisions.Medicaid eligible individuals can be expected to have access to private sources of health insurance, the extent to which they will participate in Medicaid, or maintain private insurance once enrolled in Medicaid, is unknown. If these individuals' rates of private insurance are similar to the 12.4 percent of adult Medicaid enrollees whom we estimated had private insurance in 2012, about 868,000 of the projected 7 million new enrollees in 2014 would be expected to have private insurance. States face multiple challenges in ensuring that Medicaid is the payer of last resort for enrollees that have private health insurance. Selected states and CMS have taken various steps to address some of these challenges; however, selected states and stakeholders suggested that further CMS guidance and efforts to facilitate information sharing among states could improve TPL efforts nationwide. As the identification of Medicaid enrollees with private health insurance is a critical first step for achieving TPL cost savings, many states nationwide conduct electronic data matches of Medicaid enrollment files with insurer files themselves or through a contract with a vendor that conducts matches on the state's behalf. While not required, such state efforts to independently identify enrollees with private insurance can lead to significant cost savings. For example, Minnesota officials reported that by contracting with a vendor for electronic data matching, the state nearly doubled identified cases of TPL in a 5-year period, saving the state an Despite such efforts, states we estimated $50 million over this period.included in our review reported experiencing the following challenges to their coverage identification efforts: Challenges obtaining out-of-state coverage data. Medicaid enrollees in one state may have coverage from a health insurer that is licensed in a different state--for example, some enrollees work and participate in employer-sponsored insurance in one state while living and enrolling in Medicaid in a neighboring state. State laws requiring insurers to provide coverage data may not apply if insurers are not licensed in the state, and officials from two of the states we reviewed noted that insurers sometimes refuse to provide coverage data to Medicaid agencies outside the state in which they are licensed. HMS representatives reported that, while HMS advocates that insurers provide coverage data to Medicaid agencies outside the state in which the insurers are licensed, many insurers refuse to do so. According to CMS, there is a significant amount of third-party coverage derived from insurers licensed in a different state from where the Medicaid enrollee resides. Challenges with insurers conducting data matches. State and HMS representatives reported that, rather than providing coverage data to the state (or its contractor, as applicable), some insurers request the Medicaid data and perform the data match themselves. HMS representatives reported that, in such cases, states only have access to matches identified by the insurer, which may understate the number of individuals with overlapping coverage. One state reported estimating that insurers missed the identification of about 7 percent of the individuals with private insurance when insurers conducted the match instead of the state's contractor. Challenges with obtaining key data elements. Insurers may not maintain or provide states or their contractors access to key data elements, such as Social Security numbers, and not having access to these data can reduce the efficiency or usefulness of data matches, according to officials in several states we reviewed. For example, officials from two selected states noted that data matches are more difficult and error-prone when Social Security numbers are not available. Similarly, officials from two other states we reviewed reported that their ability to verify identified coverage would be assisted if employer identification numbers were included in insurer coverage data. Challenges with timeliness of data matches. Most selected states reported that there is a time lag, typically up to 15 to 30 days, between an individual's enrollment in Medicaid and when the individual is included in a data match with private insurers. As a result, states may not be able to identify other coverage until after enrollees have already begun using services. States would generally then seek reimbursement for paid claims. States in our review reported taking various steps to address these and other coverage identification challenges. Four of the eight selected states reported initiatives underway or completed to improve data-matching strategies to identify private coverage, some of which focused on nationally coordinated approaches. For example, Minnesota officials reported that Minnesota law allows the state Medicaid agency and Medicaid managed care plans to participate in a national coverage data registry, launched in late 2013 by CAQH, an association of health plans and trade associations. The data registry allows participating insurers and states to submit coverage data files for comparison with files of other participants in order to identify individuals with overlapping coverage. Minnesota officials commented that the registry was at an early stage but expected that participation of private insurers would increase over time because of benefits to private insurers of coordinating with one another. Table 1 describes a variety of initiatives underway or completed to improve coverage data in selected states. In addition, at least two of the eight states had laws that addressed challenges with obtaining private insurer compliance with TPL requirements, including requirements to provide coverage data. For example, Michigan law authorizes the state to collect coverage data from insurers to determine TPL and to assess penalties on insurers for noncompliance.in obtaining national coverage data from insurers. In addition, Minnesota Michigan officials reported that the state was successful law requires that all insurers that cover state Medicaid enrollees must comply with TPL requirements irrespective of where they are licensed. Selected states have taken various actions that support or increase oversight of Medicaid managed care plan TPL activities, as applicable. For example, in five of the eight states in our review, individuals with third- party coverage may be eligible to enroll in Medicaid managed care plans The laws and certain TPL responsibilities are delegated to these plans. of two selected states--Ohio and Minnesota--specifically authorize Medicaid managed care plans to recover TPL payments on the state's behalf. Ohio officials in particular credited the legislation as effective in improving insurer cooperation with the state's Medicaid managed care plans. While the DRA required states to have laws in effect compelling insurers to provide states with access to data and recognize the states right to recoup payments, it did not provide that those laws specifically require insurers to similarly cooperate with Medicaid managed care plans conducting such work on behalf of states. CMS provided guidance that, when states delegate TPL responsibilities to a Medicaid managed care plan, third-parties should treat the plan as if it were the state.representatives reported that this guidance has been effective in garnering cooperation from insurers that previously refused to provide coverage data or pay claims to Medicaid managed care plans in various states without legislation specifically requiring them to do so. However, a few insurers continue to refuse to cooperate with such plans despite this guidance, according to information provided by representatives of HMS HMS and Medicaid Health Plans of America (MHPA)--an association of Medicaid managed care plans. In addition, Minnesota sought to improve its oversight of Medicaid managed care TPL activities by initiating a program to allow the state to review Medicaid managed care plan TPL payment recoveries and to arrange for conducting supplemental recoveries when the plans had not recouped payment within a set time. However, according to a representative of the National Association of Medicaid Directors, it can be difficult for states to work with Medicaid managed care plans and insurers as needed to strengthen state oversight. The other states included in our review that delegate TPL work to Medicaid managed care plans did not report conducting this type of oversight, which is consistent with information provided by MHPA in which plans indicated that some states that contract with Medicaid managed care plans to perform TPL activities do not specifically review these activities. We have previously found that some Medicaid managed care plans may have a conflict of interest in conducting payment recoveries. Specifically, Medicaid managed care plans may not have appropriate incentives to identify and recover improper payments--which include payments made for treatments or services that were not covered by program rules, that were not medically necessary, or that were billed for but never provided--because doing so could reduce future capitation rates. Most selected states reported challenges with denials from private insurers for procedural reasons, such as for not obtaining prior authorization before receiving services or not using in-network providers. HMS representatives estimated that in 2013, insurers had denied about $120 million in claims for failure to obtain prior authorization, and about $30 million for failure to use an in-network provider, for states and for Medicaid managed care plans with which HMS contracted. Selected states reported various methods to reduce such denials: Ohio and Missouri laws explicitly prohibit denials due solely to a lack of prior authorization for services. Massachusetts, Georgia, and New York officials reported that they contest denials due solely to a lack of prior authorization for services based on general state legislation passed in accordance with the DRA, which requires states to prohibit insurers from denying claims based solely on the date the claim was submitted, the form that was used, or the failure to properly document coverage at the point of service. Michigan and Minnesota, through their Medicaid provider manuals, require providers to check for third-party coverage and specify that providers are not to be paid by Medicaid for services provided to enrollees if rules of the third-party coverage were not followed. For example, Michigan's Medicaid provider manual states that Medicaid will not cover charges incurred when enrollees elect to go out of their third-party insurer's preferred provider network. Michigan and Minnesota officials reported that these types of denials were generally not problems for the state. See Michigan Medicaid Provider Manual, Coordination of Benefits, SSSS 1.3, 2.1 (October 2014) and Minnesota Medicaid Provider Manual, Billing Policy (Overview), Section on Coordination of Services (September 2014) and Medicare and Other Insurance, Section on Third-Party Liability (TPL) (December 2013). CMS has taken steps, including issuing additional guidance, to address certain challenges that states face in ensuring that Medicaid is the payer of last resort. For example, CMS published a set of frequently asked questions (FAQ) in September 2014 that clarified the parameters under which health insurers are permitted to release coverage information to states in light of Health Insurance Portability and Accountability Act of 1996 privacy restrictions, and emphasized the role of state legislation in specifying the scope of information required to be submitted by health insurers. The guidance also reiterated previously published information, such as clarifying that when states delegate TPL responsibilities to a Medicaid managed care plan, third parties are required to treat the plan as if it were the state. CMS officials also noted that the agency is available to provide technical assistance relating to TPL at the request of states or other entities. In addition, CMS has also taken steps to foster collaboration among states. For example, CMS solicited effective TPL practices that had been implemented as of 2013 from states and published the responses. On a related note, CMS officials highlighted the role of the Coordination of Benefits (COB)-TPL Technical Advisory Group (TAG) in providing states with opportunities to coordinate and share information on TPL challenges and effective practices. Specifically, CMS officials said that COB-TPL TAG representatives are responsible for canvassing states about problems that may be occurring and reporting these back to CMS. However, officials from one state suggested that COB-TPL TAG representatives need to do more to proactively survey states and share information about problems that states not directly represented on the COB-TPL TAG are experiencing. While acknowledging CMS's efforts, stakeholders and officials from selected states suggested a need for additional federal action, commenting on how, for example, additional or clarified guidance could facilitate state efforts to conduct certain TPL activities. The National Association of Medicaid Directors recommended, given the growth in states' use of managed care, that CMS require states to share available insurance coverage information with Medicaid managed care plans and provide an approved approach for conducting oversight of such plans' TPL activities. According to a representative of this association, several states indicated that explicit CMS guidance in this area would provide states leverage to strengthen their Medicaid managed care plan contracts and oversight related to TPL. HMS representatives recommended that CMS strengthen its statements encouraging insurers to share coverage information with out-of-state Medicaid agencies, and further clarify through regulations existing CMS guidance regarding insurer cooperation with Medicaid managed care plans that conduct TPL activities on behalf of states. State officials suggested that CMS could provide information to ensure all states are aware of promising available data-matching strategies. CMS, however, may have incomplete information to inform such guidance as, according to CMS, the agency does not actively track all states' coverage-identification strategies on an ongoing basis, and in some cases, may not be aware of promising state initiatives. While the effective state practices CMS solicited and shared with states included information on initiatives implemented as of 2013, other state initiatives underway were not included. For example, Minnesota officials said they had submitted information about the CAQH data registry; however, the state's submission did not meet the criteria for inclusion in the effective practices document because the state had not yet implemented the registry. In addition, while CMS suggests that states should oversee Medicaid managed care plan TPL activities, as applicable, the agency does not track which states delegate TPL responsibilities to Medicaid managed care plans, nor the problems with or oversight of related Medicaid managed care plan TPL activities in states that do. Officials from selected states also emphasized efficiencies and other benefits that could be gained from state collaboration and information sharing, which CMS could support. For example, Michigan officials noted that the state wanted to explore sharing the national coverage data it obtained from insurers, as well as the TPL tracking and billing system it developed, with other states, noting the cost-effectiveness of states using its system and data rather than each developing their own. In addition, officials in multiple states noted the value of CMS-facilitated national TPL conferences that provide states with opportunities to discuss emerging problems and share expertise regarding solutions. CMS officials indicated that the last conference occurred when there were significant changes under the DRA and that CMS has no specific plans to facilitate future TPL conferences, but officials noted that discussions were underway regarding additional conferences or other training opportunities. National survey data suggest that a substantial number of Medicaid enrollees--7.6 million--had private health insurance in 2012 and that many of these enrollees were in eligibility groups that incur, traditionally, higher medical costs. Furthermore, this number is expected to increase because of the Medicaid expansion. States have front-line responsibility for ensuring that Medicaid is the payer of last resort and are required to take steps to identify individuals with other health insurance and ensure that other insurance pays to the extent of its liability. Substantial increases in TPL cost savings in recent years highlight that improvements to TPL efforts, such as heightened attention to coverage identification, can substantially improve TPL cost avoidance and recoveries. The scale of the cost savings to Medicaid at both federal and state levels through the identification of coverage through, and payment of services by, private health insurance--reportedly nearly $14 billion in 2011--underscores the potentially significant return on investment that may be gained from continued TPL improvement efforts and attention to resolving remaining gaps in state access to available coverage data. Selected states have taken a variety of steps to further improve TPL efforts, and other states may also be implementing initiatives to address persistent challenges states report in ensuring Medicaid pays after other liable third parties. The various initiatives that selected states have undertaken--such as initiatives to improve identification of enrollees with private health insurance through data matches or to ensure that TPL efforts are maintained in an increasingly managed care environment-- highlight options that other states could consider to improve their respective TPL savings. Other states may also have initiatives that could be adopted more broadly. CMS has taken steps to support states and publicize effective state practices. However, as new strategies emerge over time, a robust ongoing effort to collect and share information about state initiatives would ensure that states--particularly any states that may not conduct data matches with private insurers-- are aware of available data matching strategies and solutions to challenges states or Medicaid managed care plans may face in conducting TPL activities. Given the significant federal Medicaid outlays, which are increasing as Medicaid expands under PPACA, the federal government has a vested financial interest in further increasing states' TPL cost savings, and CMS should play a more active leadership role in monitoring, understanding, supporting and promoting state TPL efforts. In light of the federal interest in ensuring that Medicaid should pay only after other liable third parties; state initiatives to improve TPL efforts, such as coverage identification strategies; and states' increasing use of managed care, we recommend that the Secretary of Health and Human Services direct CMS to take the following two additional actions to oversee and support state TPL efforts: Routinely monitor and share across all states information regarding key TPL efforts and challenges. Provide guidance to states on their oversight of TPL efforts conducted by Medicaid managed care plans. We provided a draft of this report to HHS for comment. In its written comments--reproduced in appendix III--HHS concurred with our recommendations. HHS stated that it will continue to look at ways to provide guidance to states to allow for sharing of effective practices and to increase awareness of initiatives under development in states. HHS also stated that it will explore the need for additional guidance regarding state oversight of TPL efforts conducted by Medicaid managed care plans. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Health and Human Services, the Administrator of the Centers for Medicare & Medicaid Services, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. To assess the extent to which Medicaid enrollees have private health insurance, we utilized the ACS, an annual survey conducted by the U.S. Census Bureau. The ACS includes representative samples of households from each state and also includes individuals residing in institutions such as nursing homes. The ACS collects self-reported information, such as the type of health insurance coverage as of the date of the survey (if any), disability status, age, and state of residence. We analyzed data from the most recent ACS Public Use Microdata Sample (PUMS) that was available at the time we conducted our work, which covered calendar year 2012. Medicare is a federal health insurance program for individuals aged 65 and older or with certain disabilities and individuals with end-stage renal disease. TRICARE is a federal health program generally for active-duty military personnel and their dependents, and retirees and their dependents and survivors. Medicaid coverage was assigned to foster children, certain individuals receiving Supplementary Security Income or Public Assistance, and the spouses and children of certain Medicaid beneficiaries. Medicare coverage was assigned to individuals aged 65 and older who received Social Security or Medicaid benefits. TRICARE was assigned to active-duty military personnel and their spouses and children. that the ACS PUMS data were sufficiently reliable for the purposes of our engagement. From the available ACS PUMS data, we constructed the following variables for our analysis: Medicaid coverage and eligibility category. We defined individuals as having Medicaid if they reported health coverage through Medicaid, medical assistance, or any kind of government assistance plan for individuals with low incomes or a disability. These sources of coverage are combined in one question in the ACS PUMS. For purposes of the report, we refer to these individuals collectively as Medicaid enrollees. We further categorized Medicaid enrollees into four broad Medicaid eligibility categories--children, adults, disabled, and aged: We defined the child eligibility category as individuals aged 0 through 18 who did not report a disability. We defined adult eligibility category as individuals aged 19 through 64 who did not report a disability. We defined the disabled eligibility category as individuals aged 0 through 64 who reported one or more of the 6 disability indicators included in the ACS data. We defined the aged eligibility category as individuals aged 65 and older. Third-party private and public health coverage. We defined individuals as having private insurance coverage if they reported having health insurance through a current or former employer or union, insurance purchased directly from an insurance company, or both. We defined individuals as having public coverage other than Medicaid if they reported coverage through Medicare or TRICARE, or having ever used or enrolled in health care provided through the Department of Veterans Affairs (VA). Based on the variables defined above, we used calendar year 2012 ACS PUMS data to estimate the number and percentage of Medicaid enrollees with private and other sources of health coverage. We produced separate estimates by Medicaid eligibility group and state of residence. To generate our estimates, we applied the appropriate weights contained in the ACS PUMS data files in order to expand the sample to represent the total population and to account for the complex sample design. Specifically, we used the person weights to generate estimated numbers and percentages. We used the person replicate weights to generate standard errors. To assess the precision of our estimates, we calculated a relative standard error for each estimate. A relative standard error is calculated by dividing the standard error of the estimate by the estimate itself. For example, if an estimate has a mean of 100 and a standard error of 20, the relative standard error would be 20/100, which would be 20 percent. Estimates with small relative standard errors are considered more reliable than estimates with large relative standard errors. A small relative standard error is a more precise measurement since there is less variance around the mean. Unless otherwise noted, estimates included in this report have relative standard errors of less than 15 percent. The following tables provide more detailed information about the estimates derived from of our analysis of the 2012 American Community Survey (ACS) Public Use Microdata Sample (PUMS). Specifically, tables 1 and 2 provide estimates of the number and percentage of Medicaid enrollees with other sources of health coverage by Medicaid eligibility category and by state. In addition to the contact named above, Susan Anthony, Assistant Director; Emily Beller; George Bogart; Britt Carlson; Laurie Pachter; and Ying Long made key contributions to this report.

In fiscal year 2013, Medicaid--jointly financed by states and the federal government--provided health care coverage to over 70 million individuals at a total cost of about $460 billion. Congress generally established Medicaid as the health care payer of last resort, meaning that if enrollees have another source of health care coverage--such as private insurance--that source should pay, to the extent of its liability, before Medicaid does. This is referred to as third-party liability (TPL). There are known challenges to ensuring that Medicaid is the payer of last resort. GAO was asked to provide information on the prevalence of private insurance among Medicaid enrollees and on state and CMS efforts to ensure that Medicaid is the payer of last resort. This report examines (1) the extent to which Medicaid enrollees have private insurance, and (2) state and CMS initiatives to improve TPL efforts. GAO analyzed the 2012 ACS; interviewed Medicaid officials from eight states with high program spending or enrollment that used managed care; interviewed CMS officials and stakeholders; and reviewed relevant laws, regulations, and CMS guidance. Based on responses to the 2012 U.S. Census Bureau's American Community Survey (ACS)--the most recent available at the time the work was conducted--GAO estimates that 7.6 million Medicaid enrollees (13.4 percent) had private health insurance in 2012. The estimated prevalence of private health insurance varied among Medicaid eligibility categories, which may differ with respect to Medicaid benefits and costs. The number of Medicaid enrollees with private health insurance is expected to increase with the expansion of Medicaid. Selected states reported taking various steps to address challenges to ensuring that Medicaid is the payer of last resort and acknowledged recent Centers for Medicare & Medicaid Services (CMS) support, while also suggesting additional federal action. Four of the eight reviewed states reported various initiatives to improve coverage identification, such as arranging to participate in a data registry that allows participants to identify individuals with overlapping coverage. CMS has taken steps to issue TPL guidance and share some information on effective state practices, and such federal efforts should be ongoing to ensure that evolving approaches are captured and shared across states. In addition, officials in five states reported that enrollees with third-party coverage may be eligible to enroll in Medicaid managed care--in which states contract with health plans to provide services to enrollees and may delegate TPL activities such as payment recoveries to these plans. One of the five states had initiated a program to oversee plans' TPL recoveries, while other states did not report similar oversight. The National Association of Medicaid Directors reported that, in the absence of explicit CMS guidance in this area, it can be difficult for states to work with plans to improve TPL oversight and has recommended CMS provide such guidance. GAO recommends that the Secretary of the Department of Health and Human Services (HHS) direct CMS to (1) routinely monitor and share across all states information regarding key TPL efforts and challenges, and (2) provide guidance on state oversight of TPL efforts conducted by Medicaid managed care plans. HHS concurred with GAO's recommendations and noted plans to address them.

