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Within DOD's overall acquisition framework, there are three key decision- support processes--the acquisition management system, requirements determination, and resource allocation--that must work closely together for acquisition programs to successfully deliver the right weapon systems at the right time and right price. Each process is managed and overseen by different organizations and leaders within DOD and the military departments. At the DOD level, the Under Secretary of Defense for Acquisition, Technology, and Logistics (USD (AT&L)) is responsible for the acquisition function and is the Milestone Decision Authority (MDA) for major defense acquisition programs, whereas the Joint Chiefs of Staff are responsible for implementing the requirements process, and the Under Secretary of Defense (Comptroller) is responsible for the resource process. At the military department level, where programs are largely planned and executed, the civilian service acquisition executive is responsible for the acquisition process, while the service chiefs have responsibility for assisting the military departments in the development of requirements and the resourcing processes. We have previously found that these processes are fragmented, making it difficult for the department to achieve a balanced mix of weapon systems that are affordable and feasible and provide the best military value to the warfighter. In recent years, Congress and DOD have taken steps to better integrate the requirements and acquisition processes. For example, the department added new decision points and reviews for weapon programs as they progress through the acquisition process. Additionally, USD (AT&L) now serves as an advisor to the council that reviews requirements for major weapon programs. Furthermore, the Fiscal Year 2011 National Defense Authorization Act delineated that the service chiefs have a responsibility to assist the secretaries of the military departments concerned in carrying out the acquisition function. Generally, major defense acquisition programs go through a series of phases as they progress from the identification of the need for a new capability, through initial planning of a solution, to system development, and finally production and deployment of a fielded system. High-level, operational requirements of major weapon systems are first generated, vetted, and put forward for DOD-level review and approval, generally by the military services. These requirements are prioritized based on how critical the associated system characteristics are to delivering the military capability. Key performance parameters are considered most critical by the sponsor military organization, while key system attributes and other performance attributes are considered essential for an effective military capability. Through systems engineering efforts, these high-level requirements must then be translated into lower-level technical requirements and specifications to design and build the weapon system. Figure 1 illustrates the notional types and levels of requirements for weapon system development. Following military service-level reviews and approvals, the high-level operational requirements, which are specified in a capability development document, go through several key stages where DOD-level reviews and validations are required, a process accomplished for joint military requirements within the department's Joint Capabilities Integration and Development System (JCIDS) process. Capability requirements documents for these programs are assessed and validated within JCIDS by the Chairman of the Joint Chiefs of Staff with the advice of the Joint Requirements Oversight Council (JROC), which is chaired by the Vice Chairman of the Joint Chiefs of Staff and is comprised of the Vice Chiefs of Staff of each military service and the Combatant Commanders, when directed by the chairman. These high-level requirements along with several other acquisition-related analyses and documents (e.g., acquisition strategy, cost estimates, and test and evaluation plan) are required for approval at Milestone B, when an acquisition program formally starts system development. As major defense acquisition programs go through the iterative phases of the acquisition process, they are reviewed by the Defense Acquisition Board, which is chaired by USD (AT&L) and includes the secretaries of the military departments and other senior leaders. However, prior to these DOD-level reviews, programs have reviews and approvals at the military service level where the service acquisition executives and service chiefs are involved. In our prior report on the acquisition chain of command, we found that service chiefs and their supporting offices have multiple opportunities to be involved in major defense acquisition programs throughout the acquisition process, including participation in integrated product teams, service-level reviews during system development, and requirements review and approval prior to a program's production decision. Figure 2 illustrates DOD's current acquisition process and where the military service chiefs and service acquisition executives have primary responsibilities. Generally, after Milestone B, when system development begins in earnest, the chief's role diminishes whereas the service acquisition executive's role becomes more prominent. For more than a decade, we have recommended numerous actions to improve the way DOD acquires its defense systems. Our work in commercial best practices and defense acquisitions has consistently found that, at the program level, a key cause of poor program outcomes is the approval of programs with business cases that contain inadequate knowledge about requirements and the resources--funding, time, technologies, and people--needed to execute them.programs run into problems during system development because requirements are unrealistic, technologies are immature, cost and schedule are underestimated, and design and production risks are high. Some key recommendations that we have made in the past to improve DOD's acquisition process include the following: Require that systems engineering that is needed to evaluate the sufficiency of available resources be conducted before weapon system requirements are formalized; Require, as a condition for starting a new weapon system program, that sufficient evidence exists to show there is a match between a weapon's system requirements and the resources the program manager has to develop that weapon; Require program officials to demonstrate that they have captured appropriate knowledge at program start (Milestone B), which includes ensuring that requirements for the product are informed by the systems engineering process, and establishing cost and schedule estimates on the basis of knowledge from preliminary design using system engineering tools; Have contractors perform more detailed systems engineering analysis to develop sound requirements before DOD selects a prime contractor for the systems development contract; and Define a shipbuilding approach that calls for (1) demonstrating balance among program requirements, technology demands, and cost considerations by preliminary design review, and (2) retiring technical risk and closing any remaining gaps in design requirements before a contract for detail design is awarded. GAO, Defense Acquisitions: Major Weapon Systems Continue to Experience Cost and Schedule Problems under DOD's Revised Policy, GAO-06-368 (Washington, D.C.: Apr. 13, 2006). Most current and former military service chiefs that we interviewed collectively expressed dissatisfaction with the current acquisition process and the outcomes it produces. They were concerned that after validated requirements are handed over to the acquisition process, requirements are frequently added or changed to increase the scope and capabilities of a weapon system. Some current and former service chiefs said that because they lack visibility into programs, they are unable to influence trade-offs between requirements and resources. However, their views differed on how best to be more involved in the management of acquisitions and improve the integration between DOD's requirements and acquisition functions. Most of the current and former service chiefs that we interviewed were dissatisfied with the current acquisition process and stated that programs often fail to deliver needed operational capabilities to the warfighter with expected resources--such as technologies and funding--and in expected time frames. They were concerned that requirements are developed within a military service, validated by the JROC, handed over to the acquisition process and then, later on--years later--program cost, schedule, and performance problems materialize. According to a number of both current and former service chiefs, they