In an effort to promote and achieve various U.S. foreign policy objectives, Congress has expanded trade preference programs in number and scope over the past 3 decades. The purpose of these programs is to foster economic development through increased trade with qualified beneficiary countries while not harming U.S. domestic producers. Trade preference programs extend unilateral tariff reductions to over 130 developing countries. Currently, the United States offers the Generalized System of Preferences (GSP) and three regional programs, the Caribbean Basin Initiative (CBI), the Andean Trade Preference Act (ATPA), and the African Growth and Opportunity Act (AGOA). Special preferences for Haiti became part of CBI with enactment of the Haitian Hemispheric Opportunity through Partnership Encouragement (HOPE) Act in December 2006. The regional programs cover additional products but have more extensive criteria for participation than the GSP program. Eight agencies have key roles in administering U.S. trade preference programs. Led by the United States Trade Representative (USTR), they include the Departments of Agriculture, Commerce, Homeland Security, Labor, State, and Treasury, as well as the U.S. International Trade Commission (ITC). U.S. imports from countries benefiting from U.S. preference programs have increased significantly over the past decade. Total U.S. preference imports grew from $20 billion in 1992 to $110 billion in 2008. Most of this growth in U.S. imports from preference countries has taken place since 2000. This accelerated growth suggests an expansionary effect of increased product coverage and liberalized rules of origin for least- developed countries (LDC) under GSP in 1996 and for African countries under AGOA in 2000. In particular, much of the growth since 2000 is due to imports of petroleum from certain oil producing nations in Africa, accounting for 79.5 percent of total imports from Sub-Saharan Africa in 2008. For example, in that same year, U.S. imports from the oil producing countries of Nigeria grew by 16.2 percent, Angola by 51.2 percent, and the Republic of Congo by 65.2 percent. There is also evidence that leading suppliers under U.S. preference programs have "arrived" as global exporters. For example, based on a World Trade Organization (WTO) study in 2007, the three leading non-fuel suppliers of U.S. preference imports--India, Thailand, and Brazil--were among the top 20 exporters in the world, and were also major suppliers to the U.S. market. Exports from these three countries also grew faster than world exports as a whole. However, these countries have not reached World Bank "high income" level criteria, as they range from "low" to "upper middle" levels of income. GSP--the longest standing U.S. preference program--expires December 31, 2009, as do ATPA benefits. At the same time, legislative proposals to provide additional, targeted benefits for the poorest countries are pending. Preference programs entail a number of difficult policy trade-offs. For example, the programs are designed to offer duty-free access to the U.S. market to increase beneficiary trade, but only to the extent that access does not harm U.S. industries. U.S. preference programs provide duty-free treatment for over half of the 10,500 U.S. tariff lines, in addition to those that are already duty-free on a most favored nation basis. But they also exclude many other products from duty-free status, including some that developing countries are capable of producing and exporting. GAO's analysis showed that notable gaps in preference program coverage remain, particularly in agricultural and apparel products. For 48 GSP-eligible countries, more than three-fourths of the value of U.S. imports that are subject to duties (i.e., are dutiable) are not included in the programs. For example, just 1 percent of Bangladesh's dutiable exports to the United States and 4 percent of Pakistan's are eligible for GSP. Although regional preference programs tend to have more generous coverage, they sometimes feature "caps" on the amount of imports that can enter duty- free, which may significantly limit market access. Imports subject to caps under AGOA include certain meat products, a large number of dairy products, many sugar products, chocolate, a range of prepared food products, certain tobacco products, and groundnuts (peanuts), the latter being of particular importance to some African countries. A second, related, trade-off involves deciding which developing countries can enjoy particular preferential benefits. A few LDCs in Asia are not included in the U.S. regional preference programs, although they are eligible for GSP-LDC benefits. Two of these countries--Bangladesh and Cambodia--have become major exporters of apparel to the United States and have complained about the lack of duty-free access for their goods. African private-sector representatives have raised concerns that giving preferential access to Bangladesh and Cambodia for apparel might endanger the nascent African apparel export industry that has grown up under AGOA. Certain U.S. industries have joined African nations in opposing the idea of extending duty-free access for apparel from these countries, arguing these nations are already so competitive in exporting to the United States that in combination they surpass U.S. free trade agreement partners Mexico and those in CAFTA, as well as those in the Andean/AGOA regions. This trade-off concerning what countries to include also involves decisions regarding the graduation of countries or products from the programs. The original intention of preference programs was to provide temporary trade advantages to particular developing countries, which would eventually become unnecessary as countries became more competitive. Specifically, the GSP program has mechanisms to limit duty-free benefits by "graduating" countries that are no longer considered to need preferential treatment, based on income and competitiveness criteria. Since 1989, at least 28 countries have been graduated from GSP, mainly as a result of "mandatory" graduation criteria such as high income status or joining the European Union. Five countries in the Central American and Caribbean region were recently removed from GSP and CBI/CBTPA when they entered into free trade agreements with the United States. In addition to country graduation, the United States GSP program also includes a process for ending duty-free access for individual products from a given country by means of import ceilings--Competitive Needs Limitations (CNL). These ceilings are reached when eligible products from GSP beneficiaries exceed specified value and import market share thresholds (LDCs and AGOA beneficiaries are exempt). Amendments to the GSP in 1984 gave the President the power to issue (or revoke) waivers for CNL thresholds under certain circumstances, for example through a petition from an interested party, or when total U.S. imports from all countries of a product are small or "de minimis." In 2006 Congress passed legislation affecting when the President should revoke certain CNL waivers for so called "super competitive" products. In 2007, the President revoked eight CNL waivers. Policymakers face a third trade-off in setting the duration of preferential benefits in authorizing legislation. Preference beneficiaries and U.S. businesses that import from them agree that longer and more predictable renewal periods for program benefits are desirable. Private-sector and foreign government representatives have stated that short program renewal periods discourage longer-term productive investments that might be made to take advantage of preferences, such as factories or agribusiness ventures. Members of Congress have recognized this argument with respect to Africa and, in December 2006, Congress renewed AGOA's third-country fabric provisions until 2012 and AGOA's general provisions until 2015. However, some U.S. officials believe that periodic program expirations can be useful as leverage to encourage countries to act in accordance with U.S. interests such as global and bilateral trade liberalization. Furthermore, making preferences permanent may deepen resistance to U.S. calls for developing country recipients to lower barriers to trade in their own markets. Global and bilateral trade liberalization is a primary U.S. trade policy objective, based on the premise that increased trade flows will support economic growth for the United States and other countries. Spokesmen for countries that benefit from trade preferences have told us that any agreement reached under the Doha round of global trade talks at the WTO must, at a minimum, provide a significant transition period to allow beneficiary countries to adjust to the loss of preferences. GAO found that preference programs have proliferated over time and have become increasingly complex, which has contributed to a lack of systematic review. In response to differing statutory requirements, agencies involved in implementing trade preferences pursue different approaches to monitoring the various criteria set for these programs. We observed advantages to each approach but individual program reviews appeared disconnected and resulted in gaps. For example, some countries that passed review under regional preference programs were later subject to GSP complaints. Moreover, we found that there was little to no reporting on the impact of these programs. To address these issues, GAO recommended that USTR periodically review beneficiary countries, in particular those that have not been considered under GSP or regional programs. Additionally, we recommended that USTR should periodically convene relevant agencies to discuss the programs jointly. In our March 2008 report, we also noted that even though there is overlap in various aspects of trade preference programs, Congress generally considers these programs separately, partly because they have disparate termination dates. As a result, we suggested that Congress should consider whether trade preference programs' review and reporting requirements may be better integrated to facilitate evaluating progress in meeting shared economic development goals. In response to the recommendations discussed above, USTR officials told us that the relevant agencies will meet at least annually to consider ways to improve program administration, to evaluate the programs' effectiveness jointly, and to identify any lessons learned. USTR has also changed the format of its annual report to discuss the preference programs in one place. In addition, we believe that Congressional hearings in 2007 and 2008 and again today are responsive to the need to consider these programs in an integrated fashion. In addition to the recommendations based on GAO analysis, we also solicited options from a panel of experts convened by GAO in June 2009 to discuss ways to improve the competitiveness of the textile and apparel sector in AGOA beneficiary countries. While the options were developed in the context of AGOA, many of these may be applicable to trade preferences programs in general. Align Trade Capacity Building with Trade Preferences Programs: Many developing countries have expressed concern about their inability to take advantage of trade preferences because they lack the capacity to participate in international trade. AGOA is the only preference program for which authorizing legislation refers to trade capacity building assistance; however, funding for this type of assistance is not provided under the Act. In the course of our research on the textile and apparel inputs industry in Sub-Saharan African countries, many experts we consulted considered trade capacity building a key component for improving the competitiveness of this sector. Modify Rules of Origin among Trade Preference Program Beneficiaries and Free Trade Partners: Some African governments and industry representatives of the textile and apparel inputs industry in Sub-Saharan African countries suggested modifying rules of origin provisions under other U.S. trade preference programs or free trade agreements to provide duty-free access for products that use AGOA textile and apparel inputs. Similarly, they suggested simplifying AGOA rules of origin to allow duty-free access for certain partially assembled apparel products with components originating outside the region. Create Non-Punitive and Voluntary Incentives: Some of the experts we consulted believe that the creation of non-punitive and voluntary incentives to encourage the use of inputs from the United States or its trade preference partners could stimulate investment in beneficiary countries. One example of the incentives discussed was the earned import allowance programs currently in use for Haiti and the Dominican Republic. Such an incentive program allows producers to export certain amounts of apparel to the U.S., duty free, made from third-country fabric, provided they import specified volumes of U.S. fabric. Another proposal put forth by industry representatives was for a similar "duty credit" program for AGOA beneficiaries. A simplified duty credit program would create a non-punitive incentive for use of African regional fabric. For example, a U.S. firm that imports jeans made with African origin denim would earn a credit to import a certain amount of jeans from Bangladesh, duty free. However, some experts indicated that the application of these types of incentives should be considered in the context of each trade preference program, as they have specific differences that may not make them applicable across preference programs. While these options were suggested by experts in the context of a discussion on the African Growth and Opportunity Act, many of these options may be helpful in considering ways to further improve the full range of preference programs as many GSP LDCs face many of the same challenges as the poorer African nations. Some of the options presented would require legislative action while others could be implemented administratively. Mr. Chairman, thank you for the opportunity to summarize the work GAO has done on the subject of preference programs. I would be happy to answer any questions that you or other members of the subcommittee may have. For further information on this testimony, please contact Loren Yager at (202) 512-4347, or by e-mail at [email protected]. Juan Gobel, Assistant Director; Gezahegne Bekele; Ken Bombara; Karen Deans; Francisco Enriquez; R. Gifford Howland; Ernie Jackson; and Brian Tremblay made key contributions to this statement. 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U.S. trade preference programs promote economic development in poorer nations by providing duty-free export opportunities in the United States. The Generalized System of Preferences, Caribbean Basin Initiative, Andean Trade Preference Act, and African Growth and Opportunity Act unilaterally reduce U.S. tariffs for many products from over 130 countries. However, two of these programs expire partially or in full this year, and Congress is exploring options as it considers renewal. This testimony describes the growth in preference program imports, identifies policy trade-offs, and summarizes the Government Accountability Office (GAO) recommendations and options suggested by a panel of experts on the African Growth and Opportunity Act (AGOA). The testimony is based on studies issued in September 2007, March 2008, and August 2009. For those studies, GAO analyzed trade data, reviewed trade literature and program documents, interviewed U.S. officials, did fieldwork in nine countries, and convened a panel of experts. Total U.S. preference imports grew from $20 billion in 1992 to $110 billion in 2008, with most of this growth taking place since 2000. The increases from preference program countries primarily reflect the addition of new eligible products, increased petroleum imports from some African countries, and the rapid growth of exports from countries such as India, Thailand, and Brazil. Preference programs give rise to three critical policy trade-offs. First, opportunities for beneficiary countries to export products duty free must be balanced against U.S. industry interests. Some products of importance to developing countries, notably agriculture and apparel, are ineligible by statute as a result. Second, some developing countries, such as Bangladesh and Cambodia, are not included in U.S. regional preference programs; however, there is concern that they are already competitive in marketing apparel to the United States and that giving them greater duty-free access could harm the apparel industry in Africa and elsewhere. Third, Congress faces a trade-off between longer preference program renewals, which may encourage investment, and shorter renewals, which may provide leverage to encourage countries to act in accordance with U.S. interests such as trade liberalization. GAO reported in March 2008 that preference programs have proliferated and become increasingly complex, which has contributed to a lack of systematic review. Moreover, we found that there was little to no reporting on the impact of these programs. In addition, GAO solicited options from a panel of experts in June 2009 for improving the competitiveness of the textile and apparel sector in AGOA countries. Options they suggested included aligning trade capacity building with trade preference programs, modifying rules of origin to facilitate joint production among trade preference program beneficiaries and free trade partners, and creating non-punitive and voluntary incentives to encourage the use of inputs from the United States or its trade preference partners to stimulate investment in beneficiary countries.

Annual vaccination is the primary method for preventing influenza, which is associated with serious illness, hospitalizations, and even deaths among people at high risk for complications of the disease, such as pneumonia. Senior citizens are particularly at risk, as are individuals with chronic medical conditions. The Centers for Disease Control and Prevention (CDC) estimates that influenza epidemics contribute to approximately 20,000 deaths and 110,000 hospitalizations in the United States each year. Here in Oregon, and throughout the nation, influenza and pneumonia rank as the fifth leading cause of death among persons 65 years of age and older. Producing the influenza vaccine is a complex process that involves growing viruses in millions of fertilized chicken eggs. This process, which requires several steps, generally takes at least 6 to 8 months from January through August each year. Each year's vaccine is made up of three different strains of influenza viruses, and, typically, each year one or two of the strains is changed to better protect against the strains that are likely to be circulating during the coming flu season. The Food and Drug Administration (FDA) and its advisory committee decide which strains to include based on CDC surveillance data, and FDA also licenses and regulates the manufacturers that produce the vaccine. Only three manufacturers--two in the United States and one in the United Kingdom--produced the vaccine used in the United States during the 2000-01 flu season. Like other pharmaceutical products, flu vaccine is sold to thousands of purchasers by manufacturers, numerous medical supply distributors, and other resellers such as pharmacies. These purchasers provide flu shots at physicians' offices, public health clinics, nursing homes, and less traditional locations such as workplaces and various retail outlets. CDC has recommended October through mid-November as the best time to receive a flu shot because the flu season generally peaks from December through early March. However, if flu activity peaks late, as it has in 10 of the past 19 years, vaccination in January or later can still be beneficial. To address our study questions, we interviewed officials from the Department of Health and Human Services (HHS), including CDC, FDA, and the Health Care Financing Administration (HCFA), as well as flu vaccine manufacturers, distributors, physician associations, flu shot providers, and others. We surveyed 58 physician group practices nationwide to learn about their experiences and interviewed health department officials in all 50 states. Although the eventual supply of vaccine in the 2000-01 flu season was about the same as the previous year's--about 78 million doses-- production delays of about 6 to 8 weeks limited the amount that was available during the peak vaccination period. During the period when supply was limited and demand was higher, providers who wanted to purchase vaccine from distributors with available supplies often faced rapidly escalating prices. By December, as vaccine supply increased and demand dropped, prices declined. Last fall, fewer than 28 million doses were available by the end of October, compared with more than 70 million doses available by that date in 1999. Two main factors contributed to last year's delay. The first was that two manufacturers had unanticipated problems growing one of the two new influenza strains introduced into the vaccine for the 2000-01 flu season. Because manufacturers must produce a vaccine that includes all three strains selected for the year, delivery was delayed until sufficient quantities of this difficult strain could be produced. The second factor was that two of the four manufacturers producing vaccine the previous season shut down parts of their facilities because of FDA concerns about compliance with good manufacturing practices, including issues related to safety and quality control. One of these manufacturers reopened its facilities and eventually shipped its vaccine, although much later than usual. The other, which had been expected to produce 12 to 14 million doses, announced in September 2000 that it would cease production altogether and, as a result, supplied no vaccine. These vaccine production and compliance problems did not affect every manufacturer to the same degree. Consequently, when a purchaser received vaccine depended to some extent on which manufacturer's vaccine it had ordered. Purchasers that contracted only with the late- shipping manufacturers were in particular difficulty. For example, health departments and other public entities in 36 states, including Oregon, banded together under a group purchasing contract and ordered nearly 2.6 million doses from the manufacturer that, as it turned out, experienced the greatest delays from production difficulties. Some of these public entities, which ordered vaccine for high-risk people in nursing homes or clinics, did not receive most of their vaccine until December, according to state health officials. Because supply was limited during the usual vaccination period, distributors and others who had supplies of the vaccine had the ability-- and the economic incentive--to sell their supplies to the highest bidders rather than filling lower-priced orders they had already received. Most of the physician groups and state health departments we contacted reported that they waited for delivery of their original lower-priced orders, which often arrived in several partial shipments from October through December or later. Those who purchased vaccine in the fall found themselves paying much higher prices. For example, one physicians' practice in our survey ordered flu vaccine from a supplier in April 2000 at $2.87 per dose. When none of that vaccine had arrived by November 1, the practice placed three smaller orders in November with a different supplier at the escalating prices of $8.80, $10.80, and $12.80 per dose. On December 1, the practice ordered more vaccine from a third supplier at $10.80 per dose. The four more expensive orders were delivered immediately, before any vaccine had been received from the original April order. Demand for influenza vaccine dropped as additional vaccine became available after the prime period for vaccinations had passed. In all, roughly one-third of the total distribution was delivered in December or later. Part of this additional supply resulted from actions taken by CDC in September, when it appeared there could be a shortfall in production. At that point, CDC contracted with one of the manufacturers to extend production into late December for 9 million additional doses. Despite efforts by CDC and others to encourage people to seek flu shots later in the season, providers still reported a drop in demand in December. The unusually light flu season also probably contributed to the lack of interest. Had a flu epidemic hit in the fall or early winter, the demand for influenza vaccine would likely have remained high. As a result of the waning demand, manufacturers and distributors reported having more vaccine than they could sell. Manufacturers reported shipping about 9 percent less than in 1999, and more than 7 million of the 9 million additional doses produced under the CDC contract were never shipped at all. In addition, some physicians' offices, employee health clinics, and other organizations that administered flu shots reported having unused doses in December and later. In a typical year, there is enough vaccine available in the fall to give a flu shot to anyone who wants one. However, when the supply is not sufficient, there is no mechanism currently in place to establish priorities and distribute flu vaccine first to high-risk individuals. Indeed last year, mass immunizations in nonmedical settings, normally undertaken to promote vaccinations, created considerable controversy as healthy persons received vaccine in advance of those at high risk. In addition, manufacturers and distributors that tried to prioritize their vaccine shipments encountered difficulties doing so. Flu shots are generally widely available in a variety of settings, ranging from the usual physicians' offices, clinics, and hospitals to retail outlets such as drugstores and grocery stores, workplaces, and other convenience locations. Millions of individuals receive flu shots through mass immunization campaigns in nonmedical settings, where organizations, such as visiting nurse agencies under contract, administer the vaccine. The widespread availability of flu shots may help increase immunization rates overall, but it generally does not lend itself to targeting vaccine to high- priority groups. The timing of some of the mass immunization campaigns last fall generated a great deal of controversy. Some physicians and public health officials were upset when their local grocery stores, for example, were offering flu shots to everyone when they, the health care providers, were unable to obtain vaccine for their high-risk patients. Examples of these situations include the following: A radio station in Colorado sponsored a flu shot and a beer for $10 at a local restaurant and bar--at the same time that the public health department and the community health center did not have enough vaccine. One grocery store chain in Minnesota participated in a promotion offering a discounted flu shot for anyone who brought in three soup can labels. Flu shots were available for purchase to all fans attending a professional football game. CDC took some steps to try to manage the anticipated vaccine delay by issuing recommendations for vaccinating high-risk individuals first. In July 2000, CDC recommended that mass immunization campaigns, such as those open to the public or to employee groups, be delayed until early to mid-November. CDC issued more explicit voluntary guidelines in October 2000, which stated that vaccination efforts should be focused on persons aged 65 and older, pregnant women, those with chronic health conditions that place them at high risk, and health care workers. The October guidelines also stated that while efforts should be made to increase participation in mass immunization campaigns by high-risk persons and their household contacts, other persons should not be turned away. Some organizations that conducted mass immunizations said they generally did not screen individuals who came for flu shots in terms of their risk levels. Some said they tried to target high-risk individuals and provided information on who was at high risk, but they let each person decide whether to receive a shot. Their perspective was that the burden lies with the individual to determine his or her own level of risk, not with the provider. Moreover, they said that the convenience locations provide an important option for high-risk individuals as well as others. Health care providers in both traditional and nontraditional settings told us that it is difficult to turn someone away when he or she requests a flu shot. The manufacturers and distributors we interviewed reported that it was difficult to determine which of their purchasers should receive priority vaccine deliveries in response to CDC's recommendations to vaccinate high-risk individuals first. They did not have plans in place to prioritize deliveries to target vaccine to high-risk individuals because there generally had been enough vaccine in previous years and thus there had been little practical need for this type of prioritization. When they did try to identify purchasers serving high-risk individuals, the manufacturers and distributors often found they lacked sufficient information about their customers to make such decisions, and they also were aware that all types of vaccine providers were likely to serve at least some high-risk individuals. As a result, manufacturers reported using various approaches in distributing their vaccine, including making partial shipments to all purchasers as a way to help ensure that more high-risk persons could be vaccinated. Others made efforts to ship vaccine first to nursing homes, where they could be identified, and to physicians' offices. All of the manufacturers and distributors we talked to said that once they distributed the vaccine it would be up to the purchasers and health care providers to target the available vaccine to high-risk groups. Immunization statistics are not yet available to show how successful these ad hoc distribution strategies may have been in reaching high-risk groups, but there may be cause for concern. Some state health officials reported that nursing homes often purchase their flu vaccine from local pharmacies, and some distributors considered pharmacies to be lower priority for deliveries. In addition, many physicians reported that they felt they did not receive priority for vaccine delivery, even though nearly two- thirds of seniors--one of the largest high-risk groups--generally get their flu shots in medical offices. The experience of the 58 physicians' practices we surveyed seemed consistent with this reported lack of priority: as a group, they received their shipments at about the same delayed rate that vaccine was generally available on the market. Ensuring an adequate and timely supply of vaccine, already a difficult task given the complex manufacturing process, has become even more difficult as the number of manufacturers has decreased. Now, a production delay or shortfall experienced by even one of the three remaining manufacturers can significantly affect overall vaccine availability. Looking back, we are fortunate that the 2000-01 flu season arrived late and was less severe than normal because we lacked the vaccine last October and November to prepare for it. Had the flu hit early with normal or greater severity, the consequences could have been serious for the millions of Americans who were unable to get their flu shots on time. This raises the question of what more can be done to better prepare for possible vaccine delays and shortages in the future. We need to recognize that flu vaccine production and distribution are private-sector responsibilities, and as such options are somewhat limited. HHS has no authority to directly control flu vaccine production and distribution, beyond FDA's role in regulating good manufacturing practices and CDC's role in encouraging appropriate public health actions. Working within these constraints, HHS undertook several initiatives in response to the problems experienced during the 2000-01 flu season. For example, the National Institutes of Health, working with FDA and CDC, conducted a clinical trial on the feasibility of using smaller doses of vaccine for healthy adults. If smaller doses offer acceptable levels of protection, this would be one way to stretch limited vaccine supplies. Final results from this work are expected in fall 2001. In addition, for the upcoming flu season CDC and its advisory committee extended the optimal period for getting a flu shot until the end of November, to encourage more people to get shots later in the season. HHS is also working to complete a plan for a national response to a severe worldwide influenza outbreak, called a pandemic. While the plan itself would likely be applied only in cases of public health emergencies, we believe that the advance preparations by manufacturers, distributors, physicians, and public health officials to implement the plan could provide a foundation to assist in dealing with less severe problems, such as those experienced last year. We believe it would be helpful for HHS agencies to take additional actions in three areas. Progress in these areas could prove valuable in managing future flu vaccine disruptions and targeting vaccine to high-risk individuals. First, because vaccine production and distribution are private- sector responsibilities, CDC needs to work with a wide range of private entities to prepare for potential problems in the future. CDC can take an ongoing leadership role in organizing and supporting efforts to bring together all interested parties to formulate voluntary guidelines for vaccine distribution in the event of a future vaccine delay or shortage. In March 2001, CDC co-sponsored a meeting with the American Medical Association that brought together public health officials, vaccine manufacturers, distributors, physicians, and other providers to discuss flu vaccine distribution, including ways to target vaccine to high-risk groups in the event of a future supply disruption. This meeting was a good first step, and continued efforts should be made to achieve consensus among the public- and private-sector entities involved in vaccine production, distribution, and administration.

Until the 2001 flu season, the production and distribution of influenza vaccine generally went smoothly. Last year, however, several people reported that they wanted but could not get flu shots. In addition, physicians and public health departments could not provide shots to high-risk patients in their medical offices and clinics because they had not received vaccine they ordered many months in advance, or because they were being asked to pay much higher prices for vaccine in order to get it right away. At the same time, there were reports that providers in other locations, even grocery stores and restaurants, were offering flu shots to everyone--including younger, healthier people who were not at high risk. This testimony discusses the delays in production, distribution, and pricing of the 2000-2001 flu vaccine. GAO found that manufacturing difficulties during the 2000-2001 flu season resulted in an overall delay of about six to eight weeks in shipping vaccine to most customers. This delay created an initial shortage and temporary price spikes. There is no system in place to ensure that high-risk people have priority for receiving flu shots when supply is short. Because vaccine purchases are mainly done in the private sector, federal actions to help mitigate any adverse effects of vaccine delays or shortages need to rely to a great extent on collaboration between the public and private sectors.