are not always involved in the acquisition process and are frequently caught by surprise when these problems emerge. Several service chiefs saw a key factor contributing to this condition as unplanned requirements growth--sometimes referred to as "creep"--that occurs during program execution. Several current and former service chiefs expressed the view that, after a program is approved and system development is underway, requirements are frequently added or changed to increase the scope and capabilities of a weapon system beyond the requirements originally agreed upon when the program started. One current service chief cited an example where program officials unnecessarily created a lower-level requirement for an aircraft system that did not meet any validated operational need. The service chief attributed the problem, in part, to a lack of military officers with acquisition expertise and a corresponding absence of acquisition officials with operational expertise. A former DOD official pointed to the lengthy timeframe usually involved in developing major weapon systems and how requirements increases occur because programs want to introduce the latest technology advances into a system, such as information technology and electronics equipment. Some current and former service chiefs stated that because they lack visibility into programs, they are unable to influence trade-offs between requirements and resources. One current service chief provided an example when program officials, in an effort to meet a validated operational requirement for speed, were developing an engine that led to cost increases, while he believed there was an existing engine available that would have required a minor reduction in capability in favor of reducing cost. The service chiefs also had concerns that requirements growth is a function of too many stakeholders within DOD having the ability to influence acquisition programs, making it difficult to hold anyone accountable for program outcomes. Many of these service chiefs believed that cultural factors and incentives within the department make it difficult for program managers to manage requirements growth and execute programs effectively. These chiefs said that program managers and other acquisition officials often lack experience and expertise to manage requirements and acquisitions, are incentivized to meet internal milestones and not raise issues, and rely too much on contractors to figure out what is needed to develop a weapon system. Further, they noted that high turnover in program manager tenure--approximately every 2-3 years according to several service chiefs--make it difficult to hold managers accountable when problems emerge. To improve weapon system program outcomes, both current and former service chiefs agree that they should be more involved in the acquisition process. However, their views differed on the measures needed to achieve more involvement and improve integration between DOD's requirements and acquisition functions. Most current service chiefs said that better collaboration does not require restructuring the chain of command. These service chiefs cited examples of ongoing collaboration between requirements and acquisition offices, and programs where they worked closely with acquisition leadership to address problems. In one case, a service chief pointed to an initiative that he and the service acquisition executive instituted to provide technical training and assistance to uniformed requirements officers as an example of formalized collaboration before and after the start of system development. Another service chief indicated that, faced with rising program costs and the possibility of cancellation, he actively monitored program progress through regular meetings with the program manager and contractor. Current service chiefs and other acquisition leadership generally indicated the service chiefs have the ability to be more involved in the current process, such as by attending service and DOD level program reviews. However, some chiefs indicated that involvement in acquisition programs, in general, varies by service chief based on their priorities and the other personalities involved. Several current and former service chiefs agreed that they have been involved in the oversight of some programs, but their level of involvement is dependent on the importance of the program and established working relationships with the service acquisition executive. One service chief stated that, at times, service chiefs have not been involved due to unfamiliarity with the acquisition process, their own perceived role in the process, or a lack of interest in an acquisition. Several former service chiefs thought that establishing co-chairmanship for key decision reviews and co-signature of key acquisition documents, particularly at the military department level, may improve collaboration, encourage requirements trade-offs during development, and force the service chiefs to share the burden of responsibility for acquisition programs. One suggestion from an outside expert for implementing this solution was to have the service chief and the service acquisition executive co-chair the service-level acquisition review board. Some military and acquisition leaders noted, however, that requiring co- chairmanship of acquisition meetings and co-signature of decision documents could slow an already complex process and further discourage program managers from raising issues and concerns. In general, the former service chiefs we interviewed emphasized the need for a stronger role in the acquisition chain of command with more formal authority and mechanisms in place to ensure that the service chiefs are consistently involved and sufficiently able to influence program decisions. However, as we found in our prior review, studies that have advocated for a stronger role for the service chiefs in the acquisition process provide Several of little evidence that this would improve program outcomes.these former service chiefs advocated for changes to DOD policy and statute, including the Goldwater-Nichols Act.service chief believed that DOD acquisition policy should require service chief approval on all major defense acquisition programs prior to program start. Some acquisition experts have observed that, in giving sole responsibility for acquisitions to the military secretaries through the service acquisition executives, DOD created an unintended wall when implementing the Goldwater-Nichols Act reforms between the military- controlled requirements process and civilian-driven acquisition process. These acquisition experts note, however, that while service chiefs had significant influence on certain acquisition programs in the past, their close involvement did not always result in successful cost, schedule, or performance outcomes. For example, service chiefs had significant involvement in the Navy's Littoral Combat Ship and the Army's Future Combat System and, in both cases, viewed the programs as providing vital operational capabilities and needing to be fielded quickly. Consequently, the programs pursued aggressive acquisition strategies that pushed the programs through development with ill-defined requirements and unstable designs, which contributed to significant cost and schedule increases, and in the case of the Future Combat System, program cancellation. Acting on the chiefs' concerns, we analyzed all 78 major defense acquisition programs and found that growth in high-level requirements-- and consequent cost growth--was rare. Rather, we found that cost growth and other problems are more directly related to deriving lower- level requirements after a program has started. The distinction between high-level and lower-level requirements is key. Growth in high-level requirements could be attributable to a lack of discipline, but growth in lower-level requirements is not the result of additions, but rather the definition and realization of the details necessary to meet the high-level requirements. The process of defining lower-level requirements is an essential function of systems engineering, much of which is done late-- after a development contract has been signed and a program has started. In other words, requirements are insufficiently defined at program start; when their full consequences are realized, trade-offs are harder to make--cost increases and schedule delays become the preferred solutions. We presented our assessment of the requirements problem to current and former service chiefs and they generally agreed with it. Several service chiefs noted that more integration, collaboration, and communication during the requirements and acquisition processes needs to take place to ensure that trade-offs between desired capabilities and expected costs are made and that requirements are essential, technically feasible, and affordable before