In carrying out its mission of providing services to veterans, VA's programs are administered through its three major administrations--VHA, Veterans Benefits Administration, and National Cemetery Administration--and VA engages all of its administrations in its strategic planning process. VA's Office of Policy is responsible for ensuring integration, collaboration, and cooperation across VA with regard to policy and strategy development. This office also leads VA's strategic planning efforts and is involved with managing VA's governance process. Within the Office of Policy, the Policy Analysis Services, the Strategic Studies Group, and the Strategic Planning Service support this work. In March 2014, VA published its current strategic plan, Department of Veterans Affairs FY 2014 - 2020 Strategic Plan, which identifies the department's mission, values, and three strategic goals. Within VHA, the Office of the Assistant Deputy Under Secretary for Health for Policy and Planning supports and advises several VHA offices--the offices of the Under Secretary for Health, Principal Deputy Under Secretary for Health, and the Deputy Under Secretary for Health for Policy and Services--on the development and implementation of VHA policy, strategic planning, and forecasting. VHA's Under Secretary for Health directs all aspects of VHA's health care system, including its annual budget and overseeing the delivery of care to veterans, as well as the health care professionals and support staff that deliver that care. In December 2012, VHA published its current strategic plan, VHA Strategic Plan FY 2013 - 2018, which identifies its mission and vision and guides budgeting, performance management, and service alignment across VHA, and its plans for how to provide for the health care needs of veterans. (See app. I.) The plan also outlines VHA's three goals and 17 objectives that are to be used to guide planning, budgeting, performance management, and service alignment across VHA; those three goals are to: (1) provide veterans personalized, proactive, patient-driven health care, (2) achieve measurable improvements in health outcomes, and (3) align resources to deliver sustained value to veterans. VHA Directive 1075: Strategic Planning Process is VHA's most current strategic planning guidance, and it outlines how VHA will identify its strategic priorities and establish and execute its strategic plan, as well as identifies roles and responsibilities in this process. In recent years, VA and VHA have established several new initiatives, activities, and priorities in response to changes in internal and external factors--including VHA leadership changes, congressional concerns regarding veterans' access to care, and the placement of VHA on our High-Risk List. Specifically, VA and VHA have developed the following new initiatives and priorities in the last 2 years: MyVA: This VA-wide initiative was launched in July 2015 and is aimed towards transforming the veterans' experience. VA has developed five priorities for this initiative: (1) improving the veteran's experience, (2) improving the employee experience, (3) improving internal support services, (4) establishing a culture of continuous improvement, and (5) enhancing strategic partnerships. "The Under Secretary for Health's Five Priorities:" VHA's Under Secretary for Health established these priorities after being appointed to his position in July 2015. The five priorities are to (1) improve access, (2) increase employee engagement, (3) establish consistent best practices, (4) build a high-performing network (which includes VA and non-VA providers), and (5) rebuild the trust of the American people. "The Secretary's 12 Breakthrough Priorities:" These priorities describe focus areas for the MyVA initiative and were first presented in a January 2016 testimony by the Secretary of VA to the Senate Committee on Veterans' Affairs. Several of these priorities--such as improving the veterans experience, increasing access to health care, and improving community care--are relevant to health care delivery in VHA. Additionally, in September 2014, VHA developed the Blueprint for Excellence, which presents strategies for transforming VHA health care service delivery in response to concerns regarding the VHA access and wait-time crisis that year. These strategies, which are linked to the goals and objectives in VHA's current strategic plan, include operating a health care network that anticipates and meets the unique needs of enrolled veterans, in general, and the service disabled and most vulnerable veterans, and delivering high-quality, veteran-centered care that compares favorably to the best of private sector in measured outcomes, value, access, and patient experience. More recently, VHA developed a crosswalk for internal discussion documenting how the various VA and VHA initiatives, activities, and priorities--such as MyVA, Blueprint for Excellence strategies, the Under Secretary for Health's Five Priorities, and the Commission on Care report--relate to each other. See fig. 1 for a timeline of internal and external factors that have affected or may affect VHA's strategic goals and objectives. VHA conducts a strategic planning process annually and through this process also established its current strategic plan. According to officials, VHA's current strategic plan was developed through its FY 2012 strategic planning process. VHA officials told us that they currently do not have plans to revise VHA's current strategic plan or develop a new one, but may, however, develop an operational plan that will cascade from and operationalize VA's strategic plan. VHA officials told us that they do plan to continue to use their current annual strategic planning process to identify VHA's future strategic goals and objectives. According to VHA officials, VHA's strategic planning process includes two key steps--(1) assessing the environment, which VHA refers to as environmental scanning, and (2) holding the annual NLC Strategic Planning Summit. These steps are consistent with leading practices in strategic planning. VHA conducts environmental scanning to identify and assess factors that may affect its future health care delivery. According to VHA policy, data from VHA's environmental scan, such as the projected number of veterans to be served, are to be used by VHA in developing its goals and objectives. In addition, the results from VHA's environmental scanning are to be used by VHA's Office of Policy and Planning and VHA program offices, in strategic decision making. In addition to environmental scanning, the NLC Strategic Planning Summit is also key to VHA's strategic planning process, in that it is the primary forum through which VHA leadership identifies and discusses the strategic goals and objectives for the next year. The NLC is responsible for recommending new or revised strategic goals and objectives and for formulating strategies to achieve them. VHA's Office of Policy and Planning coordinates the summit and invites various stakeholders to attend--such as officials from VHA central office, including program offices; VA central office; Veterans Benefits Administration; National Cemetery Administration; VISNs; and representatives of veterans service organizations. Veterans Benefits Administration and National Cemetery Administration officials indicated that they have varied levels of participation. Veterans Benefits Administration officials told us that they have historically attended several days of the summit, and National Cemetery Administration officials indicated that they may listen to the VHA's general body sessions during the summit. Even though officials from both administrations indicated they believe their input and coordination with VHA regarding its strategic planning was sufficient, Veterans Benefits Administration officials noted that increased engagement in VHA's strategic planning process would be beneficial, given the direct correlation between veterans' disability compensation ratings assigned by them and the subsequent care delivered from VHA. During the course of the summit, the NLC determines if changes to VHA's strategic goals and objectives are needed. If there are changes, VHA's Office of Policy and Planning drafts a document, gathers additional stakeholder feedback, and presents the document to VHA's Under Secretary for Health for approval. VHA also obtains and uses information from VA to inform its strategic planning process. For example, according to VA and VHA officials, VHA's environmental scanning process is, and has historically been, health-care focused, and is adjunct to the broad environmental scanning process conducted by VA. Officials noted that though distinct processes, VA's and VHA's environmental scanning processes are interrelated. VHA officials told us that they leverage VA's environmental scanning results in making decisions regarding VHA's strategic goals and objectives. Additionally, VA officials have historically been invited to participate in VHA's NLC Strategic Planning Summit, including the 2016 summit. VA's draft report of its environmental scanning identified changes in the veteran population, including growth in the number of veteran enrollees aged 65 and older, which VA officials reiterated at the 2016 NLC summit. VISNs and VAMCs have responsibility for operationalizing VHA's strategic goals and objectives, including its strategic plan, according to VHA officials. Operationalizing involves putting strategic goals and objectives into use by an organization, and includes developing initiatives, programs, or actions that will be used to accomplish those goals and objectives. VISNs and VAMCs must allocate resources, develop day-to- day activities, and create policies as part of that process. However, we found that VHA provides limited guidance for VAMCs in how to operationalize VHA's strategic goals and objectives. First, VHA has not clearly identified VAMCs' responsibilities in operationalizing its strategic goals and objectives as it has for VISNs. For example, VHA Directive 1075 states that VISN directors are to be responsible for: developing operational plans; annually tracking and reporting accomplishments in support of the VHA strategic plan; regularly updating plans to address local issues, such as geographic-specific needs; and providing input to inform future VHA goals, objectives, and strategies. However, there are no such stated responsibilities for VAMCs. According to federal internal control standards, successful organizations should assign responsibility to discrete units, and delegate authority to achieve organizational objectives. VHA and VISN officials told us that it is inferred that the VAMCs are part of the overall process even though there is no specific policy or guidance for VAMCs. All three VISNs in our review reported developing operational plans or strategies to operationalize VHA's goals and objectives at the VISN level, but two of the nine VAMCs in our review had not developed such strategies. Second, in FY 2013, VHA provided VISNs with a strategic planning guide for operationalizing the current strategic plan, but did not provide a similar guide for VAMCs. According to the guide, its purpose was to assist VISNs in outlining a multi-year plan that aligned with VHA's current strategic plan and provide relevant information regarding the development of strategies, the process for conducting a strategic analysis, and the time frame for providing strategic planning information, such as strategies, to VHA central office. The lack of guidance for VAMCs may hinder them from effectively operationalizing VHA's strategic goals and objectives, and may lead to inconsistencies in time frames, documentation, and data used for the strategic planning process. For those VAMCs in our review that developed strategies to operationalize VHA's strategic goals and objectives, for example, almost all developed local strategies on a fiscal- year cycle, which aligns with VHA's budgeting and strategic planning processes, but one VAMC developed strategies on a calendar-year cycle. Although there is no requirement for VAMCs to conduct strategic planning on a specific timeline, per leading practices for strategic planning, organizations should align their activities, core processes, and resources to ensure achievement of the agency's objectives. In addition, per federal internal control standards, management should effectively communicate information throughout the organization, as the organization performs key activities in achieving the objectives of the organization. VHA has not developed adequate strategies or an effective oversight process to ensure VHA's strategic goals and objectives are effectively operationalized. Specifically, VISNs and VAMCs lack consistently developed strategies for operationalizing VHA's strategic goals and objectives, and existing performance assessments are limited in measuring progress towards meeting these goals and objectives. Lack of consistently developed strategies. VHA has not consistently developed strategies for VISNs and VAMCs to use in operationalizing its strategic goals and objectives. Strategies should describe how a strategic plan's goals and objectives are to be achieved, and should include a description of the operational processes, staff skills, use of technology, as well as the resources-- such as, human, capital, and information--required. Among other things, our previous work has shown that strategies should have clearly defined milestones, outline how an organization will hold managers and staff accountable for achieving its goals, and be linked to the day-to-day activities of the organization. In addition, individual strategies should be linked to a specific goal or objective. In September 2014, VHA published the Blueprint for Excellence to provide strategies for transforming VHA health care service delivery in response to concerns regarding the VHA wait-time crisis that year. However, VHA did not develop a similar document for the other strategic planning years despite the development of multiple strategic documents, such as the Under Secretary for Health's five priorities. Without developing adequate strategies to correspond to all of its strategic goals and objectives, the VISNs and VAMCs have limited guidance to help them operationalize VHA's strategic goals and objectives. Moreover, the day-to-day activities and initiatives developed by VISNs and VAMCs may not appropriately align with those goals and objectives. A direct alignment between strategic goals and their associated strategies is important in assessing an organization's ability to achieve those goals. No process for ensuring and assessing progress in meeting all of VHA's strategic goals and objectives. As our previous work has shown, assessments can provide feedback to an organization on how well day-to-day activities and programs developed to operationalize strategic goals and objectives contribute to the achievement of those goals and objectives. Specifically, formal assessments are to be objective and measure the results, impact, or effects of a program or policy, as well as the implementation and results of programs, operating policies, and practices; they can also help in determining the appropriateness of goals or the effectiveness of strategies. However, VHA does not have effective oversight process for ensuring that VISNs and VAMCs are meeting all of its strategic goals and objectives. According to VHA officials, there are currently two methods for assessing VHA's performance towards meeting selected strategic goals and objectives. One method is VISN and VAMC directors' individual annual performance plans. For FY 2016, these plans present VHA's strategies for providing a successful health care delivery system, including those outlined in its Blueprint for Excellence. The directors' plans include performance metrics, which VHA, as well as VISNs and VAMCs, can use to measure demonstrated progress of a VISN or VAMC in meeting these strategies. However, multiple strategic goals and objectives have been communicated to the field, such as the Under Secretary for Health's five priorities, and it is not clear how these goals align with the strategies in the current directors' performance plans or how progress towards them can be assessed. A VHA official, who is a member of the workgroup reviewing VHA's performance metrics, told us that over the years, performance metrics were added to the director performance plans as problems or needs arose without considering the overall purpose of the metric. VHA officials reported that they have reviewed the current plans and have revised them. According to a VHA official, the new plans will have fewer metrics, and will be more strategically focused on VA's and VHA's strategic priorities, such as the Under Secretary for Health's five priorities. According to VHA officials, implementation is planned for October 1, 2016. However, it is not clear how these metrics will be linked to the strategic goals and objectives in VHA's current strategic plan. Veterans' satisfaction with VA's health care system is the second method for assessing VHA's performance towards meeting strategic goals and objectives, according to VHA officials. VHA currently collects information from a survey of veterans that addresses two of VA's priority goals, including improving access to health care, as experienced by the veteran. According to VHA officials, for the veterans' access goal, there is a large degree of alignment between the department-wide goal and how VHA measures its progress towards meeting some of its access goals and objectives in its strategic plan. However, it is not clear how VAMCs and VISNs are to use veterans' satisfaction to assess progress toward meeting other goals and objectives that have been communicated to them--such as the Under Secretary for Health's five priorities that are not focused on access. VHA officials told us that no additional VHA-level assessments had been conducted to measure progress towards meeting strategic goals and objectives. Though VHA has performance information from VISN and VAMC directors' performance plans and veteran satisfaction surveys, the performance of the agency toward meeting VA's and VHA's other strategic goals and objectives may help provide a more complete picture of overall effectiveness. In addition to a lack of adequate strategies and an effective oversight process, a large number of vacant, acting, and interim positions at some of the VISNs and VAMCs in our review have also created challenges for VHA in operationalizing its strategic goals and objectives. For example, officials from one VISN reported that acting and interim senior leadership positions within a facility in their region have had an effect on the operations of the VAMC, including the operationalization of VHA's strategic goals and objectives. They added that the acting and interim senior leaders did not feel empowered to make long-term decisions regarding the operations of the medical center because they did not know how long they would hold the position. The Under Secretary for Health told us that one of VHA's top priorities for 2016 is to fill 90 percent of VAMC director positions with permanent appointments by the end of the year. The Under Secretary added that filling these positions would help address the current gaps in leadership and provide stability for the VAMCs. As the demand for health care by our nation's veterans increases, and concerns about VA's health care system persist, it is essential that VHA conduct the necessary strategic planning to achieve its goals and objectives. VHA has established a strategic planning process to identify strategic goals and objectives for accomplishing its mission, and VISNs and VAMCs are expected to operationalize these goals and objectives. However, VHA has not delineated a role for VAMCs in this process as it has for VISNs. Moreover, the lack of adequate strategies to operationalize VHA's strategic goals and objectives, as well as the lack of an effective oversight process for assessing progress, may hinder the achievement of VHA's goals and objectives. Without consistently developed strategies, the day-to-day activities and initiatives that are developed to operationalize VHA's strategic goals and objectives may not appropriately align with those goals and objectives. This may result in VHA not being able to determine if it is adequately addressing top management concerns or department-wide strategic goals. Further, because VHA does not have an effective process to assess progress in meeting its strategic goals and objectives, it does not have needed information on how well the day-to-day activities and programs of VISNs and VAMCs are contributing to their achievement. We recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to take the following three actions: 1. Define the roles and responsibilities of VAMCs in operationalizing VHA's strategic goals and objectives; this could be accomplished by establishing roles and responsibilities for VAMCs similar to how VHA defines roles and responsibilities for VISNs in VHA Directive 1075 and by developing guidance for VAMCs similar to guidance developed for VISNs. 2. Consistently develop strategies that can be used by VISNs and VAMCs to operationalize VHA's goals and objectives, ensuring that they clearly link directly to VHA's goals and objectives. 3. Develop an oversight process to assess progress made in meeting VHA's strategic goals and objectives, including feedback on how well activities and programs are contributing to achieving these goals and objectives. We provided VA with a draft of this report for its review and comment. In its written comments, reproduced in appendix II, VA concurred with our three recommendations, and described the actions it is taking to implement them by September 2017. VA described the role that community-based outpatient clinics and health care centers play as critical health care access points for veterans and commented that our draft report does not mention these access points as components of VAMC service delivery systems. While our report draft noted the role of community-based outpatient clinics and health care centers in VA's service delivery system, we clarified that these facilities are components of VAMCs. VA also commented that our report draft does not mention the essential role that VHA program offices play in contributing to and implementing the VHA strategic plan. Our report states that program offices contribute to VHA's strategic planning process by developing some of the programs and actions that VISNs and VAMCs use to provide health care services to veterans. VA also provided technical comments, which we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to appropriate congressional committees, the Secretary of Veterans Affairs, the Under Secretary for Health, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. In addition to the contact named above, Janina Austin, Assistant Director; Kelli A. Jones, Analyst-in-Charge; Jennie Apter; and LaKendra Beard made key contributions to this report. Also contributing were George Bogart, Christine Davis, Jacquelyn Hamilton, and Vikki Porter.

Veterans' health care needs may change due to changes in veteran demographics and other factors. Strategic planning, including identifying mission, vision, goals, and objectives, and operationalizing strategies to achieve those goals and objectives are essential for VHA to establish its strategic direction to respond to these changing demands and provide care in a dynamic environment. GAO was asked to review VHA's strategic planning. This report examines (1) VHA's strategic planning process and (2) the extent to which VHA operationalizes its strategic goals and objectives. GAO reviewed VHA strategic planning documents; and interviewed officials from VA and VHA central office, three VISNs selected to provide variation in geographic location, and nine VAMCs within these VISNs selected to provide variation in factors such as geographic location and facility complexity. GAO evaluated VHA's actions against federal standards for internal control and leading practices for strategic planning. The Department of Veterans Affairs' (VA) Veterans Health Administration (VHA) uses a multi-step strategic planning process to develop its strategic goals and objectives, which includes two key steps--(1) identifying and assessing factors that may affect health care delivery, which is referred to as environmental scanning, and (2) holding the annual National Leadership Council (NLC) Strategic Planning Summit--according to officials. VHA officials told GAO that they leverage VA's environmental scanning results in making decisions regarding VHA's strategic goals and objectives and that VA's central office has historically had a role in aspects of VHA's strategic planning process--such as participating in the NLC summit. VHA relies on the VA medical centers (VAMC) that directly provide care to veterans and the Veterans Integrated Service Networks (VISN), regional entities to which the VAMCs report, to operationalize its strategic goals and objectives. However, certain limitations in VHA's processes hinder VISNs' and VAMCs' efforts in operationalizing these goals and objectives. Specifically, VHA has not specified VAMCs' role and responsibilities in its strategic planning guidance, as it has for VISNs. For example, VHA's directive for VISNs clearly states how VISN directors are to operationalize VHA's operational plans; no such directive exists for VAMC officials. Similarly, VHA provided VISNs a strategic planning guide for operationalizing its current strategic plan, but did not provide a similar guide to the VAMCs. VHA has not developed detailed strategies for VISNs and VAMCs to use in operationalizing all of its strategic goals and objectives. According to leading practices for strategic planning, strategies should describe how strategic goals and objectives are to be achieved, including a description of the operational processes, staff skills, technology and other resources required. In September 2014, VHA published the Blueprint for Excellence to provide strategies for transforming VHA health care service delivery in response to concerns regarding the VHA wait-time crisis that year. However, it did not develop similar strategy documents for other years or for the other goals and objectives in its strategic plan. VHA does not have an effective oversight process for ensuring and assessing the progress of VISNs and VAMCs in meeting VHA's strategic goals and objectives. According to VHA officials, VHA relies on two methods for assessing performance towards meeting selected strategic goals and objectives. Specifically, VHA uses VISN and VAMC directors' individual annual performance plans, as well as veteran survey information, to assess VHA's performance towards meeting certain metrics, such as improving veterans' access. However, it is unclear how these specific metrics are linked to assessing overall progress towards VHA's strategic goals and objectives. As a result, VHA may not know to what extent VISNs' and VAMCs' efforts to operationalize its goals and objectives are adequately addressing top management concerns or department-wide strategic goals. GAO recommends that VHA (1) specify VAMCs' roles and responsibilities in operationalizing its strategic goals and objectives, (2) develop detailed strategies to operationalize its goals and objectives, and (3) develop an oversight process to assess progress made. VA concurred with GAO's recommendations.