programs get underway. Some service chiefs believed that applying systems engineering to arrive at well-defined requirements before the start of system development at Milestone B can go a long way towards solving some of their dissatisfaction with the acquisition process and improving outcomes. We found few instances of requirements changes between 2009 and 2013 that involved increasing capabilities on major defense programs during system development. Seventeen programs in the current portfolio of 78 major defense acquisition programs experienced system development cost growth of more than 20 percent between 2009 and 2013, but 13 of them did not report associated key requirements increases (see table 1). A number of factors other than requirements increases contributed to the cost growth in these programs. We found that, within the current portfolio of major defense acquisition programs, 5 of 78 programs reported increases to key performance parameters between 2009 and 2013. In these 5 programs, the changes involved adding a new component, technology, or other subsystem to increase the capabilities of the weapon system. Table 2 describes the requirement changes reported by these 5 programs. In 4 programs, development cost increases were more than 20 percent during the same time period. A key factor consistently identified by GAO in prior reports is the mismatch between the requirements for a new weapon system and the resources--technologies, time, and funding--that are planned to develop Requirements, especially at the lower levels, are often the new system.not fully developed or well-defined when passed over to the acquisition process at Milestone B, at which time a system development contract is awarded and a program begins. During system development, the high- level operational requirements, such as key performance parameters and key system attributes, usually need to be further analyzed by the contractor using systems engineering techniques to fully understand, break down, and translate them into technical weapon system-level requirements and contract specifications. Systems engineering analysis translates operational requirements into detailed system requirements for which requisite technological, software, engineering, and production capabilities have been identified. It also provides knowledge to enable the developer to identify and resolve gaps before system development begins. It is often at this point--when the technical specifications are finally understood and design challenges are recognized--that cost and schedule increases materialize in a program. What may appear to be requirements growth is the recognition that the weapon system will require considerably more time and money than expected to build to these derived technical specifications to meet the validated operational requirements. The process of translating high-level operational requirements into low- level requirements and technical specifications in many programs does not usually occur until well after Milestone B approval (see figure 3 for a notional depiction). The number of requirements can expand greatly over time, as the designs of the subsystems and components become defined. In the case of the Army's Future Combat System, a large program that was intended to equip combat brigades with an advanced set of integrated systems, requirements were still being defined when the program was canceled beginning in 2009--after 6 years and $18 billion had been spent on initial system development. The program was approved to start system development with 7 key performance parameters. In order to meet these key performance parameters--which did not change--the program ultimately translated them into over 50,000 lower-level requirements before it was canceled. Requirements definition remains a challenge facing current major defense acquisition programs. For example, the F-35 program, which was conceptualized around three aircraft design variants to achieve cost efficiencies, has had difficulty reconciling different requirements imposed by the military services. According to program officials, in order to meet the nine validated key performance parameters, the program developed approximately 3,600 specifications. While the operational requirements for the F-35 have not increased, factors such as poorly defined requirements, significant concurrency between development and production, and immature technologies have contributed to significant cost growth and delays in the program. We found that several of the major defense acquisition programs that experienced cost growth, but did not report changing key performance parameters, had a significant number of engineering change orders and other configuration changes. As operational requirements become better understood during system development, contract specifications change to reflect what is needed to build the weapon system. Changes show up in engineering change orders and other design configuration changes, which contribute to cost growth. For example, between 2009 and 2013, the Littoral Combat Ship program reported 487 changes to its system configuration or design. Similarly, the Joint Tactical Radio System Handheld, Manpack, and Small Form Fit Radios program reported making 29 engineering changes and 11,573 software changes between 2009 and 2013. In neither case were the high-level requirements increased. While some configuration changes are necessary to manage obsolescence and other issues, the pursuit of poorly defined requirements results in overly optimistic cost and schedule estimates that are sometimes unachievable--leading to cost and schedule growth as programs encounter increased technical challenges necessary to achieve operational requirements. GAO's prior work as well as DOD's own policy emphasizes that the translation of operational requirements into technical weapon system specifications, which are informed by systems engineering, should take place prior to approving a program at Milestone B and awarding a contract that locks in the requirements. This allows trade-offs between requirements and resources to take place, and the establishment of more realistic cost, schedule, and performance commitments before programs get underway. However, DOD often does not perform sufficient up-front requirements analysis via systems engineering on programs to determine whether the requirements are feasible and there is a sound business case to move forward. Programs are proposed with unachievable requirements and overly optimistic cost and schedule estimates and, usually, participants on both the requirements side and the acquisition side are loathe to trade away performance. For example, a preliminary design review is a key systems engineering event that should be held before the start of system development to ensure requirements are defined and feasible, and the proposed design can meet the requirements within cost, schedule, and other system constraints. In 2013, GAO reviewed the 38 major defense acquisition programs that held preliminary design reviews that year. Only 11 of these programs held design reviews prior to the start of system development. The remaining 27 programs completed or planned to complete their design reviews approximately 24 months, on average, after the start of development. Thus, the resource consequences of deriving lower-level requirements are similarly deferred. We shared a summary of our assessment of the requirements problem, namely that high-level requirements are poorly defined when passed over to the acquisition process at the start of development, with the current and former service chiefs and they generally agreed with our findings. Several current and former service chiefs indicated that requirement and resource trade-offs, informed by systems engineering, do not consistently take place before programs get underway. Some chiefs also noted that reassessments of requirements, acquisition, and funding are not conducted often enough during program execution. According to one service chief, under the current acquisition process, there are too few points of collaboration among requirements officers, acquisition professionals, systems engineers, and cost estimators to work out requirements early in the process or to address problems and limitations associated with meeting operational requirements after programs are underway. Another service chief noted that the acquisition workforce lacks experience in operational and tactical settings and that his requirements community lacks technical acquisition skills, so it is important that collaboration regularly occurs between the two communities. Further, one chief emphasized that requirements officers are too dependent upon the acquisition community and its contractors to work out requirements. Several current and former service chiefs voiced concern that cost and schedule problems that acquisition programs experience are due to the failure to make appropriate trade-offs during system development. They indicated that too often programs encounter cost and schedule problems because in striving to meet challenging requirements the programs end up making technical and design changes to the weapon system. For example, one former service chief highlighted a combat vehicle program in development which had fallen short of meeting its vehicle speed requirement by a small percentage. Instead of making trade-offs, and perhaps seeking requirements relief, the program manager requested additional funding so the contractor could make design changes to the engine. Another service chief stated that requirement changes made during weapon system development are often viewed as sacrificing capability rather than reconciling requirements with operational conditions. The chief was concerned that program managers too often take the view that requirements cannot be changed and avoid elevating problems to leadership before they become critical, forgoing the opportunity to make needed trade-offs. In addition, one service chief described this problem as "cost creep" to meet requirements, not "requirements creep". We have previously found that incentives within the current acquisition process create pressure on defense system requirements and are geared toward delaying knowledge so as not to jeopardize program funding. Several current and former service chiefs agreed that there needs to be more integration, collaboration, and communication during the requirements and acquisition processes to ensure trade-offs are made and the requirements that get approved are essential, technically feasible, and affordable prior to the start of system development. Some service chiefs said that conducting systems engineering analyses during requirements setting and, again, early on during an acquisition program's planning phase to inform trade-offs between cost and capability could go a long way toward establishing better defined requirements and improving program outcomes. Almost all of the service chiefs stated that there is a need to further enhance expertise within the government, and several specified expertise in systems engineering. Several service chiefs indicated that systems engineering capabilities are generally lacking in the requirements development process, and do not become available until after requirements are validated and an expensive and risky system development program is underway. Some service chiefs advocated that having systems engineering capabilities available to the military services during requirements development could help to ensure earlier assessment of requirements feasibility. The service chiefs' views on the importance of systems engineering is consistent with our prior acquisition work, which calls for DOD to implement a knowledge-based approach to guide the match of defense program needs with available technology and resources. The service chiefs expressed a willingness to be more involved in the management and oversight of acquisition programs. Enhancing collaboration between the requirements and acquisition processes could be one of several steps needed to address the underlying culture and incentives that exist in DOD that lead to programs that are not feasible and affordable. We have found in prior work that characteristics of DOD's processes and incentives create pressure to push for unrealistic defense system requirements and lead to poor decisions and mismatches This culture has become between requirements and resources. ingrained over several decades and a number of studies and reforms have been directed at changing the incentives underlying the culture, without much success. GAO-01-288. be overly optimistic and to minimize the difficulty and resources needed to deliver the capability. Many of our prior recommendations have been aimed at this problem and, while one could argue whether more formal authority should be granted to the service chiefs, the current acquisition process allows for the service chiefs to be more involved in the management and oversight of acquisition programs. Regardless, the solution must involve investing in systems engineering expertise sooner-- while developing requirements--to enable technological knowledge to better shape and define operational requirements. Recommendations such as holding preliminary design reviews before the start of system development have been made as a means to improve program outcomes. After initial support, the enthusiasm for these practices wanes and the old pressures to continue with insufficient knowledge prevail, because the old practices allow programs to proceed and funding to flow. Importantly, the negative consequences of proceeding with limited knowledge are not sufficient to counteract these pressures, as accountability for the initial poor decisions is lost by the time problems emerge. Information and expertise will not result in good outcomes unless the need for a solid business case is reinforced. In order to improve program outcomes, DOD must focus its efforts on better integrating the requirements and acquisition processes, which can be achieved through better collaboration between these communities from the generation of requirements through system development, coupled with a greater emphasis on systems engineering and knowledge attainment early in a program's life cycle. Without sufficient systems engineering input to better define requirements and examine trade-offs early on, there is no assurance that acquisition programs going forward have a sound basis to start system development. To help ensure that requirements are well defined and well understood before a program is approved to start system development, we recommend that the Secretary of Defense direct the military service chiefs and service acquisition executives to work together to take the following two actions: Assess whether sufficient systems engineering expertise is available during the requirements development process; and Develop a better way to make sure sufficient systems engineering is conducted and opportunities exist to better define requirements and assess resource trade-offs before a program starts. DOD provided us with written comments on a draft of this report, which are reprinted in appendix II. The department concurred with both of our recommendations, stating that the early application of systems engineering expertise and ensuring the availability of appropriately skilled personnel are critical to successful program outcomes. DOD noted that recent changes to department-wide policies, such as DOD Instruction 5000.02, strengthen the department's focus on conducting systems engineering and making trade-offs during requirements development and pre-program planning. DOD further agreed that continuing to improve engagement between the requirements and acquisition communities will result in better informed program initiation and resourcing decisions. We are encouraged that DOD agrees with our recommendations and has recently taken steps to strengthen its policies and identify the need for early systems engineering. However, for many years DOD policies have emphasized the importance of a knowledge-based approach to acquiring weapon systems, but practice does not always follow policy. Instead, incentives exist that encourage deviation from sound policies and practices. We believe that DOD must focus on achieving better collaboration between the requirements and acquisition communities such as by ensuring that more systems engineering and other expertise are applied when requirements are being defined. It is through informed collaboration that knowledge will be attained, trade-offs between requirements and resources can be made earlier, and acquisition programs will begin development with realistic cost and schedule estimates, ultimately leading to improved outcomes. We are sending copies of this report to appropriate congressional committees; the Secretary of Defense; the Secretaries of the Air Force, Army, and Navy; the Chief of Staff of the Air Force; the Chief of Staff of the Army; the Chief of Naval Operations; the Commandant of the Marine Corps; and the Under Secretary of Defense for Acquisition, Technology, and Logistics. In addition, this report also is available at no charge on the GAO website at http://www.gao.gov. If you have any questions about this report or need additional information, 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. Key contributors to this report are listed in appendix III. GAO issued a report in 2014 on the military service chiefs' role in the acquisition chain of command. This report reviews further related issues and concerns the military service chiefs have with the Department of Defense's (DOD) acquisition process and outcomes