Active-duty military personnel are not covered by Title VII of the Civil Rights Act of 1964, as amended, or the implementing governmentwide equal employment opportunity and affirmative action regulations and guidelines of the Equal Employment Opportunity Commission. However, the Secretary of Defense has established a separate equal opportunity program with similar requirements for these personnel. In 1969, the Secretary of Defense issued a Human Goals Charter that remains the basis for DOD's equal opportunity program. It states that DOD is to strive to provide everyone in the military the opportunity to rise to as high a level of responsibility as possible based only on individual talent and diligence. The charter also states that DOD should strive to ensure that equal opportunity programs are an integral part of readiness and to make the military a model of equal opportunity for all, regardless of race, color, sex, religion, or national origin. To help ensure equal opportunity in the services, a 1988 DOD directive and related instruction require that the services prepare annual MEOAs. In preparing their MEOAs, the services collect, assess, and report racial and gender data in 10 categories. The Deputy Assistant Secretary of Defense for Equal Opportunity (DASD(EO)) is primarily responsible for monitoring the services' equal opportunity programs, including preparing written analyses of the services' MEOAs and a DOD summary. As recently as March 1994, the Secretary of Defense reaffirmed DOD's equal opportunity goals, stating that equal opportunity is a military and an economic necessity. While noting that DOD has been a leader in equal opportunity, the Secretary stated that it can and should do better. He initiated several measures, including a major DOD study looking at ways to improve the flow of minorities and women into the officer ranks from recruitment through high-level promotions. According to DASD(EO)'s Director of Military Equal Opportunity, MEOAs are the primary source of information for monitoring the services' equal opportunity programs. While MEOAs provide some useful information, the analyses of this information did not consistently identify and assess the significance of possible racial or gender disparities. In addition, data for 9 of the 10 MEOA reporting categories was reported inconsistently among the services. For the promotion and separation categories, some key data that would be helpful in understanding the progression of minorities and women through the ranks was not required to be reported. In analyzing the outcomes of an organization's personnel actions for possible racial or gender disparities, Equal Employment Opportunity Commission guidance recommends using the racial and gender composition of the eligible pool as a basis for comparison. All other things being equal, the racial and gender makeup of persons selected for a particular action should--over time--reflect the racial and gender composition of the eligible pool. In other words, the likelihood or odds of a particular outcome occurring for a minority group should be about the same as for the majority or dominant group in the long run. When the actual odds are less and the difference is statistically significant, and patterns or trends are identified, further analysis would be necessary to determine the cause(s) of the disparity. Seven of the 10 MEOA reporting categories lend themselves to comparing the odds of a minority group member being selected to the odds of a dominant group member being selected. However, the DOD directive and the related instruction do not require such an analysis, and none was done by the services. The services did make some comparisons to the group average; that is, they compared a minority group selection rate to the overall selection rate for all groups (minority and majority). But because the minority group was usually so small compared to the total group, disparities in the minority group selection rate compared to the overall group rate often were not detected or appeared insignificant. Also, this approach is not helpful in identifying trends or patterns. Statistical significance testing can provide a basis to determine if a disparity in the odds of being selected for a minority group compared to the odds of the majority group is due to random chance. Statistical significance testing, over time, can also assist in identifying trends or patterns in equal opportunity data that may warrant further analysis. In the fiscal year 1993 MEOAs (the latest available), only the Army routinely reported statistical significance testing results. The Marine Corps and the Navy reported some statistical significance testing. The Air Force did not report any statistical significance testing. While the DOD instruction on preparing MEOAs encourages the use of statistical significance testing, its use is not required, and instructions on how to conduct such tests are not provided. All four of the officials responsible for preparing the MEOAs for their respective service said they did not have prior experience in analyzing equal opportunity data and that DOD's instruction was not particularly helpful. In analyzing the services' 1993 MEOAs, we found that the MEOA reporting requirements were addressed differently by one or more of the services in 9 of the 10 categories. Only the promotion category appeared to be consistently reported. In most instances, definitions and interpretations of what is called for were not consistent among the services. In some cases, one or more of the services did not comply with the DOD instruction. Following are examples of some of the inconsistencies we found: The Army specifically reported accessions for its professional branches, such as legal, chaplain, and medical. The other services did not. The Air Force, the Army, and the Navy reported on officers who had been separated involuntarily. But the Army did not separately report officers who had been separated under other than honorable conditions or for bad conduct. The Marine Corps did not report any separation data for officers. The Air Force, the Army, and the Navy provided enlisted and officer assignment data by race and gender. The Marine Corps combined into one figure its data on selections to career-enhancing assignments for its O-2 through O-6 officers for each racial and gender category and did not provide any information on its enlisted members. The Air Force, the Marine Corps, and the Navy reported discrimination or sexual harassment complaints by race and gender. The Army did not identify complainants by race and gender. The Army reported utilization of skills data by each racial category and for women. The Air Force reported skills data for blacks, Hispanics, and women. The Marine Corps and the Navy combined the racial categories into one figure for each skill reported and did not report on women. The Air Force and the Army included officers in their reports on discipline. The Marine Corps and the Navy did not. Two important factors in analyzing the progression of minorities and women in the services are how competitive they are for promotions and whether they are leaving the services at disproportionate rates. These factors have been of concern in the officer ranks. In March 1994, the Secretary of Defense directed that a study of the officer "pipeline" be conducted. This study is still underway but is addressing ways to improve the flow of minorities and women through the officer ranks. Although DOD's MEOA guidance requires reporting on promotions and separations, it does not require the services to report racial and gender data for all promotions or voluntary separations. The guidance requires the services to report racial and gender data in their MEOAs for promotions that result from a centralized servicewide selection process. For enlisted members, this includes promotions to E-7, E-8, and E-9; for officers, this includes promotions to O-4, O-5, and O-6. For the most part, promotions at the lower ranks are not routinely assessed. In addition, the MEOA data for officers in each of the services and enlisted members in the Marine Corps is limited to those promotions that occurred "in the zone." We noted that about 900, or about 8 percent, of the services' officer promotions and about 500, or about 19 percent, of Marine Corps enlisted promotions in fiscal year 1993 were not reported and were from either below or above the zone. Without routinely assessing promotions in the lower ranks and in each of the promotion zones for possible racial or gender disparities, the services' ability to identify areas warranting further analysis is limited. The services are also required to report in their MEOAs racial and gender data on involuntary separations, such as for reduction in force or medical reasons, but are not required to report on the great majority of separations that are for voluntary reasons. In fiscal year 1993, about 163,500 enlisted members and about 16,400 officers voluntarily left the services for reasons other than retirement. Analyzing this data for racial or gender disparities could increase the services' understanding of who is leaving the services and help focus their efforts in determining why. DASD(EO) and his predecessors have not provided the services with analyses of their MEOAs and have prepared a DOD summary only on 1990 data, even though both have been required annually since fiscal year 1988. Although one Marine Corps official recalled receiving the summary, she said that it was not helpful or constructive. In addition, some of the service officials responsible for their service's MEOAs said the assessments were done primarily to satisfy the DOD requirement. They noted that, except for the promotion category, MEOAs generally received little attention outside the services' equal opportunity offices. Although DASD(EO) acknowledges these problems, they continue. The DOD instruction calls for the services to submit their MEOAs for the prior fiscal year by February 1 each year and for DASD(EO) to complete its analyses within 90 days. The 1993 MEOAs were not all received by DASD(EO) until May 1994. As of the end of June 1995, DASD(EO) had not provided its 1993 MEOA analyses to the services, and the 1994 MEOAs have not been completed by all the services. To identify possible disparities, we analyzed three MEOA categories--accessions, assignments, and promotions--for fiscal years 1989 through 1993. We compared each minority group--American Indian, Asian, black, and Hispanic--to the dominant white group and compared females to males. The analytical approach we used is one of several methods for analyzing and identifying trends in equal opportunity data. It compares the odds of selection from a particular racial or gender group to the odds of selection from the dominant group for a particular outcome. Used as a managerial tool, this methodology is especially well suited to analyzing various outcomes for racial and gender groups of very different sizes and selection rates. Appendix I contains a more detailed explanation of our methodology, including our rationale for using this approach rather than alternative approaches. Our analysis showed some racial or gender disparities, although the number of disparities varied considerably among the MEOA categories, across the services, and by race and gender. Appendix II presents our detailed results. Conclusions about DOD's personnel management practices cannot be based solely on the existence of statistically significant disparities. Further analysis would be necessary to determine why the disparities occurred. Certain job criteria or selection procedures may have an adverse impact on one or more groups, but if the criteria or procedure can be shown to accurately measure required job skills, the impact could be warranted. Additionally, a group's social characteristics may lead to disparities; for example, a group's low interest or propensity to serve in the military could help explain its lower odds of entering the services. MEOAs did not report information on the eligible pools for accessions. At the suggestion of the DOD Office of Accession Policy, we used certain data from the Defense Manpower Data Center for the eligible pools. For enlisted accessions, we used the gender and racial makeup of persons who had taken the Armed Forces Qualification Test. This meant the individual had expressed interest in the military and had made the time and effort to take the initial tests for entrance into the services. Because comparable eligible pool data for officers was not available, the DOD Office of Accession Policy suggested we use civilian labor force data for college graduates between 21 and 35 years old as the eligible pool. This data provides a comparison to the overall racial and gender composition of this portion of the U.S. population but does not account for an individual's interest or propensity to serve in the military, which may vary by race and gender. Using these eligible pools, we found statistically significant racial and gender disparities that may warrant further analysis. For example, in all the services, Asians had statistically significant lower odds of entering as either an enlisted member or officer in nearly all the years examined; the odds of blacks and Hispanics entering the Air Force as either an enlisted member or officer were statistically significantly lower than whites in most of the years we examined; and in the Army, Hispanics had statistically significantly lower odds than whites of entering the officer corps. For the eligible pool for career-enhancing assignments, we used the numbers of enlisted members and officers eligible for such assignments reported in each of the services' MEOAs. In the three services we examined, we found that the odds of enlisted and officer minorities being selected for these assignments were not statistically significantly different from whites in most instances. An exception, however, was Asian officers in the Navy. As a group, they had statistically significant lower odds than whites of being selected for most assignments. In addition, the odds of Air Force and Navy women officers being selected for many of the assignments in the years we examined were statistically significantly lower than the odds of selection for their male counterparts. Like assignments, we used the eligible pool data for promotions reported in the services' MEOAs. In about 37 percent of the enlisted (E-7, E-8, and E-9) and officer (O-4, O-5, and O-6) promotion boards we examined, one or more minority groups had statistically significant lower odds of being promoted than whites. We found statistically significant lower odds of minorities being promoted compared to whites most often (1) for blacks, (2) at the E-7 and O-4 levels, and (3) in the Air Force. On the other hand, the odds of females being promoted were not statistically significantly different or were greater than the odds for males in nearly all the enlisted and officer boards we examined. To help make the services' MEOAs more useful in monitoring the services' equal opportunity programs, we recommend that the Secretary of Defense direct DASD(EO) to do the following: Devise methodologies for analyzing MEOA data that would more readily identify possible racial and gender disparities than current methods permit and establish criteria for determining when disparities warrant more in-depth analyses. The Secretary may wish to consider the methodology we used in this report, but other methods are available and may suit the purposes of MEOAs. Ensure that the services (1) use comparable definitions and interpretations in addressing the MEOA categories and (2) provide complete information for each of the MEOA categories. Prepare the analyses of the services' annual MEOAs and the DOD summary, as required. In commenting on a draft of this report, DOD concurred with the report and stated that it has already initiated several efforts to make the recommended improvements. DOD's comments are reproduced in appendix III. To evaluate whether MEOAs provided DASD(EO) with sufficient information to effectively monitor the services' equal opportunity programs, we reviewed the services' MEOAs for fiscal years 1989 through 1993. In addition, we analyzed the services' fiscal year 1993 MEOA--the latest available at the time of our review--for reporting completeness and consistency. We reviewed the DOD directive and instruction governing the military's equal opportunity program. We discussed preparation of MEOAs with cognizant officials in the services and DASD(EO)'s Office of Military Equal Opportunity. To determine whether possible racial or gender disparities in selection rates existed, we analyzed military accessions, assignments, and promotions for active-duty enlisted members and officers. We chose to analyze these categories because relatively large numbers of servicemembers were involved and, for the most part, the necessary data was readily available. For accessions, we used data from the Defense Manpower Data Center. For assignments and promotions, we used data from the services' MEOAs. We did not independently verify the accuracy of the data. We performed our review from January 1994 to April 1995 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Armed Services Committee and the Senate and House Committees on Appropriations; the Chairman, House Committee on National Security; the Secretaries of Defense, the Air Force, the Army, and the Navy; and the Commandant of the Marine Corps. Copies will also be made available to others upon request. Please contact me at (202) 512-5140 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix IV. The Equal Employment Opportunity Commission has established policies and procedures for federal agencies to collect and analyze data on civilian personnel actions such as hiring, assignments, and promotions to determine whether selection procedures adversely affect any race, sex, or ethnic group. Although these policies and procedures do not apply to active-duty military personnel, the Department of Defense (DOD) directive and instruction related to its military equal opportunity program set forth similar requirements. We chose not to use the "four-fifths" rule described in the Commission's guidance for determining whether adverse impact may have occurred. As pointed out by the Commission, the four-fifths rule is a "rule of thumb" and has limitations. For example, when the relevant groups are very large--as in the military--differences in the ratio of the two selection rates greater than four-fifths may be statistically significant; that is, areas of possible adverse impact may not be detected if just the four-fifths rule is used. Therefore, to determine whether possible racial or gender disparities existed in the military services' personnel actions that we examined, we used an "odds ratio" methodology. This methodology is especially well suited to analyzing various outcomes for racial and gender groups of very different sizes and selection rates. Use of this methodology also enabled us to do analyses that are more sensitive to changes in the relative numbers of women and minorities than the more traditional method, which compares selection rates (the number selected divided by the total number eligible). The odds of a particular group member being selected for an outcome is determined by dividing the number of individuals selected by the number not selected. An "odds ratio" is the odds of one group member being selected divided by the odds of another group member being selected for that same outcome. If the odds of being selected for both group members are equal, the ratio will be one. When the ratio is not equal to one, the methodology allows us to determine whether the difference is statistically significant, that is, whether it is likely due to random chance or not. For purposes of this report, we use the term statistically significant to denote those instances where the likelihood of the outcome having occurred randomly is less than 5 percent. The odds ratio methodology is relatively straightforward but can involve a large number of calculations and comparisons. If we had calculated odds ratios for each racial and gender group for each personnel action outcome in the three Military Equal Opportunity Assessment (MEOA) categories we examined--accessions, career-enhancing assignments, and promotions--almost 3,000 odds ratios would have been needed. Instead of performing all these calculations, we used "modeling" techniques to determine how race and gender affected the reported outcomes for the three sets of data. Once we understood the effect race and gender had on the outcomes, we had to calculate and analyze only the odds ratios that significantly affected the actual outcomes. For each personnel action, we considered five different models, as follows: Model one assumed that race and gender had no effect on the outcome of accessions, assignments, or promotions. Model two assumed that only gender had an effect--that is, all racial groups would have equal odds of being selected for the outcome, but males and females would not. Model three assumed just the opposite--males and females would have equal odds of being selected, but the racial groups would not. Model four assumed that both race and gender affect the odds of selection independently of one another. In other words, the odds ratios indicating the difference between males and females in one racial group would be the same as the corresponding ratios in the other groups. Model five assumed that both race and gender had an effect and that the two factors operated jointly. That is, the odds ratios describing racial differences varied by gender, and the odds ratios describing gender differences varied by racial group. Determining which model to use required two steps. First, using statistical software, we created a hypothetical database for each model essentially identical to the actual data but modified to reflect the assumptions we made. For example, the hypothetical database created for the third model assumed that the odds of males and females being selected would be equal (that is, the odds ratio would be 1.0). Second, the hypothetical odds ratios were compared to the actual odds ratios for each of the personnel actions. If there were significant differences, we rejected the model's assumptions. In virtually all instances, model four was the most appropriate and preferred way to present the results. Its overall results were not significantly improved upon by any of the other models. This meant that for the personnel actions we analyzed, we only needed to calculate the odds ratios for each racial and gender group compared to whites and males, respectively (see app. II). We did not have to calculate the odds ratios for males and females within each racial group because, according to the model, the gender difference was the same across racial groups. This appendix presents the odds ratios we calculated for each of the three MEOA categories we examined--accessions, assignments, and promotions. Some ratios are much less than 1 (less than three one-thousandths, for example) or much greater (over 16,000, for example). Such extremes occurred when the percentage of persons selected from a small-sized group was proportionately very low or very high compared to the percentage selected from the dominant group. Our tests of statistical significance, however, took group size into account. Therefore, although many odds ratios were less than one (some much less), the disparity was not necessarily statistically significant. In the tables in this appendix, we have shaded the odds ratios that indicate possible adverse impact; that is, the ratios are less than one and statistically significant. A more in-depth analysis would be warranted to determine the cause(s) of these disparities. As discussed in appendix I, we compared the odds for females with those for males and the odds of minority racial groups with those for whites. To help the reader remember the relationships in our tables, we have labeled the top of each column listing odds ratios with the gender or racial group and symbols of what the proper comparison is. For example, F:M means the ratio compares the odds of females to males and B:W means the ratio compares the odds of blacks to whites for the particular outcome being analyzed. The odds ratios can also be used to make certain comparisons within and among the services and identify trends whether they are statistically significant or not. If the objective, for example, is to increase the representation of a particular minority group vis-a-vis whites, the odds ratio should be greater than one. When it is not, it means whites are being selected in proportionately greater numbers than the minority group. Tables II.1 and II.2 present the odds ratios for enlisted and officer accessions, respectively. We compared gender and racial data for those entering the military to the gender and racial composition of selected eligible pools. In determining what to use for the eligible pool, we conferred with officials in DOD's Office of Accession Policy. For the enlisted member eligible pool, we used those men and women who had taken the Armed Forces Qualification Test and scored in the top three mental categories during the respective fiscal year. These were generally high school graduates who had been initially screened by the recruiter for certain disqualifying factors such as a criminal record or obvious physical disabilities. Using test takers as the eligible pool also took into account the propensity to serve in the military, since the men and women taking the test had to make the time and effort to do so. Moreover, this data was readily available from the Defense Manpower Data Center. For officers, determining a relevant eligible pool was not as precise. Officers primarily come from Reserve Officers' Training Corps programs, officer candidate schools, and the military academies, but no information was reported on the racial and gender makeup of the programs' applicants in the services' MEOAs, nor was it available from the Defense Manpower Data Center. At the suggestion of DOD's Office of Accession Policy, we used national civilian labor force gender and racial statistics for college graduates 21 to 35 years old as the eligible pool. This data was readily available from the Defense Manpower Data Center, and nearly all officers have college bachelor's degrees and are in this age group when they enter the service. We could not account for an individual's propensity or desire to serve as a military officer using civilian labor force data. While our analyses highlight those racial groups that entered the services' officer corps at lower rates or odds compared to whites based on their representation in the civilian labor force, further analyses would be necessary to determine why this occurred. In both tables we present the odds ratios for females compared to males. In each of the 5 years we reviewed and across the services, the odds of women entering the services were statistically significantly lower than for men. This fact is not surprising considering that women's roles in the military are limited and they may, as a group, have less interest or propensity to serve in the military than men. Even in recent years when the restrictions have been loosened, the services have not reported accessing more than about 14 percent of women for the enlisted ranks and about 19 percent for the officer ranks, compared to over 50 percent representation in the civilian labor force. Nevertheless, we present the data to illustrate the disparities among the services. For example, in fiscal year 1993, the odds of women in our eligible pool entering the Marine Corps as officers were less than one-tenth the odds for men. In contrast, for the same year, the odds of women entering the Air Force as officers were about one-third the odds for men. Shaded areas indicate ratios that are less than one and statistically significant. Shaded areas indicate ratios that are less than one and statistically significant. Tables II.3 through II.6 present the odds ratios for enlisted and officer career-enhancing assignments as identified by the services in their respective MEOAs. For the gender and racial makeup of the eligible pools and of who was selected, we used data reported in the MEOAs. As previously noted, the Marine Corps data for officer assignments is an accumulation of all its officers in the ranks O-2 through O-6. Although we calculated the odds ratios for this data and they are presented in table II.5, more detailed analysis by more specific assignments may be appropriate before any conclusions are drawn. In addition, the Marine Corps did not report any assignment data for its enlisted personnel. For several of the assignments, the MEOA data was insufficient for our analysis; these instances are indicated as "no data." In others, no minority candidates were in the eligible pool, and these instances are indicated as "none" in the appropriate odds ratio column. Finally, in the Navy, combat exclusion laws prohibit women from serving aboard submarines, and this is so noted in the chief of the boat assignment for E-9s. Shaded areas indicate ratios that are less than one and statistically significant. (Continued on next page.) Shaded areas indicate ratios that are less than one and statistically significant. Shaded areas indicate ratios that are less than one and statistically significant. (Continued on next page.) Table II.5: Odds Ratios for Marine Corps Officer Career-Enhancing Assignments, Fiscal Years 1989-93 American Indians AI:W Shaded areas indicate ratios that are less than one and statistically significant. Shaded areas indicate ratios that are less than one and statistically significant. (Continued on next page.) American Indians AI:W Shaded areas indicate ratios that are less than one and statistically significant. Tables II.7 and II.8 present the odds ratios for enlisted and officer promotion boards, respectively, for each of the services. For the gender and racial makeup of the eligible pools and of who was selected, we used data reported in the MEOAs. In several instances, no promotion boards were held, or data was not reported in the service's MEOA for a particular rank, service, and year; these are noted as appropriate. In other instances, no minority group candidates were in the eligible pool for promotion to a particular rank; we have indicated these as "none" in the appropriate ratio column. Shaded areas indicate ratios that are less than one and statistically significant. (Continued on next page.) Shaded areas indicate ratios that are less than one and statistically significant. (Continued on next page.) Shaded areas indicate ratios that are less than one and statistically significant. Table II.8: Odds Ratios for the Services' Officer Promotion Boards, Fiscal Years 1989-93 American Indians AI:W Shaded areas indicate ratios that are less than one and statistically significant. (Continued on next page.) Shaded areas indicate ratios that are less than one and statistically significant. (Continued on next page.) Douglas M. Sloane, Social Science Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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Pursuant to a congressional request, GAO reviewed the services' Military Equal Opportunity Assessments (MEOA) to determine whether certain active-duty personnel data reflect racial and gender disparities within the services. GAO found that: (1) MEOA do not consistently identify and assess the significance of possible racial and gender disparities within the services; (2) MEOA categories are reported differently by each service, since the services are not required to report data on low rank promotions and voluntary separations; (3) the Deputy Assistant Secretary of Defense for Equal Opportunity (DASD EO) has not analyzed the services' MEOA or Department of Defense (DOD) summaries for fiscal year 1993; (4) there are significant statistical disparities in the number of minorities considered for accessioning, career enhancement, and promotion; and (5) some of these disparities can be attributed to job-related and societal factors.