it produces. Specifically, we examined (1) the views of current and former military service chiefs on the current acquisition process, and (2) key problems or factors the service chiefs identified with the acquisition process and our assessment of these issues. To obtain the views of current and former military service chiefs on the current acquisition process, we conducted interviews with 12 current and former military service chiefs and vice chiefs between August and December 2014. We met with all current military service chiefs and vice chiefs as of September 2014, including the Chief and Vice Chief of Staff of the Air Force, the Chief and Vice Chief of Staff of the Army, the Chief and Vice Chief of Naval Operations, and the Commandant and Assistant Commandant of the Marine Corps. These individuals possessed joint- and service-level experience, including positions as the Chairman of the Joint Chiefs of Staff and Combatant Commander. In December 2014, after completing our interviews, we analyzed our findings and sent a summary to the four current and three former military service chiefs, but not the vice chiefs, for their review and comment. We received responses from five of the seven service chiefs, all of whom concurred with our findings. We reviewed any comments and made changes to the summary document, as appropriate. We also interviewed or sought the perspectives of additional current and former DOD leadership, including the Service Acquisition Executive of the Air Force, Army, and Navy; officials from the Office of the Secretary of Defense, Joint Staff; and another former member of the Joint Chiefs of Staff. We analyzed evidence and examples collected from our interviews with current and former military service chiefs and DOD leadership. We also reviewed findings from existing reports and compendiums focused on the acquisition chain of command and interviewed acquisition subject matter experts to discuss the current acquisition process, the role of the military service chiefs in the acquisition chain of command, and potential solutions to improve program outcomes. We reviewed prior GAO work on weapon system acquisition and commercial best practices and analyzed the extent to which evidence exists that would demonstrate that these potential solutions may improve program outcomes. To assess key problems or factors the service chiefs identified with the acquisition process and our assessment of these issues, we drew upon our extensive body of work in defense acquisitions and best practices, and reviewed program execution information from ongoing major defense acquisition programs. We reviewed the annual Selected Acquisition Reports (SAR) from 2009 to 2013 for the 78 programs in DOD's current portfolio of major defense acquisition programs. SAR data was collected from the Defense Acquisition Management Information Retrieval (DAMIR) Purview system, referred to as DAMIR. We assessed the reliability of the data by reviewing existing information about DAMIR and determined that the data were sufficiently reliable for the purposes of this report. We analyzed the performance metrics to determine the extent to which programs were reporting changes to key performance parameters. Our analysis was limited to unclassified requirements that are included as part of the SAR. In October 2014, we developed and submitted a questionnaire to 28 major defense acquisition programs that had reported key requirement changes in their respective SAR from 2009 to 2013, sought requirement relief from the Joint Requirements Oversight Council, or experienced a development cost increase or decrease of 10 percent or more between 2011 and 2013. We conducted two pretests of the questionnaire prior to distribution to ensure that our questions were clear, unbiased, and consistently interpreted. We obtained responses from all 28 programs, and in cases where questionnaire results differed from previously collected SAR data, we submitted follow-up questions to the program office to adjudicate any discrepancies. To determine the extent to which programs that experienced development cost growth also changed key requirements, we compared the research, development, test and evaluation cost estimates from 2009 and 2013 for DOD's current portfolio of major defense acquisition programs, as reported in their annual SAR. In instances where a program began development after 2009, we compared the program's initial research, development, test and evaluation cost estimate with its 2013 current estimate. We then reviewed any program that had a cost increase of more than 20 percent to determine if this program also reported key requirement changes in its annual reports for the same time period. We also leveraged prior and ongoing GAO work on weapon system acquisition. We conducted this audit from October 2014 to June 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, John E. Oppenheim, Assistant Director; Jacob Leon Beier; Brandon H. Greene; Laura M. Jezewski; Megan Porter; Abby C. Volk; Marie P. Ahearn; Peter W. Anderson; Jean L. McSween; and Kristy E. Williams made key contributions to this report.

GAO has reported extensively on problems in cost, schedule, and performance for major defense acquisition programs. According to some acquisition reform advocates, expanding the role of the military service chiefs in the process to acquire weapon systems may improve acquisition outcomes. Following a 2014 GAO report on the service chiefs' role in the acquisition chain of command, GAO was asked to review further related issues and concerns the service chiefs have with the acquisition process and its outcomes. This report examines: (1) the views of current and former military service chiefs on the acquisition process, and (2) key problems or factors the service chiefs identified with the acquisition process and GAO's assessment of these issues. GAO conducted interviews with 12 current and former military service chiefs and vice chiefs, and with other current and former DOD leadership to discuss the acquisition process. GAO also drew upon its extensive body of work on defense acquisitions and best practices. To assess key problems with the current process, GAO reviewed program execution information on all 78 current major defense programs. Most current and former military service chiefs and vice chiefs GAO interviewed from the Army, Air Force, Navy, and Marine Corps collectively expressed dissatisfaction with acquisition program outcomes and believed that the Department of Defense's (DOD) requirements development and acquisition processes need to be better integrated. The service chiefs are largely responsible for developing the services' requirements for weapon systems, while the service acquisition executives are responsible for overseeing programs to plan and develop systems. Most service chiefs told GAO they were concerned that after weapon system requirements are handed to the acquisition process, requirements are changed or added by the acquisition community (sometimes referred to as "creep"), increasing the capabilities and cost of the system. Some service chiefs stated that they are not always involved in the acquisition process and are frequently caught by surprise when cost, schedule, and performance problems emerge in programs. Current and former chiefs agreed that the chiefs should be more involved in programs, but their views varied on how best to achieve this. GAO analyzed requirements for all 78 major defense acquisition programs and found that creep--or growth--in the high-level requirements is rare. Instead, it is after a program has formally started development that the myriad lower-level, technical requirements needed to complete a weapon system's design are defined (see figure). It is the definition of these requirements--most of which occurs after the service chiefs' primary involvement--that leads to the realization that much more time and resources are needed to build the weapon system. The process of systems engineering translates high-level requirements, such as range, into specifics, like fuel tank size. GAO has previously reported on the importance of conducting systems engineering early so that the consequences of high-level requirements can be confronted before a program starts. When GAO presented its analysis of the problem to the service chiefs, they generally agreed with it. Several noted that trade-offs informed by systems engineering must take place before programs start so that requirements are better defined and more realistic cost, schedule, and performance commitments can be made. GAO recommends that DOD ensure sufficient systems engineering is conducted to better define requirements and assess resource trade-offs before a program starts. DOD concurred with the recommendations, citing recent policy changes. GAO believes more focus is needed on implementing actions.

The Federal Aviation Act of 1958, as amended, gives DOT responsibility for promoting new airlines' operations, while at the same time determining whether applicants proposing to provide air transportation services for compensation or hire meet federal economic and safety standards before commencing operations. Within DOT, this responsibility is shared by OST and FAA. All applicants must obtain separate authorization from both offices before starting their operations. OST's Certification Process When OST receives an application, it administers a three-part test to determine whether the applicant is "fit, willing, and able" to properly perform the proposed services. First, OST assesses whether the applicant's key personnel and management team as a whole possess the background and experience necessary to perform the proposed operations. Second, it reviews the applicant's operating and financial plans to determine whether the applicant has access to or a plausible plan for raising sufficient funds to pay all of its start-up expenses and maintain a working capital reserve equal to 3 months' normal operating costs. Finally, it reviews the applicant's compliance record to determine whether the applicant or its key personnel have a history of safety violations or consumer fraud and may thus pose a risk to the traveling public, or whether other factors indicate that the applicant would not be likely to comply with federal rules, laws, and directives. If OST finds that the applicant meets these criteria, it issues a "show cause" order tentatively finding the applicant fit to operate. Interested parties, including competitor airlines and members of the public, are given an opportunity to raise concerns or objections about the applicant's fitness to conduct the proposed operation. If no objections are filed that convince OST that its tentative findings were incorrect, it will issue a "final" order finding the applicant fit. Even so, the authority to begin the proposed operation will not be granted until the applicant submits the required (1) Air Carrier Certificate and Operations Specifications from FAA; (2) evidence that it has liability insurance coverage for each of its aircraft; (3) information on any changes in financing, ownership, key personnel, or management since the initial determination of fitness; and (4) verification that it has sufficient funds to meet OST's financial criteria. FAA uses a five-phase process to determine whether an applicant's manuals, aircraft, facilities, and personnel meet federal safety standards. First, in the preapplication phase, FAA gives the applicant basic information about the agency's certification process and assigns a team of inspectors to meet with the applicant to discuss the proposed operation. Second, in the formal application phase, the applicant must submit all required documents, including a letter of application, operations and maintenance manuals, training curriculums, and personnel resumes documenting key personnel's managerial and technical skills. Third, in the document compliance phase, FAA inspectors review the documents to determine whether they comply with applicable safety regulations and operating practices. Fourth, in the demonstration and inspection phase, the inspectors conduct on-site inspections of the applicant's aircraft and maintenance facilities; observe proposed training programs; review maintenance, operations, and record-keeping procedures; and review actual in-flight operations. Finally, in the certification phase, FAA issues an Air Carrier Certificate and approves the applicant's operations specifications. We found that many applicants do not successfully complete OST's and FAA's certification processes and, therefore, cannot begin flight operations. From January 1990 through July 1995, 180 applicants filed with OST to begin new airline operations. Ninety of the 180 applicants successfully completed OST's and FAA's processes and began operations. Of these 90, 57 were operating as of July 1995, while 33 began flying but ultimately ceased operations for a variety of reasons, such as insufficient revenues and competition from other airlines. As shown in figure 1, 33 of the remaining 90 applicants were tentatively found fit by OST but either never began operations, primarily because they lacked the financial resources necessary to carry out the proposed operations, or are still attempting to complete their financing or finish FAA's certification process before they can begin operations. Another 47 applicants had withdrawn their applications or had them dismissed or denied by OST because the applicants were unable to meet its fitness standards. Ten applications were pending OST's approval. Authorized and Operating (57) Authorized but Ceased Operations (33) Tentatively Found Fit but Never Began Operations (33) OST analysts and FAA headquarters officials told us that several factors determine whether an applicant successfully completes both offices' processes. These factors include the completeness of the initial application, the applicant's managerial skills and technical knowledge about operating an airline, and the applicant's ability to obtain sufficient funds to meet OST's financial criteria. Furthermore, the analysts told us that the majority of the applicants that do not complete the processes or never begin operations do not acquire the financial resources necessary to cover the start-up costs for their proposed operations. While OST's and FAA's certification processes are designed to ensure that new airlines meet federal economic and safety requirements, we found that the processes contained some inefficiencies that resulted in spending federal resources on applicants that had little probability of successfully completing the processes and beginning operations. Specifically, OST determined some applicants to be financially fit before they had sufficient funds to complete both certification processes. Because a significant amount of resources is spent on applicants that never complete the certification processes, FAA recently revised its process to require applicants to complete certain tasks before it will expend resources on other certification activities. Additionally, OST tightened its financial standards by requiring applicants to submit third-party verification of their financial plans with their applications. And together, OST and FAA have established an electronic communications link to better share information about applicants. To determine financial fitness, OST requires applicants to submit financial plans that show they have a plausible plan for raising the capital needed to conduct the proposed services. Only after the applicants receive FAA's certification--but before OST gives them the authority to operate--are they required to verify that they actually have sufficient funds to meet OST's financial criteria for beginning and sustaining their proposed operations. OST officials indicated that they require only a financial plan and not actual funds on hand because some applicants are unable to obtain funds from financial institutions or other investors unless they can show that OST has found them fit. As a result, applications can proceed far into FAA's certification process before they are terminated or suspended because of the applicants' inability to raise the needed capital. Consequently, hundreds of hours of FAA inspectors' time can be expended on certification efforts before it is known that the applicants are unable to obtain the needed funds. According to OST analysts, the primary reason that 33 applicants tentatively found fit had never begun or had not yet begun operations was that they were unable or are still trying to obtain the funds necessary to meet OST's financial criteria and complete FAA's process. Although the analysts routinely give applicants additional time to raise money, many still do not acquire the needed funds because their funding plans fall through or the market conditions change. For example, OST found an applicant fit on the basis of its proposal to raise about 98 percent of its capital through state economic development funds. However, the funds from that prospective source never became available, and the applicant had to seek alternative financing. OST granted the applicant four extensions to allow time to raise the needed capital, but the applicant never obtained the funds necessary to commence operations. FAA expended about 650 staff hours, or about $52,000, on certification activities for this applicant. We could not determine the staff hours, or dollars, that OST analysts spent on certification activities for this applicant because, according to the analysts, they do not maintain records of the staff time spent on individual applicants. In another case, we found that FAA had to suspend its certification efforts during the