According to DOD's Counternarcotics Strategy developed in fiscal year 2009, the department seeks to disrupt the market for illegal drugs by helping local, state, federal, and foreign government agencies address the drug trade and narcotics-related terrorism. DOD achieves this mission through three goals--detecting and monitoring drug trafficking, sharing information on illegal drugs with U.S. and foreign government agencies, and building the counternarcotics capacity of U.S. and foreign partners. DASD-CN>, with oversight from the Under Secretary of Defense for Policy, exercises management and oversight of DOD's counternarcotics activities and performance measurement system. DASD-CN>'s responsibilities include ensuring DOD develops and implements a counternarcotics program with clear priorities and measured results. Programs, Resources, and Assessments, a division within DASD-CN>, is the lead office for the development of counternarcotics resources and plans. Among other activities, this office directs and manages the planning, programming, and budgeting system of the DOD counternarcotics program and is responsible for updating and disseminating guidance on DOD's counternarcotics performance measurement system. DOD's counternarcotics activities are implemented through DOD's combatant commands, military departments, and defense agencies. According to DOD, these organizations provide assets, such as aircraft and patrol ships, military personnel, and other assistance, to support U.S. law enforcement agencies and foreign security forces in countering narcotics trafficking. In support of DOD's counternarcotics activities, DOD reported resources totaling approximately $7.7 billion from fiscal year 2005 to fiscal year 2010, including more than $6.1 billion appropriated to its Counternarcotics Central Transfer Account and more than $1.5 billion in supplemental appropriations (see table 1). Of these resources, DOD estimated that approximately $4.2 billion were in support of its international counternarcotics activities from fiscal years 2005-2010. DOD efforts to develop performance measures for its counternarcotics activities are long-standing. We reported in December 1999 that DOD had not developed a set of performance measures to assess the impact of its counternarcotics operations, but had undertaken initial steps to develop such measures. In January 2002 and November 2005, we found that DOD was in the process of developing performance measures focused on its role of detecting and monitoring the trafficking of illegal drugs into the United States. In November 2005 we recommended that DOD, in conjunction with other agencies performing counternarcotics activities, develop and coordinate counternarcotics performance measures. In December 2006 Congress directed ONDCP--the organization that establishes U.S. counternarcotics goals and coordinates the federal budget to combat drugs--to produce an annual report describing the national drug control performance measurement system that identifies the activities of national drug control program agencies, including DOD. In May 2007 ONDCP issued guidance requiring DOD and other national drug control program agencies to annually submit to the Director of ONDCP a performance summary report including performance measures, targets, and results. In addition, ONDCP officials stated that they have recommended improvements to DOD's performance measures, both in correspondence and in meetings with DOD staff. DOD does not have an effective system for tracking the progress of its counternarcotics activities; however, it continues efforts to improve the system. We have found that measuring performance provides managers a basis for making fact-based decisions. DOD has established performance measures for its counternarcotics activities and a database to collect performance information. However, these measures lack a number of attributes which we consider key to successful performance measures and, therefore, do not provide a clear indication of DOD's progress toward its counternarcotics goals. Recognizing the need to update and improve its measures, in May 2010, DOD issued new guidance for its counternarcotics performance measurement system. However, DOD officials noted the department will faces challenges implementing the guidance. We have previously reported that effective performance measurement systems include steps to measure performance, such as establishing performance measures and collecting data. In response to ONDCP's 2007 guidance, DOD developed performance measures for its fiscal year 2007 counternarcotics activities and established a centralized database within its performance measurement system to collect data on those performance measures. The counternarcotics performance measurement system database, maintained by DASD-CN>, requires DOD components to submit performance information at specified intervals during the fiscal year, such as results for performance measures, the mechanisms used to collect results data, and future performance targets. For fiscal year 2009, DOD guidance required that all projects funded by its Counternarcotics Central Transfer Account have a performance measure. As a result, DOD reported it had 285 performance measures for its fiscal year 2009 counternarcotics activities. Of those, 239 were performance measures related to DOD's mission of supporting U.S. agencies and foreign partners in countering narcotics trafficking. (See table 2 for examples of DOD's counternarcotics performance measures.) DOD's current set of counternarcotics performance measures varies in the degree to which it exhibits key attributes of successful performance measures. Prior GAO work has identified nine attributes of successful performance measures. Table 3 shows the nine attributes, their definitions, and the potentially adverse consequences of not having the attributes. Our analysis found that DOD's counternarcotics performance measures lack several of the key attributes of successful performance measures. Based on our analysis of a generalizable sample of DOD's fiscal year 2009 performance measures, we found the attributes of core program activities and linkage were generally present, but other attributes such as balance and limited overlap were missing, and attributes including governmentwide priorities, reliability, objectivity, clarity, and measurable targets were present in varying degrees. We found that the attribute of core program activities was identified in the set of measures, while balance and limited overlap did not appear to be present. Core program activities. We estimate that all of DOD's counternarcotics performance measures cover the department's core program activities. We have previously reported that core program activities are the activities that an entity is expected to perform to support the intent of the program, and that performance measures should be scoped to evaluate those activities. For the measures we reviewed, DOD divides its core counternarcotics activities across its 3 goals and 13 objectives (see table 2). In our analysis, we found at least one performance measure covering each of DOD's counternarcotics objectives. Therefore, we determined that DOD's core program activities were covered. Balance. DOD's set of performance measures lack balance. We have previously reported that balance exists when a set of measures ensures that an organization's various priorities are covered. According to DOD, performance measures best cover its priorities when five measurable aspects of performance, as defined by DOD--input, process, output, outcome, and impact--are present in its performance measures. As an example, "number of attendees to basic counterdrug intelligence course" is, in our determination, a measure of output, as it measures the services provided by DOD. We estimate 93 percent of DOD's fiscal year 2009 performance measures are input, process, or output measures, while 6 percent are outcome measures and 0 percent are impact measures. Therefore, given that DOD's set of measures is highly skewed towards input, process, and output measures and contains no impact measures, we determined that the set is not balanced by DOD's criteria. Performance measurement efforts that lack balance overemphasize certain aspects of performance at the expense of others, and may keep DOD from understanding the effectiveness of its overall mission and goals. Limited overlap. We determined there to be overlap among DOD's performance measures. We found instances where the measures and their results appeared to overlap with other measures and results. When we spoke with DASD-CN> officials concerning this, they stated that the set of measures could be conveyed using fewer, more accurate measures. We have reported that each performance measure in a set should provide additional information beyond that provided by other measures. When an agency has overlapping measures, it can create unnecessary or duplicate information, which does not benefit program management. Of the remaining six attributes of successful performance measures, only one attribute--linkage--was present in almost all of the measures, while the other five attributes--governmentwide priorities, reliability, objectivity, clarity, and measurable targets--appeared in varying degrees (see figure 1). DOD's counternarcotics performance measures demonstrate linkage. We estimate that 99 percent of DOD's measures are linked to agencywide goals and mission. DOD's counternarcotics performance measurement system database requires that for each performance measure entered into the database, a goal and related objective of DOD's counternarcotics mission be identified. Our analysis found that in all but one instance, linkage between DOD's goals and performance measures is easily identified. However, DOD's counternarcotics performance measures did not fully satisfy five attributes. Governmentwide priorities. We estimate that 41 percent of the measures we analyzed cover a broader governmentwide priority, such as quality, timeliness, efficiency, cost of service, or outcome. We determined, for example, that the governmentwide priority of "quality" was reflected in the measure "number of sensors integrated and providing reliable and dependable radar data to JIATF-S and/or host nations," because it measures the reliability and dependability of detection services. In the majority of the instances, however, measures did not address a governmentwide priority. For example, the measure "number of trained military working dog teams trained" was determined not to cover a governmentwide priority because it does not measure the quality or efficiency of training provided. When measures fail to cover governmentwide priorities managers may not be able to balance priorities to ensure the overall success of the program. Reliability. We estimate that 46 percent of DOD's performance measures have data collection methods indicated in the database that generally appear reliable. Reliability refers to whether a measure is designed to collect data or calculate results such that the measure would be likely to produce the same results if applied repeatedly to the same situation. For each entry in the database, users are directed to enter, among other information, one performance measure and its associated methodology, target, and result. However, in numerous instances the system contained multiple performance measures entered into fields that should contain only one measure. Such entries could result in errors of collecting, maintaining, processing, or reporting the data. Additionally, some measures did not provide enough information on data collection methods or performance targets to assure reliability. For example, a measure in the database states "continuous U.S. Navy ship presence in the SOUTHCOM area of responsibility." The performance target listed for this measure is "3.5," but to what 3.5 refers--such as days, number of ships, or percentage points--is not explained. Moreover, the methodology in the database for this measure is entered as "not applicable." Therefore, the measure's methodology does not provide insight into how DOD could measure whether or not it reached its target of 3.5. As a result, we determined that this measure did not have data collection methods to gather reliable results. We have previously reported that if errors occur in the collection of data or the calculation of their results, it may affect conclusions about the extent to which performance goals have been achieved. Objectivity. We estimate that 59 percent of DOD's performance measures for its counternarcotics activities are objective. We have previously reported that to be objective, measures should indicate specifically what is to be observed, in which population or conditions, and in what time frame, and be free of opinion and judgment. We estimate that 41 percent of DOD's measures are not objective and could therefore face issues of bias or manipulation. For example, a measure in the database is, "percent of inland waterways controlled by Colombian Marine Corps forces." For this measure, no criteria for "controlled" is provided and it is not clear how the Colombian government reports the percentage of waterways under its control and over what time frame this control will occur. Clarity. We estimate that 65 percent of DOD's performance measures exhibit the attribute of clarity. A measure achieves clarity when it is clearly stated and the name and definition are consistent with the methodology used for calculating the measure. However, we estimate that 35 percent of DOD's measures are not clearly stated. For example, one of DOD's measures linked to the objective of sharing information with U.S. and partner nations is "identify and establish methodology for implementation." For this measure, no associated methodology is identified, and it is unclear what is being implemented. We have previously reported that a measure that is not clearly stated can confuse users and cause managers or other stakeholders to think that performance was better or worse than it actually was. Measurable target. We estimate that 66 percent of DOD's measures have measurable targets. Where appropriate, performance goals and measures should have quantifiable, numerical targets or other measurable values. Some of DOD's measures, however, lacked such targets. For example, one performance measure identified its target as "targets developed by the local commander." As it is not quantifiable, this target does not allow officials to easily assess whether goals were achieved because comparisons cannot be made between projected performance and actual results. DOD officials have acknowledged that weaknesses exist in the department's current set of counternarcotics performance measures. In May 2010 DOD issued revised guidance for its counternarcotics performance measurement system to guide users in establishing performance measures that more accurately capture the quantitative and qualitative achievements of DOD's activities. To do this, the guidance states that performance measures should be, among other attributes, useful for management and clearly stated. The guidance describes different types of performance measures that can be used to monitor DOD's contribution to its strategic counternarcotics goals, such as those that measure DOD's efficiency, capability, and effectiveness at performing its activities. Additionally, according to the guidance, DOD components should provide evidence of the quality and reliability of the data used to measure performance. However, DOD officials noted four specific challenges that the department faces in developing performance measures consistent with its revised guidance. Creating performance measures that assess program outcomes. Some DOD officials noted that, because DOD acts as a support agency to partner nations and other law enforcement entities--and the actual interdiction of drugs is conducted by other entities--measuring the outcome of DOD's performance is difficult. While developing outcome measures can be challenging, we have found that an agency's performance measures should reflect a range of priorities, including outcomes. Moreover, we have found that methods to measure program outcomes do exist. For example, agencies have applied a range of strategies to develop outcome measures for their program, such as developing measures of satisfaction based upon surveys of customers. In addition, officials from EUCOM, AFRICOM, and JIATF-S stated that while developing outcome performance measures can be difficult, developing such measures for support activities is possible and is done at other federal agencies. For example, EUCOM indicated it could track the outcome of the support it provides to partner nations by tracking the annual percentage increase in interdictions and arrests related to illicit trafficking. Additionally, JIATF-W indicated that it conducts quarterly command assessments of current programs, which focus on aligning resources provided by JIATF-W to the outcomes of its law enforcement partners. Implementing revisions in a timely manner. DOD officials noted that implementing revisions to the department's performance measures in a timely fashion will be difficult given that such revisions are resource and time intensive. Further, while including dates for submission, DOD's revised guidance does not clearly specify a time frame by which DOD components should revise the counternarcotics performance measures that are to be submitted to the database. We have previously reported that establishing timetables for the development of performance measures can create a sense of urgency that assists in the effort being taken more seriously. DASD-CN> officials noted that time frames by which DOD's measures would be revised are being discussed. However, these officials do not expect new performance measures to be established in fiscal year 2010, and said that fiscal year 2011 would be the earliest year of full implementation of the guidance. Ensuring adequate resources are available. DOD officials noted that ensuring adequate resources--such as expertise and training in performance management--are available to develop performance measures at both DASD-CN> and the combatant commands will be a challenge. These officials noted that DOD employees tasked with developing performance measures and tracking the progress towards achieving goals are not sufficiently trained to design and monitor outcome performance measures. We have previously reported that access to trained staff assists agencies in their development of performance measures. Ensuring reliable data. DOD officials noted that ensuring data used to measure DOD performance are reliable is challenging. To measure the performance of its counternarcotics activities DOD officials told us they rely heavily on external sources of data, such as U.S. law enforcement agencies and foreign government officials. This challenge can pose issues for DOD regarding data verification and ensuring proper information is recorded for performance measures. DOD makes limited use of its performance measurement system to manage its counternarcotics activities and has applied few practices to facilitate its use. We have found that the full benefit of collecting performance information is realized only when managers use the information to inform key decisions. While DOD has applied some practices to facilitate the use of the performance information in its system, it does not utilize certain key practices, such as frequently and effectively communicating performance information. Absent an effective performance management system, DOD lacks critical information to use to improve the management and oversight of its counternarcotics activities. We have previously reported that, in addition to measuring performance, effective performance measurement systems include steps to use information obtained from performance measures to make decisions that improve programs and results. We identified several ways in which agencies can use performance information to manage for results, including using data to (1) identify problems and take corrective actions, (2) develop strategy and allocate resources, and (3) identify and share effective approaches. DOD officials representing DASD-CN>, AFRICOM, CENTCOM, EUCOM, NORTHCOM, SOUTCOM, JIATF-S, and JIATF-W told us they rarely use information from DOD's counternarcotics performance measurement system to manage counternarcotics activities. Specifically, they rarely use the system to: Identify problems and take corrective actions. Agencies can use performance information to identify problems or weaknesses in programs, to try to identify factors causing the problems, and to modify a service or process to try to address problems. DOD officials representing DASD- CN> and SOUTHCOM told us that they currently make limited use of the performance information in DOD's performance measurement system to manage counternarcotics activities. Officials from DASD-CN> stated that they use data from the performance measurement system to produce reports for ONDCP, which may include information identifying problems in the implementation of DOD's counternarcotics activities. However, in reviewing these documents, we found that the reports did not include a clear assessment of DOD's overall progress toward its counternarcotics goals. For instance, the report submitted to ONDCP for fiscal year 2009 contained detailed information on 6 of DOD's 285 counternarcotics performance measures, but did not clearly explain why the results of these 6 measures would be critical to the success of DOD's counternarcotics program. Moreover, according to ONDCP, DOD's reports for fiscal years 2007, 2008, and 2009 did not fulfill the requirements of ONDCP's guidance because the reports were not authenticated by the DOD-IG. Further, officials from AFRICOM, CENTCOM, EUCOM, NORTHCOM, JIATF-S, and JIATF-W told us they do not use the DOD's performance measurement system to manage counternarcotics activities. While these officials indicated that they submitted performance information to the system's database as required by DOD guidance, they stated they tend to manage programs using information not submitted to the system (see table 4). For example, CENTCOM officials told us information obtained in weekly program meetings regarding the timeliness and cost of counternarcotics projects, not data sent to the system's database, is most often used to help them identify problems and make program adjustments. Recognizing the need improve the information in the system's database, officials from DASD-CN> told us that for fiscal year 2011 they are working with DOD components to integrate performance information into the system's database that can be more useful for decision making. Officials from several combatant commands stated they could integrate performance information obtained from outside sources into the counternarcotics performance measurement system. Officials from JIATF- S, for example, told us they collect and analyze a variety of data on counternarcotics activities that they do not input into DOD's counternarcotics performance measurement system. On a daily basis, JIATF-S collects information on "cases"--that is, boats or planes suspected of illegal trafficking. In addition to tracking the number of cases, JIATF-S compiles information as to whether or not a particular case was targeted, detected, or monitored, and whether or not those actions resulted in interdictions or seizures of illegal drugs. By compiling this information, officials at JIATF-S told us they can better identify program outcomes, areas in which their efforts are successful, and ways to take corrective actions. Develop strategy and allocate resources. Agencies can use performance information to make decisions that affect future strategies, planning, and budgeting, and allocating resources. DASD-CN>'s role includes both defining the strategic goals and managing the budgeting system of the DOD counternarcotics program. DOD's counternarcotics guidance states that information from the counternarcotics performance measurement system will inform strategic counternarcotics plans, but it does not clearly state how the system will be used to inform decisions to allocate resources. Moreover, officials from DASD-CN> told us that the office does not currently link performance information from the counternarcotics performance measurement system's database directly to budget allocation decisions. In addition, our analysis of DOD's fiscal year 2011 Drug Interdiction and Counterdrug Activities Budget Estimates-- which provides details on DOD's fiscal year 2011 budget request for its counternarcotics activities--identified no clear link between budget allocation decisions and performance information in the system's database. DOD officials told us they plan to incorporate performance information from the counternarcotics performance measurement system into future budget requests provided to Congress. Identify and share effective approaches. We have reported that high- performing organizations can use performance information to identify and increase the use of program approaches that are working well. According to DOD's counternarcotics performance measurement system guidance, DASD-CN> will use performance information submitted to the system's database to compile reports for ONDCP, which DASD-CN> has done. However, DASD-CN> officials told us they do not currently use the system to produce reports for DOD components, which could assist in identifying and sharing effective approaches between DOD's components. While indicating performance reports could be a useful tool, officials from several DOD components told us they had not received such reports from DASD-CN>. DOD's May 2010 guidance does not state whether the system will be used to produce such reports in the future. We have found that agencies can adopt practices that can facilitate the use of performance data. These include (1) demonstrating management commitment to results-oriented management; (2) aligning agencywide goals, objectives, and measures; (3) improving the usefulness of performance data to better meet management's needs; (4) developing agency capacity to effectively use performance information; and (5) communicating performance information within the agency frequently and effectively. As part of its role overseeing DOD's counternarcotics activities, DASD- CN> manages the DOD counternarcotics performance measurement system. DASD-CN> applies some practices to facilitate the use of its counternarcotics performance measurement system. For example, DASD- CN> has recently taken steps to demonstrate management commitment by issuing revised guidance emphasizing the development of improved performance measures and, according to DASD-CN> officials, conducting working groups with some DOD components to assist them in revising performance measures. Moreover, DASD-CN> officials told us they are taking steps to increase staffing to better oversee the performance measurement system. We have found that the commitment of agency managers to result-oriented management is critical to increased use of performance information for policy and program decisions. Further, DASD-CN> has created a results framework that aligns agencywide goals, objectives, and performance measures for its counternarcotics activities. As we have previously reported, such an alignment increases the usefulness of the performance information collected by decision makers at each level, and reinforces the connection between strategic goals and the day-to-day activities of managers and staff. However, DASD-CN> has not applied certain key practices to facilitate the use of data, such as improving the usefulness of performance information in its performance measurement system, developing agency capacity to use performance information, and communicating performance information frequently and effectively. Furthermore, DOD officials told us they face challenges using DOD's performance measurement system to manage their activities due to (1) the limited utility of the performance measures and data currently in DOD's counternarcotics database, (2) insufficient capacity to collect and use performance information, and (3) infrequent communication from DASD- CN> regarding performance information submitted to the database. For instance, DOD's guidance emphasizes the development of performance measures that are, among other attributes, useful for management and supported by credible data. However, DOD officials from several combatant commands told us that the performance measures and targets currently in the system are of limited utility and will need to be revised. Moreover, officials from several DOD components emphasized the need to build additional capacity to use performance data, such as receiving training on how to revise performance standards and measures. We have found that the practice of building analytical capacity to use performance information--both in terms of staff trained to do analysis and availability of research and evaluation resources--is critical to an agency using performance information in a meaningful way. Finally, DOD components told us that they received little feedback or direction from DASD-CN> regarding performance information they submitted to the system. We have previously reported that improving the communication of performance information among staff and stakeholders can facilitate the use of performance information in key management activities. For more information see table 5. DOD reported more than $1.5 billion in fiscal year 2010 for its counternarcotics activities, but has not yet developed an effective performance measurement system to readily inform progress toward the achievement of its counternarcotics goals. We have previously reported that performance measurement systems include steps to measure performance to gauge progress and use the information obtained to make key management decisions. DOD acknowledges weaknesses in its performance measurement system and has taken steps to improve the system, such as revising its guidance for the development of performance measures and holding working groups with DOD components. However, its current set of measures lack key attributes of successful performance measures, such as balance, objectivity, and reliability. Moreover, DOD infrequently uses the information presently in its counternarcotics performance measurement system and has yet to fully apply key practices to facilitate its use. Absent an effective performance measurement system, DOD lacks critical performance information to use to improve its management decisions, eliminate wasteful or unproductive efforts, and conduct oversight of its activities. To improve DOD's performance measurement system to manage and oversee its counternarcotics activities, we recommend that the Secretary of Defense take the following two actions: 1. To address weaknesses identified in DOD's counternarcotics performance measurement system, we recommend that the Secretary of Defense direct the Deputy Assistant Secretary for Counternarcotics and Global Threats to review the department's performance measures for counternarcotics activities and revise the measures, as appropriate, to include the key attributes of successful performance measures previously identified by GAO. 2. To address factors associated with the limited use of DOD's counternarcotics performance measurement system, we recommend that the Secretary of Defense direct the Deputy Assistant Secretary for Counternarcotics and Global Threats to apply practices that GAO has identified to facilitate the use of performance data. We provided a draft of this report to DOD and ONDCP for their review and comment. We received written comments from DOD, which are reprinted in appendix II. DOD concurred with our recommendations, and stated it has developed and begun to implement a plan to improve the quality and usefulness of its counternarcotics performance measurement system. ONDCP did not provide written comments. We received technical comments from DOD and ONDCP, which we have incorporated where appropriate. We are sending copies of this report to interested congressional committees, the Secretary of Defense, and the Director of the Office of National Drug Control Policy. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4268 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Section 1016 of the National Defense Authorization Act for Fiscal Year 2010 directed GAO to report on the Department of Defense's (DOD) performance measurement system used to assess its counternarcotics activities. In response to this mandate, we examined the extent to which (1) DOD's counternarcotics performance measurement system enables DOD to track progress and (2) DOD uses performance information from its counternarcotics performance measurement system to manage its activities. Our work focused on the efforts of DOD to develop an effective counternarcotics performance measurement system. Within DOD, we spoke with officials from several relevant components involved in the management, oversight, and implementation of DOD's counternarcotics activities, including the Office of the Deputy Assistant Secretary of Defense for Counternarcotics and Global Threats (DASD-CN>), U.S. Africa Command (AFRICOM), U.S. Central Command (CENTCOM), U.S. European Command (EUCOM), U.S. Northern Command (NORTHCOM), U.S. Southern Command (SOUTHCOM), the Joint Interagency Task Force- South (JIATF-S), the Joint Interagency Task Force-West (JIATF-W), and the DOD Inspector General (DOD-IG). We also discussed DOD efforts with officials from the Office of National Drug Control Policy (ONDCP), the organization that establishes U.S. counternarcotics goals and coordinates the federal budget to combat drugs. To examine the extent to which DOD's counternarcotics performance measurement system enables the department to track its progress we analyzed DOD strategy, budget, and performance documents, such as DOD's Counternarcotics Strategy, Drug Interdiction and Counterdrug Activities Budget Estimates, and Performance Summary Reports. We reviewed relevant DOD and ONDCP guidance on performance measures, such as DOD's Standard Operating Procedures for the Counternarcotics Performance Metrics System and ONDCP's Drug Control Accounting circular. Further, we evaluated a generalizable random sample of DOD's fiscal year 2009 counternarcotics performance measures (115 of 239 measures) to assess the extent to which these measures adhered to GAO criteria on the key attributes of successful performance measures. Because we followed a probability procedure based on random selections, our sample is only one of a large number of samples that we might have drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample's results at a 95 percent confidence interval (e.g., plus or minus 6 percentage points). This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. To evaluate the sample, two analysts independently assessed each of the performance measures against nine attributes of successful performance measures identified by GAO. Those analysts then met to discuss and resolve any differences in the results of their analyses. A supervisor then reviewed and approved the final results of the analysis. In conducting this analysis, we analyzed information contained in DOD's counternarcotics performance measurement system database and spoke with DOD officials responsible for managing counternarcotics activities and entering information into the database. We did not, however, review supporting documentation referenced but not included in the system's database, nor did we assess other databases that might exist at the DOD component level. We also discussed DOD's performance measures with cognizant officials from ONDCP and several DOD components, including DASD-CN>, AFRICOM, CENTCOM, EUCOM, NORTHCOM, SOUTHCOM, JIATF-S, JIATF-W, and the DOD-IG. To evaluate the extent to which DOD uses performance information from its counternarcotics performance measurement system to support its mission, we held discussions with officials from DOD components-- including DASD-CN>, AFRICOM, CENTCOM, EUCOM, NORTHCOM, SOUTHCOM, JIATF-S, and JIATF-W--to determine the ways in which these components use information from DOD's system, as well as other sources of performance information. We also examined DOD's Performance Summary Reports and fiscal year 2011 Drug Interdiction and Counterdrug Activities Budget Estimates to assess the extent to which these materials reported that DOD used performance information from its counternarcotics performance measurement system database. Further, we analyzed the extent to which DOD applies key management practices previously identified by GAO to facilitate the use of performance information from its counternarcotics performance measurement system. We also traveled to Tampa, Miami, and Key West, Florida where we visited CENTCOM, SOUTHCOM, and JIATF-S. In these visits, we met with DOD officials responsible for management and implementation of counternarcotics activities to discuss DOD's use of performance data to support its counternarcotics mission. To determine the completeness and consistency of DOD funding data, we compiled and compared data from DOD with information from cognizant U.S. agency officials in Washington, D.C. We also compared the funding data with budget summary reports from the ONDCP to corroborate their accuracy. Although we did not audit the funding data and are not expressing an opinion on them, based on our examination of the documents received and our discussions with cognizant agency officials, we concluded that the funding data we obtained were sufficiently reliable for the purposes of this report. We conducted this performance audit from December 2009 to July 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individual named above, Juan Gobel, Assistant Director; Elizabeth Curda; Martin de Alteriis; Karen Deans; Mark Dowling; Justin Fisher; Richard Geiger; Eileen Larence; Marie Mak; Christopher Mulkins; John Pendleton; Elizabeth Repko; and Mark Speight made key contributions to this report.

The Department of Defense (DOD) leads detection and monitoring of aerial and maritime transit of illegal drugs into the United States in support of law enforcement agencies. DOD reported resources of more than $1.5 billion for fiscal year 2010 to support its counternarcotics activities. Congress mandated GAO report on DOD's counternarcotics performance measurement system. Specifically, this report addresses the extent to which (1) DOD's counternarcotics performance measurement system enables DOD to track progress and (2) DOD uses performance information from its counternarcotics performance measurement system to manage its activities. GAO analyzed relevant DOD performance and budget documents, and discussed these efforts with officials from DOD and the Office of National Drug Control Policy (ONDCP). DOD does not have an effective performance measurement system to track the progress of its counternarcotics activities; however, it continues efforts to improve the system. GAO has previously reported that measuring performance provides managers a basis for making fact-based decisions. DOD has established performance measures for its counternarcotics activities and a database to collect performance information, including measures, targets, and results. However, these measures lack a number of attributes, such as being clearly stated and objective, which GAO considers key to successful performance measures. In May 2010, DOD issued new guidance for its counternarcotics performance measurement system. However, DOD officials noted the department will face challenges implementing the guidance. These challenges include creating performance measures that assess program outcomes and ensuring adequate resources, such as expertise in performance management, are available to develop measures. DOD rarely uses the information in its performance measurement system to manage its counternarcotics activities and has applied few practices to facilitate its use. GAO has found that the full benefit of collecting performance information is realized only when managers use it to inform key decisions. However, DOD officials responsible for counternarcotics activities throughout the department told us they rarely use data submitted to the system to manage activities. Rather, they tend to manage programs using data not submitted to the system, such as information obtained in weekly program meetings regarding the cost and timeliness of projects. Moreover, officials responsible for oversight of DOD's activities stated they use the system to develop reports for ONDCP, but not to allocate resources. While DOD has applied some practices to facilitate the use of the performance information in its system, it does not utilize certain key practices identified by GAO, such as frequently and effectively communicating performance information. Absent an effective performance management system, DOD lacks critical information to use to improve the management and oversight of its counternarcotics activities. GAO recommends that the Secretary of Defense take steps to improve DOD's counternarcotics performance measurement system by (1) revising its performance measures and (2) applying practices to better facilitate the use of performance data to manage its counternarcotics activities. DOD concurred with GAO's recommendations.