demonstration phase (phase four)--in which FAA reviews each applicant's aircraft operations--because an applicant had not acquired its aircraft. Four months after these efforts were suspended, the applicant withdrew from the process because it was unable to obtain the funds to purchase or lease any aircraft. In this case, FAA had spent about 800 staff hours, or about $64,000, on certification activities. Even though OST still requires applicants to present only a plan for raising the necessary capital, OST recently tightened its standards on what is acceptable as evidence of a funding plan and when such evidence must be submitted. According to the Chief of the Air Carrier Fitness Division, all applicants are now required to submit, with their applications, third-party verification that they are working with an established brokerage firm, financial institution, or qualified individuals to raise the necessary capital. Copies of private placement agreements, debt instruments, or other stock offerings must be submitted as part of the application before OST will process it further and issue a show cause order finding the applicant fit. OST officials said that these changes are an attempt to reduce the amount of OST's and FAA's resources expended on applicants that do not have their basic financing plans in place when they seek OST's authority to begin operations. Recognizing that a significant amount of resources is expended on applicants that do not complete the certification process, FAA revised its process in October 1995 to make the process more efficient. FAA officials stated that this action was necessary given the amount of time and resources devoted to applicants that never successfully complete the process and given the need to find a way to reduce the staff resources expended on these applicants. Under FAA's new process, which incorporates a "gate" system, applicants are required to complete certain steps--at key points in the process--before FAA inspectors will expend additional resources on certification activities. To illustrate, FAA now requires applicants to have applied for OST's authority during the preapplication phase (phase one) before FAA assigns a certification team to the applicant. During our review, we found that one applicant had proceeded to phase three--the document compliance phase--of FAA's five-phase process before it submitted an application to OST. Upon reviewing the application, OST analysts questioned the reasonableness of the applicant's estimated start-up expenses and operating costs for 3 months. As a result of the analysts' inquiry, the applicant subsequently withdrew its application. However, by this time FAA had expended 1,300 hours of inspectors' time, incurring about $104,000 in certification costs. FAA's new process, if properly implemented, should preclude the recurrence of this type of problem. FAA officials told us that in the past, some applicants would wait until the last moment to purchase or lease the aircraft, facilities, and services necessary to conduct the proposed operations. Because some applicants could not raise the needed capital, they delayed completing or never completed the process, resulting in FAA's expending significant resources on unsuccessful applications. Under FAA's revised process, when submitting their formal applications in phase two, the applicants must provide proof, such as signed contracts or letters of agreement, that they have purchased or leased the aircraft, facilities, and services needed for the proposed operations before FAA will begin reviewing their operating, maintenance, or training manuals. In addition, by the time the applicants reach the formal application phase, they must have been tentatively found fit by OST and a show cause order must have been issued. Furthermore, FAA now requires applicants to submit completed general operating, maintenance, and training manuals at the time of the formal application. Applicants are encouraged to seek outside assistance in preparing these documents. FAA inspectors told us that in the past it was not uncommon for them to spend a significant amount of time assisting applicants in developing these documents. For example, although OST had determined that one applicant's key personnel possessed the technical knowledge and skills necessary to provide the proposed services, during a subsequent certification review, FAA inspectors found that the applicant's personnel did not have the necessary knowledge and skills to develop the required manuals for the proposed operations. Even after obtaining extensive assistance from FAA, the applicant submitted maintenance manuals that included procedures for replacing an aircraft's propellers, whereas the proposed operations would use only DC-9 jet aircraft. When the applicant did not obtain certification within 1 year of the date of the initial determination of fitness, OST granted the applicant an extension without fully coordinating with FAA. Even with the extension, the applicant could not produce acceptable manuals, and FAA eventually terminated its certification efforts. By this time, however, FAA had expended about 1,800 staff hours, or about $144,000, processing the application. According to DOT officials, in October 1995 OST and FAA established an electronic communications link to better share information about applicants, and OST now routinely contacts FAA before granting any extensions of the 1-year period. Applicants currently pay nominal fees to OST but nothing to FAA to certify their proposed new operations. The fees that applicants currently pay represent less than 1 percent of what it costs the government to conduct certification activities. For example, the 90 applicants that completed OST's and FAA's certification processes paid an average fee of only $760 for certification, or less than 1 percent of the government's average estimated cost of over $150,000 to certify each applicant. OST officials recognize that the existing fees do not cover a substantial portion of the costs of certifying new airlines. The Chief of the Air Carrier Fitness Division estimated that it typically takes an OST analyst about 80 to 100 staff hours, costing about $4,000, to certify a new carrier. We could not determine the actual number of staff hours or dollars OST spent on certification efforts for applicants from January 1990 through July 1995 because, according to OST analysts, they did not maintain such data. Nevertheless, based on the Chief's estimate of $4,000 per applicant, we calculated that OST spent about $360,000 in certification costs for the 90 airlines that actually began operations, or about $720,000 for the 180 applicants that filed applications during the 5-1/2 years covered by our review. In comparison, OST officials estimated that the 180 applicants paid a total of only $160,000 in fees. The Chief of the Air Carrier Fitness Division recognized that OST may be recouping only a portion of the government's costs for processing applications through the fees. Nevertheless, the Chief commented that the regulation setting the application fees paid to OST--which includes fees for 50 types of applications, including applications to operate new airlines--has not been reviewed in over 10 years because of the scope of the undertaking and the limited availability of staff. Like OST, FAA could not readily determine the total number of staff hours spent on the applications received since January 1990 because, according to both FAA headquarters officials and field inspectors, they did not have a centralized system for recording this information for the 5-1/2 years covered by our review. Nevertheless, in May 1995 FAA told us that recent certification efforts have required between 1,200 and 2,700 hours of inspectors' time, for an average of 1,835 hours, to certify a new airline. At the $80 hourly rate for inspectors, the average cost is about $150,000 per certification. We estimate that it cost FAA more than $13.5 million to certify the 90 airlines that actually began operations. In October 1995, FAA estimated the staff time and costs for the applicants that did not complete its process to be about 800 hours, or $64,000 per applicant. Nevertheless, FAA does not charge fees for its certification efforts. We found that, in addition to paying nominal fees for certification, applicants also can make substantial modifications to their proposed operations during the certification process without paying additional fees, even though such actions can significantly increase the government's costs. For example, during the certification process one applicant changed the type of aircraft it planned to use. This action caused FAA inspectors to essentially restart their efforts, resulting in additional reviews and increased costs. Title 31, section 9701, of the U.S. Code gives federal agencies the authority to charge