According to the Department of Labor, in 2005, about 60 percent of U.S. women age 16 and older were in the workforce, compared to 46 percent in 1975. Some U.S. employers offer alternative work arrangements to help workers manage both work and other life responsibilities. One type of alternative work arrangement allows workers to reduce their work hours from the traditional 40 hours per week, such as with part-time work or job sharing. The Family and Medical Leave Act (FMLA) of 1993 requires most employers to provide workers 12 weeks of unpaid leave from work for a variety of reasons, such as childbirth, caring for relatives with serious health conditions, or other personal reasons, such as their own serious health condition or the adoption of a child, and employers must guarantee workers a similar job upon return. Some arrangements adopted by employers, such as flextime, allow employees to begin and end their workday outside the traditional 9-to-5 work hours. Other arrangements, such as telecommuting from home, allow employees to work in an alternative location. Child care facilities are also available at some workplaces to help workers with their care giving responsibilities. In addition to benefiting workers, these arrangements may also benefit employers by helping them recruit and retain workers. The federal government also provides child care subsidies for certain low- income families, and tax breaks for most parents, both to support their ability to work and to balance work-family responsibilities. Under programs funded by the Child Care and Development Fund, Temporary Assistance for Needy Families (TANF) and state resources, states have the flexibility to serve certain types of low-income families. The Head Start program provides comprehensive early childhood education and development services to low-income preschool children, on a part- or full- day basis. Last, the Child and Dependent Care Tax Credit allows parents to reduce their tax on their federal income tax return if they paid someone to care for a child under age 13 or a qualifying spouse or dependent so they could work or look for work. In addition, the federal government offers workforce development and training programs designed to assist low-wage/low-skilled workers in the United States. The Workforce Investment Act (WIA) of 1998 requires states and localities to bring together a number of federally funded employment and training services into a statewide network of one-stop career centers. Low-skilled workers and dislocated workers can choose the training they determine best for themselves, working in consultation with a case manager. Additionally, the federal government provides tax breaks and incentives for companies to hire low-income workers, public assistance recipients, and workers with disabilities. Most of the countries we studied are members of the European Union, which provides minimum standards or basic rights for individuals across member states. For example, the 1997 directive on equal treatment of part- time work mandates that people holding less than full-time jobs be given prorated pay and benefits without discrimination. EU directives are generally binding in terms of the results to be achieved, but an opt-out option occasionally allows member states to delay action. Additionally, in 2000, member states have agreed to increase the number of women in employment, the number of adults in lifelong learning, and the provision of child care by the end of the decade. The EU offers financial support to its member states to help them succeed in employment goals. Other differences are relevant to consideration of the workforce attachment policies of our study countries. Although U.S. women have high levels of educational attainment, their workforce participation, in general, is lower than that of the countries we studied. While a higher education level is associated with greater likelihood of labor force participation, labor force participation for U.S. women is lower than that in any of our study countries except Ireland and New Zealand (see table 1). However, working women in the United States are more likely to work full-time than those in all other study countries except Sweden or Denmark. In the Netherlands, a country where 36 percent of all employment is part-time, women constitute more than three-quarters of employees working less than 30 hours per week. Differences in taxation across countries reflect economic and social priorities. The ratio of total tax revenues to gross domestic product (GDP) is a commonly used measure of state involvement in national economies. Countries with high tax-to-GDP ratios generally pay more from the public budget for services that citizens would have to pay for themselves--or do without--in lower-taxed countries. In 2004, Sweden had the highest tax revenue as a percentage of GDP among our study countries, at 50.4 percent. Denmark came next at 48.8 percent, followed by France at 43.4 percent. The United States had the lowest tax revenue as a percentage of GDP in 2004, at 25.5 percent. (See table 2.) Governments and employers in the countries we studied developed a variety of laws, government policies, and formal and informal practices, including periods of paid leave (such as maternity, paternity, or parental leave), flexible work schedules, child care, and training that may help women and low-wage/low-skilled workers enter and remain in the labor force. In addition to family leave for parents, countries provide other types of leave, and have established workplace flexibility arrangements for workers. All of the countries also subsidize child care for some working parents through a variety of means, such as direct benefits to parents for child care and tax credits. Last, governments and employers have a range of training and apprenticeship programs to help unemployed people find jobs and to help those already in the workforce advance in their careers. Many countries have developed and funded parental leave policies to assist employees in combining their work and family lives, recognizing, in part, the need to promote women's participation in the labor force. A 1996 directive of the European Council requires all countries in the EU-- including each of the European countries we reviewed--to introduce legislation on parental leave that would provide all working parents the right at least 3 months of leave--preferably paid--to care for a new baby. In the United States, the FMLA allows approximately 3 months of unpaid leave. Some of the countries we studied are social welfare states, and generally fund family leave payments through tax revenues and general revenues. For example, Canada, the UK, and the Netherlands fund paid leave policies in part through national insurance programs, which use payroll taxes paid by employers and employees. Denmark's paid maternity, paternity, and parental leaves are financed by income tax revenues through an 8 percent tax on all earned income. Many national leave policies in our study countries require employees to work for a period of time before they can take leave, giving employers assurances that employees are committed to their jobs. For example, in Denmark, employed women with a work history of at least 120 hours in the 13 weeks prior to the leave are allowed 18 weeks of paid maternity leave. In some countries, though, all parents are entitled to take family leave. In Sweden, all parents are entitled to parental benefits whether or not they are working. In the UK, by law, all expectant employees can take up to 52 weeks of maternity leave, regardless of how long they have worked for their employer. To enhance workers' ability to take leave, the countries we studied replace all or part of the wages they forgo while on leave. Dutch employees on maternity leave and their partners are entitled to receive 100 percent of their wages, up to a maximum. In the UK, women who meet qualifying conditions of length of service and who earn a minimum amount for the national insurance system can receive up to 90 percent of their earnings. In Ireland, women can generally be paid at 80 percent of earnings, subject to their contributions into the social insurance system. However, employers may offer more leave than legally required. Leave is often intended to help parents care not just for newborns. In the Netherlands, Sweden, Denmark, and the UK, parents have the option of using their leave flexibly by dividing it into discrete parts, sometimes with the consent of an employer. In the Netherlands, for example, parents may divide the leave into a maximum of three parts and can take the leave simultaneously or following one another. The Netherlands, Sweden, and Denmark allow parents the use of parental leave until their child turns either 8 or 9, while the UK allows the use of parental leave until a child turns 5. Further, some countries allow workers to take leave to care for other family members. In Canada, all employees are eligible to take 8 weeks of unpaid leave to provide care and support to a seriously ill family member or someone considered as a family member. In other countries, the leave is more limited. New Zealand requires that all employers provide a minimum of 5 days of paid sick leave for an eligible employee's own illness or to care for family members. A few countries have also developed national policies that promote flexible work opportunities, apart from leave. Dutch law gives eligible employees the right to reduce or increase working hours for any reason. Employers can deny the request only if the change would result in a serious obstacle, such as not having enough other workers to cover the hours an employee wishes to reduce. Similarly, British law allows workers to request changes to the hours or location of their work, to accommodate the care of children and certain adults. According to government officials from the UK Departments of Trade and Industry, and Communities and Local Government, this law provides the government with a cost-effective means to help women return to work. Although similar to the law in the Netherlands, this law gives employers in the UK more leeway to refuse an employee's request. Flexible working opportunities for employees are often adjusted or developed by individual employers. Many employers extended the Right to Request provisions to all employees, for example. In other cases, employers have developed new opportunities. One local government employer in the UK offers employees the ability to take a career break for up to 5 years to care for children or elders, with the right to return to the same position. Employees of the organization are also able to take time off when children are home on holidays, share the responsibilities of one position with another employee through the practice of job sharing, and vary their working hours. In Denmark, a large employer allowed an employee who was returning to work from a long-term illness to gradually increase her working hours until she reached a full-time schedule over the course of several months. Flexible working arrangements in the United States have been adopted by some employers, but are not mandated in federal law. All of our study countries have made a public investment in child care, a means of allowing women to access paid employment and balance work and family, according to the European Commission. In Canada, the government provides direct financial support of $100 a month to eligible parents for each child under 6. In New Zealand, support is available through a child care tax credit of $310 per year to parents who have more than $940 in child care costs. Researchers have reported that, like leave benefits, early childhood education and care services in European countries are financed largely by the government. According to these researchers, funding is provided by national, state, or regional and local authorities, and the national share typically is dominant in services for preschool-age children. These researchers also reported that care for very young children and, to a lesser extent, for preschool children is partially funded through parental co-payments that cover an average of 15 percent to 25 percent of costs. In some countries the provision of early childhood care and education is viewed as a social right, in others as a shared responsibility. In Sweden and Denmark, parents are guaranteed a place in the state child care system for children of a certain age, according to the European Commission. More than 90 percent of Danish children are in publicly supported child care facilities, according to a Danish researcher. Other countries view the provision of child care as a responsibility shared among government, employers, and parents. In the Netherlands, overall, employers, employees, and the government are each expected to pay about one-third of child care costs, according to a report by the European Commission. Aside from public support for child care, some employers in the countries we reviewed offered additional resources for their employees' child care needs. For example, although not mandated to do so by law until January 2007, many employers in the Netherlands had been contributing towards their employees' cost for child care. In the Netherlands, about two-thirds of working parents received the full child care contribution from their employers, according to a recent survey. In addition, a Canadian union negotiated employer subsidies to reimburse some child care expenses for its members, according to union representatives. Our study countries provide services in a variety of ways to help both the unemployed and low-skilled workers to develop their skills. The percentage of GDP that each country spends on training programs varies. (See table 3.) To help the unemployed develop the skills necessary to obtain work, our study countries provided various services, including providing training directly and giving employers incentives to provide training or apprenticeships. In Denmark, to continue receiving unemployment benefits after 9 months, the unemployed are required to accept offers, such as education and training, to help them find work. Particular groups of the unemployed that may face difficulty in finding employment, such as women and the low-skilled, may be offered training sooner. Employers in Denmark may receive wage subsidies for providing job-related experience and training to the unemployed, or for providing apprenticeships in fields with a shortage of available labor. In the United States, training services generally are provided by WIA programs, which are provided by government. Local governments and private entities also seek to help the unemployed obtain and upgrade skills. For example, a local government council in the UK provides unemployed women training in occupations in which they are underrepresented, such as construction and public transport. While the women are not paid wages during the typical 8-12 weeks of training, they may receive unemployment insurance benefits as well as additional support for child care and transportation. Additionally, a privately run association in the Netherlands provides entrepreneurial training to women who have been on public assistance for at least 10 years to start their own businesses, according to an organization official. Both of these initiatives were funded jointly by the local governments and the European Social Fund. Our study countries also have training initiatives focused on those already in the workforce. For example, Canada introduced an initiative to ensure that Canadians have the right skills for changing work and life demands. The program's goal is to enhance nine essential skills that provide the foundation for learning all other skills and enable people to evolve with their jobs and adapt to workplace changes, according to the government. Denmark has had a public system in place since the mid-1960s that allows low-skilled workers to receive free education, wage subsidies, and funding for transportation costs. About one-half of unskilled workers took part in training courses that were either publicly financed or provided privately by employers in the past year, according to a Danish researcher. The UK has also developed an initiative which offers employers training assistance to meets their needs. The UK's Train to Gain program, based on an earlier pilot program, provides employers free training for employees to achieve work-related qualifications. To qualify for Train to Gain, employers need to agree to at least a minimum level of paid time that employees will be allowed to use for training. Employers with fewer than 50 full-time employees are eligible for limited wage subsidies. Train to Gain also provides skills advice to employers and helps match business needs with training providers. The UK Leitch Review recommended that the government provide the bulk of funding for basic skills training and that all adult vocational skills funding be routed through programs such as Train to Gain. As is the case with other benefits, many training programs aimed at increasing employees' skills are initiated privately by employers and employees. For example, an employer in Saskatchewan, Canada, reported that he supports employees' advancement by paying for necessary educational courses, such as those that prepare employees for required licenses. A large government employer in the UK, recognizing the challenges faced by women in a male-dominated field, offers flexible training to make the training more easily accessible to women--training is available online, from work or home, as well as through DVDs that can be viewed at one's convenience. In the Netherlands, according to an employer representative, most training is developed through agreements in which employers agree to pay. In Denmark, a director in the Ministry of Education reported that some companies give employees the right to 2 weeks per year of continuing education in relevant and publicly funded education. Research has found that workplace policies such as child care and family leave encourage women to enter and return to the workforce, while evaluations of training policies show mixed results. Readily available child care appears to enable more women to participate in the labor market, especially when it is subsidized and meets quality standards such as having a high staff-to-child ratio and a high proportion of certified staff. Women are also more likely to enter and remain in the workforce if they have paid family leave, although the length of leave affects their employment. An extensive review of available research by the European Commission shows mixed results in whether training helps the unemployed get jobs. Some training initiatives have shown promise but have not been formally evaluated. In general, researchers and officials reported that it is difficult to determine the effects of a policy for a variety of reasons. Readily available child care, especially when it is subsidized and regulated with quality standards such as a high staff-to-child ratio and a high proportion of certified staff, appears to increase women's participation in the labor force by helping them balance work and family responsibilities, according to research from several cross-national studies. Additionally, the European Commission reports that women prolong their time away from work when child care is not subsidized and relatively expensive. Low-wage workers, especially single parents, who are predominantly women, are particularly sensitive to the price of child care, according to a European Commission report. Research from the United States also shows that highly priced child care can deter mothers from working, according to a review of the literature. The association between child care and women's labor force participation is found in several studies that control for a variety of factors, including individual countries' cultural norms and experiences. However, the relationship between early childhood education--which acts as child care for some parents--and women's labor force participation is uncertain. Because many unemployed mothers also place their children in subsidized preschool, any impact that the preschool has on encouraging mothers to work may appear to be diminished, according to a cross-national study. Research shows that paid family leave encourages women's employment, but is not conclusive as to the ideal length of family leave to encourage women to return to work. One extensive review of the literature on family leave found that leave increases the chance that women will return to work by the end of the year following the birth. Another study examining paid maternity leave of varying lengths of time in several Western European countries, including Denmark, France, Ireland, and Sweden, concluded that maternity leave may increase women's employment rate by about 3-4 percent. However, if leave is too short, women may quit their job in order to care for their children, according to a European Commission report. Another study found that if leave is too lengthy, it may actually discourage women from returning to work after having a child. One researcher stated that French mothers with at least two children returned to the workforce less frequently when they became eligible for 3 years of family leave. On the contrary, some researchers found that Sweden's lengthy leave allowed more women to enter and remain in the labor force in the long run. One review of the literature concluded that leave of up to about 1 year is positively associated with women's employment, while another found that after 20 weeks, the effect of leave on employment begins to deteriorate. Evaluations of training programs, where they exist, have shown mixed results, but many national and local efforts have shown promise. Research on training program participants from Sweden and Denmark found that training programs do not appear to positively affect all participants' employment. While the Danish government's labor market policies seem to have successfully lowered the overall unemployment rate to around 4 percent by the end of 2006, according to Danish officials, the effect of specific training programs on participants' employment is difficult to discern. On the other hand, a number of evaluations of French training programs suggest that these programs help participants secure jobs. New Zealand's evaluation of two of its training programs, which provide both remedial and vocational skills to participants, found that the training had a small effect on the participants' employability. According to a European Commission report, one researcher's review of 70 training program evaluations, including those in Denmark, France, The Netherlands, Sweden and the UK, suggested that training programs have a modest likelihood of making a positive impact on post-program employment rates. However, the European Commission reports that many studies on individual outcomes are based upon short-term data, while the effects on participants' employment may not be evident for 1 to 2 years or more. Some national and local training initiatives that we reviewed--both those for the employed and those for the unemployed--have shown promise, although some have not been subject to an evaluation. For example, an evaluation of the precursor to the UK's national Train to Gain program found that 8 out of 10 participants believed they had learned new skills, and employers and participants both felt that the training enabled participants to perform better at work. However, the evaluation estimated that only 10-15 percent of the training was new training, while the remaining 85-90 percent of the training would have occurred without the program. Although a planned evaluation has not yet been conducted, an individual UK employer reported that it had trained 43 women for jobs in which they are underrepresented. Fourteen of these women found employment and 29 are in further training. Even where evaluations do exist, it is difficult to determine the effects of any policy for a variety of reasons. Policies affecting female labor force participation interact with cultural factors, such as a country's ideology concerning social rights and gender equality, according to a researcher from Ireland. In some cases, too, new policies interact with existing ones. For example, a researcher reported that the French government provides payments to mothers who may choose to stay home with their children, while also subsidizing child care that encourages mothers to work. Additionally, changes in the labor market may actually bring about the enactment of policies, rather than the other way around. For example, it is difficult to be sure whether the availability of child care causes women to enter the labor force or if it is an effect of having more women in the workforce, according to one researcher's review of the relevant literature. Further, few evaluations of certain policies and practices have been conducted in Europe, although this is starting to change, according to the European Commission. Moreover, some policies were recently developed, and governments frequently make changes to existing policies, which may make it difficult to evaluate them. For example, a report by the Canadian government states that flexible work arrangements are relatively new and represent an area in which research is needed. In other cases, a policy simply codified into law a widely used practice. For example, a government official in the Netherlands reported that it was very common for Dutch women to choose to work part-time even before legislation passed that promoted employees' right to reduce their working hours. The experiences of the countries we reviewed have shown that characteristics of policies, such as the level of payment during leave, can affect whether an employee uses various workplace benefits. For example, the province of Saskatchewan in Canada provides 12 days of unpaid leave per year, but low-wage workers cannot always afford to take it. Similarly, according to a University of Bristol professor, low-income mothers in the UK disproportionately return to the workforce at the end of paid maternity leave whereas more affluent mothers tend to return at the end of unpaid leave. When parental leave can be shared between parents and the level of payment is low, women tend to take the leave, in part because their income level is often lower than their husband's. A report from the European Commission also found that the ability to use leave flexibly, such as for a few hours each day or over several distinct periods rather than all at once, can also increase parents' take-up rates for leave, as parents are able to care for their children and stay in the labor force at the same time. Employer views and employee perceptions can also directly affect an employee's use of workplace benefits. Researchers in Canada, for example, found that the ability to arrange a schedule in advance and interrupt it if needed is very important to employees, but that this ability depends on how willing their supervisor is to be flexible. In addition, a cross-national study from the Organisation for Economic Co-Operation and Development, which included the countries we reviewed, found that many employers tend to view training for the low-skilled as a cost, rather than an investment, and devote substantially more resources to their high- skilled workers, on average. Since employers tend to target their training to higher skilled and full-time workers, employees who opt to work part- time may have fewer opportunities for on-the-job training that could help them advance, according to university researchers in the Netherlands. An employee's perceptions on training can also affect his or her uptake of opportunities. Employee representatives from Denmark's largest trade union confederation said that low-skilled employees are more likely to have had negative experiences with education and that these experiences can affect whether they take advantage of workplace training opportunities to increase their skills. Employees' use of workplace benefits can create management challenges for their employers. For example, an employer in Saskatchewan reported that covering for the work of staff on family leave can be complicated. He said that although he was able to hire temporary help to cover an employee on maternity leave, he faced an unexpected staff shortage when the employee decided toward the end of her leave not to return to work and the temporary employee had found another job. An official affiliated with the largest employer association in the Netherlands stated that it can be hard to organize work processes around employees' work interruptions, especially during short-term and unplanned leaves. The use of family leave or part-time work schedules may also have negative implications for an employee's career. Employers have indicated that they would prefer to hire an older woman with children than a younger woman who has yet to have children, according to university researchers in Denmark. In addition, long parental leaves may lead to an actual or perceived deterioration in women's labor market skills, according to an EU report, and can have negative effects on future earnings. According to employee representatives in Canada, in the high- tech sector, where there are rapid changes in technology, the use of parental leave can be particularly damaging. In addition, some part-time jobs have no career advancement opportunities and limited access to other benefits, such as payment during leave and training. Workplace policies and practices of the countries we studied generally reflect cooperation among government, employer, and employee organizations. Many developed countries have implemented policies and practices that help workers enter and remain in the workforce at different phases of their working lives. These policies and practices, which have included family leave and child care, for example, have been adopted through legislation, negotiated by employee groups, and, at times, independently initiated by private industry groups or individual employers. U.S. government and businesses, recognizing a growing demand for workplace training and flexibility, also offer benefits and are seeking ways to address these issues to recruit and retain workers. Potentially increasing women's labor force participation by further facilitating a balance of work and family, and improving the skills of low-wage workers throughout their careers, may be important in helping the United States maintain the size and productivity of its labor force in the future, given impending retirements. While other countries have a broader range of workforce benefits and flexibility and training initiatives, little is known about the effects of these strategies. Whether the labor force participation gains and any other positive outcomes from adopting other countries' policies would be realized in the United States is unknown. Moreover, any benefits that might come from any initiatives must be weighed against their associated costs. Nonetheless, investigating particular features of such policies and practices in some of the developed countries may provide useful information as all countries address similar issues. This concludes my statement, Madam Vice-Chairwoman. I would be happy to respond to any questions that you or other members of the committee may have. For future contacts regarding this testimony, I can be reached (202) 512-7215. Key contributors to this testimony were Sigurd Nilsen, Diana Pietrowiak, Gretta Goodwin, Avani Locke, Stephanie Toby, Seyda Wentworth, and Charles Willson. Women and Low-Skilled Workers: Other Countries' Policies and Practices That May Help These Workers Enter and Remain in the Labor Force. GAO-07-817. Washington, D.C.: June 14, 2007. An Assessment of Dependent Care Needs of Federal Workers Using the Office of Personnel Management's Survey. GAO-07-437R. Washington, D.C.: March 30, 2007. Highlights of a GAO Forum: Engaging and Retaining Older Workers. GAO-07-438SP. Washington, D.C.: February 2007. Workforce Investment Act: Employers Found One-Stops Centers Useful in Hiring Low-Skilled Workers; Performance Information Could Help Gauge Employer Involvement. GAO-07-167. Washington, D.C.: December 22, 2006. Employee Compensation: Employer Spending on Benefits Has Grown Faster than Wages, Due Largely to Rising Costs for Health Insurance and Retirement Benefits. GAO-06-285. Washington, D.C.: February 24, 2006. Social Security Reform: Other Countries' Experiences Provide Lessons for the United States. GAO-06-126. Washington, D.C.: October 21, 2005. Child Care: Additional Information Is Needed on Working Families Receiving Subsidies. GAO-05-667. Washington, D.C.: June 29, 2005. Workforce Investment Act: Substantial Funds Are Used for Training, but Little Is Known Nationally about Training Outcomes. GAO-05-650. Washington, D.C.: June 29, 2005. Highlights of a GAO Forum: Workforce Challenges and Opportunities for the 21st Century: Changing Labor Force Dynamics and the Role of Government Policies. GAO-04-845SP. Washington, D.C.: June 2004. Women's Earnings: Work Patterns Partially Explain Difference between Men's And Women's Earnings. GAO-04-35. Washington, D.C.: October 31, 2003. Older Workers: Policies of Other Nations to Increase Labor Force Participation. GAO-03-307. Washington, D.C.: February 13, 2003. Older Workers: Demographic Trends Pose Challenges for Employers and Workers. GAO-02-85. Washington, D.C.: November 16, 2001. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Increasing retirements and declining fertility rates, among other factors, could affect the labor force growth in many developed countries. To maintain the size and productivity of the labor force, many governments and employers have introduced strategies to keep workers who face greater challenges in maintaining jobs and incomes, such as women and low-skilled workers, in the workforce. This testimony discusses our work on (1) describing the policies and practices implemented in other developed countries that may help women and low-wage/low-skilled workers enter and remain in the labor force, (2) examining the change in the targeted groups' employment following the implementation of the policies and practices, and (3) identifying the factors that affect employees' use of workplace benefits and the resulting workplace implications. The testimony is based on a report we are issuing today (GAO-07-817). For that report, we conducted an extensive review of workforce flexibility and training strategies in a range of developed countries and site visits to selected countries. Our reviews were limited to materials available in English. We identified relevant national policies in the U.S., but did not determine whether other countries' strategies could be implemented here. The report made no recommendations. The Department of Labor provided technical comments; the Department of State had no comments on the draft report. Governments and employers developed a variety of laws, government policies, and formal and informal practices, including periods of leave, flexible work schedules, child care, and training. Each of the countries we reviewed provides some form of family leave, such as maternity, paternity, or parental leave, that attempts to balance the needs of employers and employees and, often, attempts to help women and low-wage/low-skilled workers enter and remain in the workforce. In Denmark, employed women with a work history of at least 120 hours in the 13 weeks prior to the leave are allowed 18 weeks of paid maternity leave. In addition to family leave for parents, countries provide other types of leave, and have established workplace flexibility arrangements for workers. U.S. federal law allows for unpaid leave under certain circumstances. All of the countries we reviewed, including the United States, also subsidize child care for some working parents through a variety of means, such as direct benefits to parents for child care or tax credits. For example, in Canada, the government provides direct financial support of $100 a month per child, to eligible parents for each child under 6. Last, governments and employers have a range of training and apprenticeship programs to help unemployed people find jobs and to help those already in the workforce advance in their careers. Although research shows that benefits such as parental leave are associated with increased employment, research on training programs is mixed. Leave reduces the amount of time that mothers spend out of the labor force. Cross-national studies show that child care--particularly when it is subsidized and regulated with quality standards--is positively related to women's employment. Available research on training in some of the countries we reviewed shows mixed results in helping the unemployed get jobs. Some local initiatives have shown promise, but evaluations of some specific practices have not been conducted. Some country officials said it is difficult to attribute effects to a specific policy because the policies are either new or because they codified long-standing practices. While policies do appear to affect workforce participation, many factors can affect the uptake of workplace benefits, and employees' use of these benefits can have implications for employers and employees. For example, employees' use of workplace benefits can create management challenges for their employers. Additionally, employees are more likely to take family leave if they feel that their employer is supportive. However, while a Canadian province provides 12 days of unpaid leave to deal with emergencies or sickness, low-wage workers cannot always afford to take it. Similarly, the uptake of available benefits can also have larger implications for an employee's career. Some part-time jobs have no career advancement opportunities and limited access to other benefits. Since employers tend to target their training to higher-skilled and full-time workers, employees who opt to work part-time may have fewer opportunities for on-the-job training that could help them advance, according to researchers in the Netherlands.

Real property is generally defined as facilities, land, and anything constructed on or attached to land. The federal government leases real property (referred to in this report as leased space) for a variety of purposes including office spaces, warehouses, laboratories, and housing. As the federal government's landlord, GSA designs, builds, manages, and safeguards buildings to support the needs of other federal agencies. GSA is authorized to enter into lease agreements with tenant agencies for up to 20 years that the Administrator of GSA considers to be in the interest of the federal government and necessary to accommodate a federal agency. GSA uses its authority to lease space for many federal government agencies, and in fiscal year 2009 acquired more than 182 million square feet, the most leased space of any federal agency. In response to our 2005 recommendation and to enhance coordination with the FPS, GSA established the Building Security and Policy Division within the Public Buildings Service. The division developed the Regional Security Network, which consists of several security officials for each of GSA's 11 regions, to further enhance coordination with FPS at the regional and building levels and to carry out GSA security policy in collaboration with FPS and tenant agencies. Some agencies have independent or delegated leasing authority which allow the agency to perform all necessary functions to acquire leased space without using GSA. In fiscal year 2009, VA, USDA, and DOJ, using GSA-delegated and/or independent leasing authority, leased a total of approximately 30 million of square feet to help meet their varying missions. Specifically, VA leased approximately 10 million square feet and has a large inventory of real property, including medical centers, outpatient facilities, and ambulatory care clinics. USDA leased approximately 17 million square feet. USDA uses leased space to administer programs which assist farmers and rural communities, oversee the safety of meat and poultry, provide low-income families access to nutritious food, and protect the nation's forests, among other things. DOJ leased approximately 3 million square feet. DOJ is comprised of about 40 component agencies with wide-ranging missions, such as the U.S. Attorneys' Offices, Drug Enforcement Agency (DEA), and the Federal Bureau of Investigation (FBI). The Homeland Security Act of 2002 established DHS to centralize the federal government's efforts to prevent and mitigate terrorist attacks within the United States--including terrorism directed at federal facilities. Under the act, FPS was transferred from GSA to DHS. As of October 2009, FPS is organized within DHS's National Protection and Programs Directorate. FPS is the primary federal agency responsible for protecting and securing GSA facilities, visitors, and over 1 million federal employees across the country. FPS's basic security services include patrolling the building perimeter, monitoring building perimeter alarms, dispatching law enforcement officers through its control centers, conducting criminal investigations, and performing facility security assessments. FPS also provides building-specific security services, such as controlling access to building entrances and exits and checking employees and visitors. FPS is a fully reimbursable agency--that is, its services are fully funded by security fees collected from tenant agencies. FPS charges each tenant agency a basic security fee per square foot of space occupied in a GSA building (66 cents per square foot in fiscal year 2009), among other fees. ISC, established in 1995 by Executive Order 12977 after the bombing of the Alfred P. Murrah federal building in Oklahoma City, has representation from all the major property-holding agencies and a range of governmentwide responsibilities related to protecting nonmilitary facilities. These responsibilities generally involve developing policies and standards, ensuring compliance, and encouraging the exchange of security-related information. Executive Order 12977 called for each executive agency and department to cooperate and comply with the policies and recommendations of the Committee. DHS became responsible for chairing ISC, which, as of 2007, is housed in the Office of Infrastructure Protection within DHS's National Protection and Programs Directorate. Executive Order 13286, which amended Executive Order 12977, calls for the Secretary of DHS to monitor federal agency compliance with the standards issued by ISC. The 2004 standards, in conjunction with the Facility Security Level Determinations for Federal Facilities--which ISC issued in 2008 to update standards issued by DOJ in 1995--prescribed administrative procedures and various countermeasures for perimeter, entry, and interior, and, as well as blast and setbacks for leased spaces based upon five different facility security levels ranging between levels I and V, with level I being the lowest risk level and level V being the highest. The 2004 standards were specifically developed in response to a perceived need for security standards that could be applied in a leased space environment. The Facility Security Level Determinations for Federal Facilities and its precursors established the criteria and process for determining the security level of a facility which serves as the basis for implementing the countermeasures prescribed within other ISC standards, including the 2004 standards. According to the 2004 standards, when an agency is seeking a new lease, a security official should determine the security level of the leased space based on an early risk assessment, which is performed prior to entering into a new lease. Requirements based on the designated facility security level, as outlined within the standards, are to be incorporated into a solicitation for offers (SFO), which is sent to potential lessors, as minimum requirements. These minimum requirements must be met, with the exception of blast and setback requirements in existing buildings. Potential lessors who are unwilling or unable to meet the requirements are deemed nonresponsive according to the standards and eliminated from the SFO process. After a lease is entered into, the Facility Security Level Determinations for Federal Facilities states that risk assessments, such as facility security assessments (FSA), be conducted on a periodic and timely basis, with the facility security level being determined or adjusted as part of each risk assessment. Specifically, risk assessments are to be conducted every 5 years for facilities classified as facility security level I or II, and every 3 years for facilities classified as facility security level III, IV, or V. We have previously identified, from the collective practices of federal agencies and the private sector, a set of key facility protection practices that provide a framework for guiding agencies' physical security efforts and addressing challenges. Key facility protection practices as shown in figure 1 include the following: Information sharing and coordination establishes a means of communicating information with other government entities and the private sector to prevent and respond to security threats. Allocating resources using risk management involves identifying potential threats, assessing vulnerabilities, identifying the assets that are most critical to protect in terms of mission and significance, and evaluating mitigation alternatives for their likely effect on risk and their cost. Aligning assets to mission can reduce vulnerabilities by reducing the number of assets that need to be protected. Strategic human capital management ensures that agencies are well equipped to recruit and retain high-performing security staff. Leveraging technology supplements other countermeasures with technology in a cost-effective manner. Performance measurement and testing evaluates efforts against broader program goals and ensures that they are met on time and within budgeting constraints. Before a lease is signed, early risk assessments can help agencies allocate resources using a risk management approach, a key practice of facility protection. Through early risk assessments, security officials are able to collect key information about potential spaces, security risks, and needed countermeasures, which help leasing officials, in turn, identify the most appropriate space to lease and negotiate any needed countermeasures. Leasing officials primarily rely on security officials to supply information on physical security requirements for federally leased space. Some tenant agencies are able to supply leasing officials with key prelease information because they have developed the security expertise to conduct their own early risk assessments. For example, DEA has its own in-house security officials who work with leasing officials to conduct risk assessments early in the leasing process. This helps leasing officials assess risk and obtain space specific to DEA's security needs. Similarly, VA has created internal policy manuals that describe agency security requirements which help guide leasing and security officials on how to assess risk and obtain appropriate space. These manuals are circulated to VA leasing, facilities, and security officials, and GSA leasing officials are made familiar with VA's physical security requirements early in the leasing process for GSA- acquired space. Additionally, VA currently budgets $5 per net usable square foot for physical building security and sustainability requirements into all of its leases. At one site, VA officials are in the early stages of identifying space needs for the relocation of a community-based outpatient clinic. VA leasing officials and security officials, among others, are collaborating on decisions that integrate security with the function of the outpatient clinic that will help ensure funds are available to finance the security requirements. Despite the in-house expertise of some tenant agencies, leasing officials sometimes do not have the information they need to allocate resources using a risk management approach before a lease is signed because early risk assessments are not conducted for all leased space. Early risk assessments are absent for a significant portion of the GSA-acquired leased space portfolio because FPS does not uniformly conduct these assessments for spaces under 10,000 square feet--which constitute 69 percent of all GSA leases (see figure 2). While FPS is expected under the MOA to uniformly conduct early risk assessments for GSA-acquired space greater than or equal to 10,000 square feet, FPS and GSA officials agree that FPS is not expected to conduct early risk assessments for spaces under 10,000 square feet unless it has the resources to do so. As we have previously reported, FPS faces funding and workforce challenges, which may limit the resources available to conduct early risk assessments on spaces under 10,000 square feet. Further, FPS may lack incentive for prioritizing early risk assessments on smaller spaces, given that it receives payment on a square footage basis only after a lease has been signed. Currently, the cost of early risk assessments is distributed across all tenant agencies. We are examining FPS's fee structure as part of our ongoing work in the federal building security area. According to FPS officials, FPS generally does not have enough time to complete early risk assessments on spaces less than 10,000 square feet, in part because GSA has requested early risk assessments too late or too close to the time when a site selection must be made. A GSA official involved with physical security stated that even when GSA gives FPS proper lead time, early risk assessments are still sometimes not conducted by FPS. For example, in October 2009, GSA requested FPS conduct an early risk assessment for a leased space under 10,000 square feet within 8 months. One week prior to the June 2010 deadline, GSA was still unsure if an FPS inspector had been assigned and if a risk assessment had been or would be conducted. Because FPS did not keep centralized records of the number of early risk assessments requested by GSA or completed by FPS in fiscal year 2009, we were unable to analyze how often early risk assessments are requested and the percentage of requested assessments that FPS completes. Leasing and security officials from our case study agencies agreed they are best able to negotiate necessary countermeasures before a lease is executed. Because of the immediate costs associated with relocating, after a tenant agency moves in, it may be forced to stay in its current leased space, having to accept unmitigated risk (if countermeasures cannot be negotiated) or expend additional time and resources to put countermeasures in place (and negotiate supplemental lease agreements) once a lease has been signed. For example, a DEA leasing official stated that relocation is often not a viable solution given costs, on average, of between $10 and $12 million to find and move an office to a new space. Furthermore, at one of our site visits, DEA officials have been working to install a costly fence--a DEA physical security requirement for this location that was originally planned as part of the built-to-suit facility, but canceled because of a lack of funds. According to DEA officials, now that DEA has acquired funding for the fence, they have been negotiating for more than a year with GSA and the lessor to receive supplemental lease agreements, lessor's design approval, and resolve issues over the maintenance and operation of the fence. According to DEA officials, fence construction is expected to commence in January 2011. Balancing public access with physical security and implementing security measures in common areas of federally leased space are major challenges. The public visits both owned and leased federal facilities for government services, as well as for other business transactions. In leased space, the number and range of people accessing these buildings can be large and diverse, and building access is generally less restricted than in owned space. Fewer access restrictions and increased public access heighten the risk of violence, theft, and other harm to federal employees and the public. In leased space, it can be more difficult to mitigate risks associated with public access because tenant agencies typically do not control common areas, which are usually the lessor's responsibility, particularly in multitenant buildings. Common areas, as shown in figure 3, can include elevator lobbies, building corridors, restrooms, stairwells, loading docks, the building perimeter, and other areas. FSAs can identify countermeasures to address risks with public access, but FSA recommendations can be difficult to implement because tenant agencies must negotiate all changes with the lessor. Lessors may resist heightened levels of security in common areas--such as restricted public access--because of the potential adverse effect on other tenants in the building. For example, a multitenant facility security level IV building we visited, housing the United States Forest Service among other federal agencies, experienced difficulty installing X-ray machines and magnetometers in the main lobby. The lessor deemed these proposed countermeasures inconvenient and disruptive for some other tenants, including two commercial businesses located on the ground floor--a daycare center and a sundries shop--and for the public. Because the livelihood of these businesses depends on pedestrian traffic and because federal tenant agencies did not lease the lobby, per se, the lessor resisted having additional security countermeasures in place that would restrict public access. While some tenant agency officials at our site visits stated that lessors were responsive to security needs in common areas, other tenant agency officials we spoke with said that negotiating security enhancements to common areas with lessors is a problem that can lead to a lack of assurance that security risks and vulnerabilities are being mitigated. A regional GSA official involved with physical security stated that because GSA and tenant agencies do not control common areas in buildings where they lease space, it can be challenging to secure loading docks, hallways, and corridors. Another regional GSA official involved with physical security stated that tenant agencies do what they can by implementing countermeasures in their own leased space rather than in common areas, for example, by regulating access at the entrances to leased space rather than at the building entrances. At one site, a FBI official indicated that by relocating to a new leased space, FBI, as the sole tenant, would be able to better control common areas and public access. Overall, the negative effects of these challenges are significant because GSA, FPS, and tenant agencies can be poorly positioned to implement the practices that we have identified as key to protecting the physical security of leased spaces. Tenant agencies that are unable to identify and address vulnerabilities may choose space poorly, misallocate resources, and be limited in their ability to implement effective countermeasures. Furthermore, when tenant agencies are unable to allocate resources according to identified vulnerabilities, they may also be unable to employ the other key practices in facility protection. For example, tenant agencies may not be able to leverage technology to implement the most appropriate countermeasures if it requires a presence in common areas that are not under the control of the federal tenant. In April 2010, ISC issued the Physical Security Criteria for Federal Facilities, also known as the 2010 standards. These standards define a decision-making process for determining the security measures required at a facility. According to the standards, it is critical that departments and agencies recognize and integrate the process as part of the real property acquisition process (i.e., leasing process) in order to be most effective. The 2010 standards provide in-depth descriptions of the roles of security officials who conduct and provide early risk assessments, the tenant agency, and the leasing agency (e.g., GSA) and also define each entity's respective responsibilities for implementing the standards' decision- making process. For example, the 2010 standards state that: Tenant agencies are the decision maker as to whether to fully mitigate or accept risk. Tenant agencies must either pay for the recommended security measures and reduce the risk, or accept the risk and live with the potential consequences. Leasing officials will determine how additional countermeasures will be implemented or consider expanding the delineated area, in conjunction with the tenant agency, during the leasing acquisition process. Security officials are responsible for identifying and analyzing threats and vulnerabilities, and recommending appropriate countermeasures. Once a credible and documented risk assessment has been presented to and accepted by the tenant agency, the security official is not liable for any future decision to accept risk. The 2010 standards align with some key practices in facility protection because these standards focus on allocating resources using a risk management approach and measuring performance. As previously discussed, having information on risks and vulnerabilities allows tenant agencies to maximize the impact of limited resources and assure that the most critical risks are being prioritized and mitigated. Likewise, performance measurement, via tracking and documentation of decision making, can help agencies to determine the effectiveness of security programs and establish accountability at the individual facility level. By allocating resources using a risk management approach and measuring performance, tenant agencies and the federal government will be better positioned to comprehensively and strategically mitigate risk across the entire portfolio of real property. Allocating resources using a risk management approach is a central tenet of the 2010 standards. The 2010 standards prescribe a decision-making process to determine the risk posed to a facility (level of risk), the commensurate scope of security (level of protection) needed, and the acceptance of risk when countermeasures will not be implemented or implemented immediately. Like the 2004 standards, the 2010 standards outline a minimum set of physical security countermeasures for a facility based on the space's designated facility security level. The 2010 standards allow for this level of protection to be customized to address site specific conditions in order to achieve an acceptable level of risk. The 2004 standards allowed for some countermeasures to be unmet due to facility limitations, building owner acceptance, lease conditions, and the availability of adequate funds, but required a plan for moving to security compliant space in the future in such instances. According to the 2004 standards, these exemptions allowed agencies to obtain the best security solution available when no compliant space was available. According to the ISC Executive Director, the 2004 standards were, in effect, lower standards because of the operational considerations given to leased space. The Executive Director said that the 2010 standards correct this weakness by focusing on decision making that can lead to an acceptable level of protection and risk through a variety of means, rather than a standard that simply prescribes a fixed set of countermeasures that can then be circumvented by exemptions as in the 2004 standards. Additionally, the 2010 standards emphasize documentation of the decision- making process--a cornerstone for performance measurement. The 2004 standards required agencies to provide written justification for exceeding the standard and documentation of the limiting conditions that necessitated agencies to go below the standard. The 2010 standards more explicitly state that "the project documentation must clearly reflect the reason why the necessary level of protection cannot be achieved. It is extremely important that the rationale for accepting risk be well documented, including alternate strategies that are considered or implemented, and opportunities in the future to implement the necessary level of protection." More specifically, the 2010 standards state that any decision to reject implementation of countermeasures outright or defer implementation due to cost (or other factors) must be documented, including the acceptance of risk in such circumstances and that tenant agencies should retain documents pertinent to these decisions, such as risk assessments. The ISC Executive Director stated that after the standards are fully implemented, the federal government will be able to accurately describe the state of federal real property and physical security. For each facility, there will be documentation--a "final building report"-- containing information on physical security decision making, including the costs of implementing countermeasures. Each agency will be able to assess their entire portfolio of real property by aggregating these final building reports to determine the overall status and cost of physical security. These reports will be able to demonstrate the federal government's level of protection against potential threats, according to the executive director. We agree that if the standards succeed in moving agencies to track and document such information at a building level, then tenant agency, leasing, and security officials will be better able to determine if the most critical risks are being prioritized and mitigated across an entire real property portfolio and to determine the gaps and efficacy of agency-level security programs. Early risk assessments are key initial steps in the decision-making process prescribed by the 2010 standards. The standards contain a direct call for risk assessments to be conducted and used early in the leasing process. The standards prescribe the following: Prospective tenant agencies will receive information regarding whether the level of protection can be achieved in a delineated area. Security officials will conduct risk assessments and determine facility security levels early to determine required countermeasures that leasing officials should include within SFOs. Security officials will evaluate the proposed security plans of potential lessors responding to the SFOs and update the risk assessment on offers in the competitive range to identify threats and vulnerabilities for the specific properties and recommend any additional security measures to tenant agencies and leasing officials. The 2004 standards outlined more broadly that the initial facility security level should be determined by a security official based on a risk assessment and that those potential lessors who are unwilling or unable to meet the standard be considered unresponsive to the SFO. The 2010 standards also make no distinction or exemptions to the requirement for early risk assessments of leased space, based on a space's square footage or any other wholesale factor. Like the 2004 standards, the 2010 standards apply to all buildings and facilities in the United States occupied by federal employees for nonmilitary activities. Further, according to the 2010 standards, each executive agency and department shall comply with the policies and recommendations prescribed by the standards. Given this, the 2010 standards' language on early risk assessments, as previously discussed, should encourage agencies to perform and use these assessments in leased space--including spaces under 10,000 square feet. Specifically, language within the standards directing agencies to uniformly perform and use early risk assessments as part of the prescribed decision-making process is useful, because it provides a baseline for agencies to consider as they develop protocols and allocate resources for protecting leased space. Since leased space for nonmilitary activities acquired by GSA is subject to ISC standards, and FPS provides security services for GSA-acquired leased space, it is up to both agencies to figure out how to meet the 2010 standards in light of available resources. However, as previously discussed, FPS already faces resource and other challenges in conducting these early risk assessments. Given these current challenges, it will likely be difficult for FPS to meet the 2010 standards, which would necessitate an expansion of the services FPS is expected to perform under the current MOA. In October 2009, we reported that FPS and GSA recognized that the MOA renegotiation can serve as an opportunity to discuss service issues and develop mutual solutions. Both FPS and GSA officials reported that the delivery of early risk assessments was being reviewed as part of the MOA. As part of the MOA renegotiations, GSA's Regional Security Network developed a flowchart to expressly show the need for FPS services, such as early risk assessments. According to FPS officials, one of the goals of the MOA is to clarify how early and from whom GSA officials ought to request these risk assessments from FPS. Other agencies will also have to consider how they will meet the 2010 standards' requirement for early risk assessments. VA and USDA have efforts underway to further standardize their leasing guidance which represent opportunities for doing just this. According to VA officials, VA will review and update its leasing and security manuals to reflect the 2010 standards and is currently assessing what other additional revisions to these manuals may be warranted. VA can now incorporate the 2010 standards' baseline decision-making process for its leasing and security officials, which would help support the use of early risk assessments. USDA is also modifying a department-level leasing handbook to incorporate the 2010 standards, since leasing officials can play a significant role in physical security in the leasing process, particularly given the limited number of security officials within USDA. Additionally, USDA is considering realigning its few security officials to report to a department-level office (rather than be organized under each agency) in order to maximize available resources for performing such things as risk assessments. According to officials from agencies within VA and USDA, department-level direction is a valuable resource that leasing officials rely on for determining what activities must be undertaken during the leasing process. A shortfall within the 2010 standards is that they do not fully address the challenge of not controlling common areas and public access in leased space. Though the standards speak to tenant agencies, leasing officials, and security officials about their various roles and responsibilities in implementing the standard, the 2010 standards lack in-depth discussion for these entities about how to work with lessors to implement countermeasures. The 2010 standards outline specific countermeasures for addressing public access as part of protecting a facility's entrance and interior security, such as signage, guards, and physical barriers. Similar to the 2004 standards, the 2010 standards acknowledge that the ability to implement security countermeasures is dependent on lessors. Nevertheless, like the 2004 standards, there is little discussion on ways for tenant agencies, leasing officials, and security officials to work with or otherwise leverage lessors, which in our view is a significant omission given that implementing countermeasures can depend largely on lessors' cooperation. Given the critical role that lessors play, guidance for tenant agencies, leasing officials, and security officials--such as best practices--from ISC could be helpful for agencies as they attempt to meet the baseline level of protection prescribed within the 2010 standards for protecting leased space. Best practices comprise the collective practices, processes, and systems of leading organizations, including federal agencies and the private sector. Best practices can provide agencies, though diverse and complex, with a framework for meeting similar mission goals, such as facility protection. Guidance on working with lessors could suggest such practices as the inclusion of clauses within SFOs and lease agreements that obligate lessors to a level of protection in common areas as defined in ISC standards (i.e., deemed necessary by tenant agencies, in conjunction with security officials, as the result of FSAs conducted after a lease is executed). Currently, GSA standard leasing templates contain language stipulating that lessors must provide a level of security that reasonably prevents unauthorized entry during nonduty hours and deters loitering or disruptive acts in and around leased space. Prior to the execution of the lease, leasing officials and tenant agencies could also negotiate or stipulate a cost-sharing structure with lessors in the event that future countermeasures are needed. For example, GSA standard leasing templates already reserve that right of the government to temporarily increase security in the building under lease, at its own expense and with its own personnel during heightened security conditions due to emergency situations. A best practice could be that such existing language regarding common areas and the implementation of security countermeasures be articulated and linked to ISC standards more definitively within SFO and leasing agreements. This could provide tenant agencies, leasing officials, and security officials the leverage necessary for compelling lessors to allow or cooperatively implement security countermeasures in common areas in order to mitigate risks from public access. As the government's central forum for exchanging information and guidance on facility protection, ISC is well positioned to develop and share best practices. ISC has the capacity to create a working group or other mechanism to address this gap in its 2010 standards. ISC has previously developed best practices in physical security issues, and one of its five standing subcommittees is focused on developing best practices related to technology. Officials from our case study agencies reported that their agencies use ISC guidance and standards in developing policies and protocols for physical security and leasing. Moreover, we have reported that previous ISC standards have been viewed as useful in communicating increased physical security needs to private owners and involving them directly in the process of security program development for their buildings. Federal agencies continue to rely on leased space to meet various missions, but the limited use of early risk assessments and a lack of control over common areas present challenges to protecting this space. Though all risks can never be completely predicted or eliminated, it is imperative to address these challenges because they leave GSA, FPS, and tenant agencies poorly positioned to implement key practices in facility protection, such as allocating resources using a risk management approach, leveraging technology, and measuring performance. As the government-wide standard for protecting nonmilitary federal facilities, the 2010 standards are aligned with some of these practices, providing direction on the roles of various entities and their responsibilities in achieving minimum levels of protection and acceptable levels of risk. Specifically, the 2010 standards hold promise for positioning the federal government to begin comprehensively assessing risks with its requirement for documenting building-specific security decision making. The 2010 standards' prescription that risk assessments be used early in all new lease acquisitions is significant because it could provide the impetus for agencies to examine and allocate the resources needed for implementing early risk assessments, in particular for leases under 10,000 square feet. In contrast, the standards' lack of discussion on working with lessors is notable, given the significant role these entities have in implementing countermeasures that could mitigate risks from public access, particularly in common areas, such as lobbies and loading docks. Guidance to tenant agencies, leasing officials, and security officials on how to work with lessors, such as best practices, would give helpful direction as these entities work together to secure common areas and protect leased space. To enhance the value of ISC standards for addressing challenges with protecting leased space, we recommend that the Secretary of Homeland Security instruct the Executive Director of the ISC, in consultation, where appropriate, with ISC member agencies to (1) establish an ISC working group or other mechanism to determine guidance for working with lessors, which may include best practices to secure common areas and public access, and (2) subsequently incorporate these findings into a future ISC standard or other product, as appropriate. We provided a draft of this report to DHS, GSA, VA, USDA, and DOJ for review and comment. DHS concurred with our recommendation and GSA, VA, USDA, and DOJ provided technical comments, which we incorporated as appropriate. DHS's comments are contained in Appendix I. We will send copies of this report to the Secretary of Homeland Security, FPS Director of DHS, the Administrator of GSA, the Secretary of VA, the Secretary of Agriculture, the Attorney General, and appropriate congressional committees. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512- 2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. In addition to the contact named above, David E. Sausville, Assistant Director; Delwen Jones; Susan Michal-Smith; Sara Ann Moessbauer; Meghan Squires; Kyle Stetler; and Friendly Vang-Johnson made key contributions to this report.

The federal government's reliance on leased space underscores the need to physically secure this space and help safeguard employees, visitors, and government assets. In April 2010 the Interagency Security Committee (ISC), comprised of 47 federal agencies and departments and chaired by the Department of Homeland Security (DHS), issued Physical Security Criteria for Federal Facilities (the 2010 standards) which supersede previous ISC standards. In response to Congress' direction to review ISC standards for leased space, this report (1) identifies challenges that exist in protecting leased space and (2) examines how the 2010 standards address these challenges. To conduct this work, GAO analyzed agency documents and interviewed federal officials from ISC, four federal departments selected as case studies based on their large square footage of leased space, and the Federal Protective Service (FPS). GAO also consulted prior work on federal real property and physical security, including key practices in facility protection. Limited information about risks and the inability to control common areas and public access pose challenges to protecting leased space. Leasing officials do not always have the information needed to employ a risk management approach for allocating resources--a key practice in facility protection. Early risk assessments--those conducted before a lease is executed--can provide leasing officials with valuable information; however, FPS, which is the General Service Administration's (GSA) physical security provider, generally does not perform these assessments for leased space under 10,000 square feet--which constitutes a majority of GSA's leases. Under its memorandum of agreement (MOA) with GSA, FPS is not expected to perform these assessments and does not have the resources to do so. Another challenge in protecting leased space is tenant agencies' lack of control over common areas (such as elevator lobbies, loading docks, and the building's perimeter) which hampers their ability to mitigate risk from public access to leased space. In leased space, lessors, not tenant agencies, typically control physical security in common areas. To implement measures to counter risks in common areas, tenant agencies must typically negotiate with and obtain consent from lessors, who may be unwilling to implement countermeasures because of the potential burden or undue effect on other, nonfederal tenants. For example, tenant agencies in a high-risk, multitenant leased facility we visited have been unable to negotiate changes to the common space, including the installation of X-ray machines and magnetometers, because the lessor believed that the proposed countermeasures would inconvenience other tenants and the public. The 2010 standards show potential for addressing some challenges with leased space. These standards align with some key practices in facility protection because they prescribe a decision making process to determine, mitigate, and accept risks using a risk management approach. Further, by requiring that decision making be tracked and documented, the standards facilitate performance measurement that could help enable agency officials to determine if the most critical risks are being prioritized and mitigated. With its emphasis on the uniform use of early risk assessments, the 2010 standards provide a baseline requirement for agencies to consider as they develop protocols and allocate resources for protecting leased space. For example, GSA and FPS must now consider this requirement, which represents an expansion of the services currently expected of FPS, as they renegotiate their MOA. In contrast, a shortfall within the 2010 standards is that they offer little means for addressing tenant agencies' lack of control over common areas and public access. While the 2010 standards outline specific countermeasures for addressing public access, they lack in-depth discussion and guidance--such as best practices--that could provide a framework for working with lessors to implement these countermeasures. Given the critical role that lessors play, such guidance is warranted. As the government's central forum for exchanging information on facility protection, ISC is well positioned to develop and share this guidance. GAO recommends that DHS instruct ISC to establish a working group or other mechanism to determine guidance for working with lessors, and to incorporate this guidance into a future ISC standard or other product, as appropriate. DHS concurred with the report's recommendation.

The mission of the FBI section that operates the National Instant Criminal Background Check System (NICS Section) is to ensure national security and public safety by providing the accurate and timely determination of a person's eligibility to possess firearms and explosives in accordance with federal law. Under the Brady Handgun Violence Prevention Act and implementing regulations, the FBI and designated state and local criminal justice agencies use NICS to conduct checks on individuals before federal firearms licensees (gun dealers) may transfer any firearm to an unlicensed individual. Also, pursuant to the Safe Explosives Act, in general, any person seeking to (1) engage in the business of importing, manufacturing, or dealing in explosive materials or (2) transport, ship, cause to be transported, or receive explosive materials must obtain a federal license or permit, respectively, issued by the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF). To assist ATF, in February 2003, the FBI began conducting NICS background checks on individuals seeking to obtain a federal explosives license or permit. Persons prohibited by federal law from possessing firearms or explosives include convicted felons, fugitives, unlawful controlled-substance users and persons addicted to a controlled substance, and aliens (any individual not a citizen or national of the United States) who are illegally or unlawfully in the United States, among others. One of the databases that NICS searches is the FBI's National Crime Information Center (NCIC) database, which contains criminal justice information (e.g., names of persons who have outstanding warrants) and also includes applicable records from the Terrorist Screening Center's (TSC) consolidated terrorist screening database. In general, individuals who are reasonably suspected of having possible links to terrorism--in addition to individuals with known links--are to be nominated for inclusion on the consolidated terrorist watchlist by the FBI and other members of the intelligence community. One of the stated policy objectives of the government's consolidated watchlist is the coordinated collection of information for use in investigations and threat analyses. Terrorist watchlist records in the NCIC database are maintained in the Known or Suspected Terrorist File (formerly the Violent Gang and Terrorist Organization File), which was designed to provide law enforcement personnel with the means to exchange information on known or suspected terrorists. In May 2009, we reported that from February 2004 through February 2009, a total of 963 NICS background checks resulted in valid matches with individuals on the terrorist watchlist. Of these transactions, approximately 90 percent (865 of 963) were allowed to proceed because the checks revealed no prohibiting information, such as felony convictions, illegal immigrant status, or other disqualifying factors. Two of the 865 transactions that were allowed to proceed involved explosives background checks. The FBI does not know how often a firearm was actually transferred or if a firearm or explosives license or permit was granted, because gun dealers and explosives dealers are required to maintain but not report this information to the NICS Section. About 10 percent (98 of 963) of the transactions were denied based on the existence of prohibiting information. No transactions involving explosives background checks were denied. For today's hearing, we obtained updated statistics from the FBI through February 2010. Specifically, from March 2009 through February 2010, FBI data show that 272 NICS background checks resulted in valid matches with individuals on the terrorist watchlist. One of the 272 transactions involved an explosives background check, which was allowed to proceed because the check revealed no disqualifying factors under the Safe Explosives Act. According to FBI officials, several of the 272 background checks resulted in matches to watchlist records that--in addition to being in the FBI's Known or Suspected Terrorist File--were on the Transportation Security Administration's "No Fly" list. In general, persons on the No Fly list are deemed to be a threat to civil aviation or national security and therefore should be precluded from boarding an aircraft. According to FBI officials, all of these transactions were allowed to proceed because the background checks revealed no prohibiting information under current law. In total, individuals on the terrorist watchlist have been involved in firearm and explosives background checks 1,228 times since NICS started conducting these checks in February 2004, of which 1,119 (about 91 percent) of the transactions were allowed to proceed while 109 were denied, as shown in table 1. According to the FBI, the 1,228 NICS transactions with valid matches against the terrorist watchlist involved about 650 unique individuals, of which about 450 were involved in multiple transactions and 6 were involved in 10 or more transactions. Based on our previous work, the NICS Section started to catalog the reasons why NICS transactions involving individuals on the terrorist watchlist were denied. According to the NICS Section, from April 2009 through February 2010, the reasons for denials included felony conviction, illegal alien status, under indictment, fugitive from justice, and mental defective. In October 2007, we reported that screening agencies generally do not check against all records in TSC's consolidated terrorist watchlist because screening against certain records (1) may not be needed to support the respective agency's mission, (2) may not be possible due to the requirements of computer programs used to check individuals against watchlist records, or (3) may not be operationally feasible. Rather, each day, TSC exports applicable records from the consolidated watchlist to federal government databases that agencies use to screen individuals for mission-related concerns. We raised questions about the extent to which not screening against TSC's entire consolidated watchlist during NICS background checks posed a security vulnerability. According to TSC officials, not all records in the consolidated watchlist are used during NICS background checks. The officials explained that in order for terrorist information to be exported to NCIC's Known or Suspected Terrorist File, the biographic information associated with a record must contain sufficient identifying data so that a person being screened can be matched to or disassociated from an individual on the watchlist. The officials noted that since not all records in TSC's consolidated watchlist contain this level of biographic information required for this type of screening, not all records from the watchlist can be used for NICS background checks. According to TSC officials, the majority of records that do not contain sufficient identifying data are related to foreign nationals who would not be prospective purchasers of firearms or explosives within the United States and therefore would not be subject to NICS checks. We are continuing to review this issue as part of our ongoing review of the terrorist watchlist. The FBI has taken additional actions to use information obtained from NICS background checks to support investigations and other counterterrorism activities. These actions include providing guidance to FBI case agents on how to obtain information related to NICS checks and efforts to analyze and share information on individuals matched to the terrorist watchlist. The FBI has provided guidance to its case agents on how to obtain information on individuals matched to the terrorist watchlist during NICS background checks. According to FBI Counterterrorism Division officials, TSC notifies the division when a NICS background check is matched to an individual on the terrorist watchlist. After verifying the accuracy of the match, the Counterterrorism Division will advise the FBI case agent that the individual attempted to purchase a firearm or obtain a firearm or explosives license or permit. The division will also provide the agent with contact information for the NICS Section and advise the agent to contact the section to answer additional questions. According to Counterterrorism Division officials, the case agent is also advised to contact ATF to obtain a copy of the form the individual used to initiate the transaction. For verified matches, NICS Section personnel are to determine if FBI case agents have information that may disqualify the individual from possessing a firearm or explosives--such as information that has been recently acquired but not yet available in the automated databases searched by NICS. To assist the division in searching for prohibiting information, NICS Section personnel are to share all available information that is captured in the NICS database with the case agent--name, date of birth, place of birth, height, weight, sex, race, country of citizenship, alien or admission number, type of firearm involved in the check (handgun, long gun, or other), and any exceptions to disqualifying factors claimed by an alien. According to FBI officials, these procedures have been successful in enabling the NICS Section to deny several gun transactions involving individuals on the terrorist watchlist based on disqualifying factors under current law. The FBI did not maintain specific data on the number of such denials. In response to a recommendation made in our January 2005 report, FBI headquarters provided guidance to its field offices in April 2005 on the types of additional information available to a field office and the process for obtaining that information if a known or suspected terrorist attempts to obtain a firearm from a gun dealer or a firearm or explosives license or permit. Regarding gun purchases, the guidance notes that if requested by an FBI field office, NICS personnel have been instructed to contact the gun dealer to obtain additional information about the prospective purchaser--such as the purchaser's residence address and the government-issued photo identification used by the purchaser (e.g., drivers license)--and the transaction, including the make, model, and serial number of any firearm purchased. According to the guidance, gun dealers are not legally obligated under either NICS or ATF regulations to provide this additional information to NICS personnel. If the gun dealer refuses, the guidance notes that FBI field offices are encouraged to coordinate with ATF to obtain this information. ATF can obtain a copy of the form individuals must fill out to purchase firearms (ATF Form 4473), which contains additional information that may be useful to FBI counterterrorism officials. Regarding a firearm or explosives permit, the FBI's April 2005 guidance also addresses state permits that are approved by ATF as alternative permits that can be used to purchase firearms. Specifically, if requested by an FBI field office, NICS personnel have been instructed to contact the gun dealer to obtain all information from the permit application. Further, the guidance notes that the use and dissemination of state permit information is governed by state law, and that the FBI has advised state and local agencies that also issue firearm or explosives permits to share all information with FBI field personnel to the fullest extent allowable under state law. According to the guidance, any information that FBI field offices obtain related to NICS background checks can be shared with other law enforcement, counterterrorism, or counterintelligence agencies, including members of an FBI Joint Terrorism Task Force that are from other federal or state law enforcement agencies. In general, under current regulations, all personal identifying information in the NICS database related to firearms transfers that are allowed to proceed (e.g., name and date of birth) is to be destroyed within 24 hours after the FBI advises the gun dealer that the transfer may proceed. Nonidentifying information related to each background check that is allowed to proceed (e.g., NICS transaction number, date of the transaction, and gun dealer identification number) is retained for up to 90 days. By retaining this information, the NICS Section can notify ATF when new information reveals that an individual who was approved to purchase a firearm should have been denied. ATF can then initiate any firearm retrievals that may be necessary. According to NICS Section officials, the section has made no firearm-retrieval referrals to ATF related to transactions involving individuals on the terrorist watchlist to date. Under provisions in NICS regulations, personal identifying information and other details related to denied transactions are retained indefinitely. The 24-hour destruction requirement does not apply to permit checks. Rather, information related to these checks is retained in the NICS database for up to 90 days after the background check is initiated. The FBI is analyzing and sharing information on individuals matched to the terrorist watchlist to support investigations and other counterterrorism activities. In our May 2009 report, we noted that the FBI is utilizing a TSC database to capture information on individuals who attempted to purchase a firearm and were a match to the watchlist. Specifically, the FBI began analyzing each separate instance to develop intelligence and support ongoing counterterrorism investigations. Further, we reported that in October 2008, the FBI's Counterterrorism Division conducted--for the first time--a proactive analysis of the information related to NICS background checks involving individuals on the terrorist watchlist that is captured in the TSC database. This analysis was conducted to identify individuals who could potentially impact presidential inauguration activities. Based on the value derived from conducting this analysis, the Counterterrorism Division decided to conduct similar analysis and produce quarterly reports that summarize these analytical activities beginning in May 2009. In updating our work, we found that the FBI's Counterterrorism Division is now issuing these analytic reports on a monthly basis. According to division officials, the reports contain an analysis of all NICS background checks during the month that involve individuals on the terrorist watchlist. The officials noted that the individuals discussed in the reports range from those who are somewhat of a concern to those who represent a significant threat. The reports are classified and distributed internally to various components within the FBI, including all FBI field offices and Joint Terrorist Task Forces. The officials stated that these reports have played a key role in a number of FBI counterterrorism investigations. According to Counterterrorism Division officials, the names of individuals discussed in the reports are shared with other members of the intelligence community for situational awareness and follow-on analytical activity. TSC also generates reports that cover all instances of screening agencies coming in contact with an individual on the terrorist watchlist, including those related to NICS transactions. TSC provides the reports to numerous entities, including FBI components, other federal agencies, and state and local information fusion centers. These reports are distributed via the FBI's Law Enforcement Online system. At the time of our updated review, TSC was exploring the possibility of electronically communicating this information to the intelligence community as well. According to officials from the FBI's Counterterrorism Division, for investigative purposes, FBI and other counterterrorism officials are generally allowed to collect, retain, and share information on individuals on the watchlist who attempt to purchase firearms or explosives. In our May 2009 report, we noted that the Department of Justice (DOJ) provided legislative language to Congress in April 2007 that would have given the Attorney General discretionary authority to deny the transfer of firearms or the issuance of a firearm or explosives license or permit under certain conditions. Specifically, such transactions could be denied when a background check on an individual reveals that the person is a known or suspected terrorist and the Attorney General reasonably believes that the person may use the firearm or explosives in connection with terrorism. The legislative language also provided due process safeguards that would afford an affected person an opportunity to challenge an Attorney General denial. At the time of our 2009 report, neither DOJ's proposed legislative language nor then pending related legislation included provisions for the development of guidelines further delineating the circumstances under which the Attorney General could exercise this authority. We suggested that Congress consider including a provision in any relevant legislation to require that the Attorney General establish such guidelines, and this provision was included in a subsequent legislative proposal. Such a provision would help DOJ and its component agencies provide accountability and a basis for monitoring to ensure that the intended goals for, and expected results of, the background checks are being achieved. Guidelines would also help to ensure compliance with Homeland Security Presidential Directive 11, which requires that terrorist-related screening-- including use of the terrorist watchlist--be done in a manner that safeguards legal rights, including freedoms, civil liberties, and information privacy guaranteed by federal law. Furthermore, establishing such guidelines would be consistent with the development of standards, criteria, and examples governing nominations to, and the use of, the watchlist for other screening purposes. Because individuals are nominated to the terrorist watchlist based on a "reasonable suspicion" standard, the government generally has not used their inclusion on the watchlist to automatically deny certain actions, such as automatically prohibiting an individual from entering the United States or boarding an aircraft. Rather, when an agency identifies an individual on the terrorist watchlist, agency officials are to assess the threat the person poses to determine what action to take, if any, in accordance with applicable laws or other guidelines. For example, the Immigration and Nationality Act, as amended, establishes conditions under which an alien may be deemed inadmissible to the United States. Also, the former White House Homeland Security Council established criteria for determining which individuals on the terrorist watchlist are deemed to be a threat to civil aviation or national security and, therefore, should be precluded from boarding an aircraft. Subsequent to the December 25, 2009, attempted terrorist attack, the President tasked the FBI and TSC to work with other relevant departments and agencies--including the Department of Homeland Security, the Department of State, and the Central Intelligence Agency--to develop recommendations on whether adjustments are needed to the watchlisting nominations guidance, including the No-Fly criteria. These efforts are ongoing. At the time of our May 2009 report, DOJ was noncommittal on whether it would develop guidelines if legislation providing the Attorney General with discretionary authority to deny firearms or explosives transactions involving individuals on the terrorist watchlist was enacted. Subsequent to that report, Senator Lautenberg introduced S. 1317 that, among other things, would require DOJ to develop such guidelines. We continue to maintain that guidelines should be a part of any statutory or administrative initiative governing the use of the terrorist watchlist for firearms or explosives transactions. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions that you or other Members of the Committee may have. For additional information on this statement, please contact Eileen Larence at (202) 512-6510 or [email protected]. In addition, Eric Erdman, Assistant Director; Jeffrey DeMarco; and Geoffrey Hamilton made key contributions to this statement. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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.

Membership in a terrorist organization does not prohibit a person from possessing firearms or explosives under current federal law. However, for homeland security and other purposes, the FBI is notified when a firearm or explosives background check involves an individual on the terrorist watchlist. This statement addresses (1) how many checks have resulted in matches with the terrorist watchlist, (2) how the FBI uses information from these checks for counterterrorism purposes, and (3) pending legislation that would give the Attorney General authority to deny certain checks. GAO's testimony is based on products issued in January 2005 and May 2009 and selected updates in March and April 2010. For these updates, GAO reviewed policies and other documentation and interviewed officials at FBI components involved with terrorism-related background checks. From February 2004 through February 2010, FBI data show that individuals on the terrorist watchlist were involved in firearm or explosives background checks 1,225 times; 1,116 (about 91 percent) of these transactions were allowed to proceed because no prohibiting information was found--such as felony convictions, illegal immigrant status, or other disqualifying factors--and 109 of the transactions were denied. In response to a recommendation in GAO's January 2005 report, the FBI began processing all background checks involving the terrorist watchlist in July 2005--including those generated via state operations--to ensure consistency in handling and ensure that relevant FBI components and field agents are contacted during the resolution of the checks so they can search for prohibiting information. Based on another recommendation in GAO's 2005 report, the FBI has taken actions to collect and analyze information from these background checks for counterterrorism purposes. For example, in April 2005, the FBI issued guidance to its field offices on the availability and use of information collected as a result of firearm and explosives background checks involving the terrorist watchlist. The guidance discusses the process for FBI field offices to work with FBI personnel who conduct the checks and the Bureau of Alcohol, Tobacco, Firearms and Explosives to obtain information about the checks, such as the purchaser's residence address and the make, model, and serial number of any firearm purchased. The guidance states that any information that FBI field offices obtain related to these background checks can be shared with other counterterrorism and law enforcement agencies. The FBI is also preparing monthly reports on these checks that are disseminated throughout the FBI to support counterterrorism efforts. In April 2007, the Department of Justice proposed legislative language to Congress that would provide the Attorney General with discretionary authority to deny the transfer of firearms or explosives to known or suspected "dangerous terrorists." At the time of GAO's May 2009 report, neither the department's proposed legislative language nor related proposed legislation included provisions for the development of guidelines further delineating the circumstances under which the Attorney General could exercise this authority. GAO suggested that Congress consider including a provision in any relevant legislation that would require the Attorney General to establish such guidelines; and this provision was included in a subsequent legislative proposal. If Congress gives the Attorney General authority to deny firearms or explosives based on terrorist watchlist concerns, guidelines for making such denials would help to provide accountability for ensuring that the expected results of the background checks are being achieved. Guidelines would also help ensure that the watchlist is used in a manner that safeguards legal rights, including freedoms, civil liberties, and information privacy guaranteed by federal law and that its use is consistent with other screening processes. For example, criteria have been developed for determining when an individual should be denied the boarding of an aircraft.