fees for services or benefits provided to specific beneficiaries. The Office of Management and Budget's Circular A-25 implements this authority by prescribing guidelines for imposing charges on users of the government's services. The general policy is that a reasonable charge should be made to each identifiable recipient of a government service, privilege, authority, or certificate from which a special benefit is derived. Section 9701 states that such charges are to be based on the (1) cost of the service to the government, (2) value of the service to the recipient, and (3) public policy or interest served. In addition, the statute establishes a policy that such services should be as self-sustaining as possible. Although FAA does not currently charge a fee for its certification efforts, DOT officials commented that a portion of the certification costs is recouped from ticket and fuel taxes paid by the operating airlines and deposited into the Airport and Airway Trust Fund. Even so, applicants do not pay into the fund until they begin operations; therefore, applicants that never begin operations never contribute to the fund. As mentioned earlier, 80 of the 180 applicants that filed applications with OST between January 1990 and July 1995 (1) were tentatively found fit but had yet to begin or had never begun operations or (2) withdrew their applications or had them dismissed or denied and thus had never contributed to the fund. OST and FAA officials recognized that the existing fees were insufficient to cover certification costs but have not reviewed the appropriateness of the current fee structures. Under legislation introduced in the Congress in September 1995, FAA would be allowed to charge fees to support various aviation services. According to the Deputy Director of Flight Standards Service, FAA plans to examine all services requiring certificates and the existing fee structures to determine the extent to which the government's costs have been or should be recouped. A date for completing this action has yet to be determined. DOT's certification processes have resulted in 90 new carriers' entering the airline industry over the past 5-1/2 years. These new carriers have benefited the traveling public by increasing competition among airlines and, in turn, reducing airfares. However, about half of the applicants that applied to operate new airlines did not complete the processes, primarily because they could not obtain sufficient financial resources. In some instances, FAA expended a significant amount of resources on costly certification activities. Although OST and FAA recently revised their certification processes to reduce the amount of resources spent on unsuccessful applications, it is too early to determine how the revisions will work in practice and to what extent they will reduce unnecessary expenditures. The fees that applicants pay for certification allow the government to recoup only a small portion--less than 1 percent--of its costs for those applicants that complete DOT's processes. Although the government recoups some of its certification costs through ticket and fuel taxes, these funds are collected only from applicants that successfully begin and sustain their operations. Applicants that never begin operations do not pay such taxes. Requiring applicants to pay a greater share of the certification costs could generate revenue that could help defray these costs--a particularly important outcome during this period of declining federal budgets. We recognize that the Congress will ultimately be involved in any decision to establish fees for various aviation support services. Given the current reduction in federal resources, we recommend that the Secretary of Transportation reevaluate the appropriateness of the Office of the Secretary's increasing its fees and FAA's establishing fees for services to certify new airlines, taking into consideration the government's costs, the value of the services to the applicant, and the public policy or interest served. We provided a draft of this report to DOT officials for their review and comment. We met with Department officials, including OST's Chief of the Air Carrier Fitness Division and FAA's Deputy Director of Flight Standards Service, to discuss their comments. The draft report contained proposed recommendations to DOT to improve OST's and FAA's certification processes and to reevaluate the existing fees for certification services. These officials generally agreed with the findings and conclusions in the draft report. In commenting, the officials provided a number of clarifications and updates that have been incorporated into the report as appropriate. Most significantly, the report has been updated to recognize a number of actions that OST and FAA have taken during the course of our review to improve their processes for certifying new airlines. Specifically, (1) FAA has revised its certification process to require that applicants complete certain steps before it will expend additional resources, (2) OST now requires all applicants to submit, with their applications, third-party verification that they are working with an established brokerage firm, financial institution, or qualified individuals to raise the necessary capital, and (3) OST and FAA have established an electronic communications link to better share information about applicants. As a result of these actions, we have deleted our proposed recommendation to improve OST's and FAA's certification processes because, if properly implemented, these actions should mitigate several of the concerns we identified and improve the efficiency of the process for certifying new airlines. DOT officials generally agreed with our remaining recommendation, recognizing that the existing fees do not cover the government's certification costs. But DOT has taken no action to date to reevaluate the existing fees. In addition, while legislation introduced in the Congress in September 1995 would allow FAA to charge fees for various aviation services, this legislation has not yet been enacted. Therefore, we continue to believe that DOT should review the appropriateness of its fees for certifying new airlines, either as a separate issue or as part of any broader effort to examine FAA's fees for the services provided to the aviation industry. We conducted our review from October 1994 through December 1995 in accordance with generally accepted government auditing standards. A detailed discussion of our objectives, scope, and methodology appears in appendix I. Unless you publicly announce its contents earlier, we plan no further distribution of this report until 10 days after the date of this letter. At that time, we will send copies to the Secretary of Transportation; the Administrator, FAA; the Director, Office of Management and Budget; and other interested parties. We will also make copies available on request. Please call me at (202) 512-2834 if you have any questions about this report. Major contributors to this report are listed in appendix II. In August 1994, Representative James L. Oberstar, the then Chairman of the Subcommittee on Aviation, House Committee on Public Works and Transportation (now the Committee on Transportation and Infrastructure), asked us to examine the Department of Transportation's (DOT) efforts to ensure that new airlines meet federal economic and safety standards before commencing flight operations. On the basis of subsequent discussions with the Subcommittee's office, this report addresses three questions: (1) How many applicants have applied for and received certification to begin new airlines since 1990? (2) What processes does DOT have in place to certify new airlines? and (3) How much does it cost to certify new airlines and how are these costs distributed between the government and the applicants? To address the first question, we obtained from DOT's Office of the Secretary (OST) a list of all the applicants that applied for new airline certification between January 1990 and July 1995. The list identified 180 applicants and gave the status of their applications as of July 1995. We also asked the Federal Aviation Administration (FAA) to verify the status of the applications. To address the second question, we reviewed pertinent federal statutes and DOT's regulations to identify which DOT units are responsible for performing certification activities. We also reviewed OST's criteria, procedures, and other pertinent documents outlining the requirements for determining an applicant's fitness. We discussed these issues with the five analysts in OST's Air Carrier Fitness Division who are responsible for assessing whether applicants have the necessary skills and resources to operate a new airline. We also selected a judgmental sample of 40 of the 180 applications filed with OST from January 1990 through July 1995 for detailed review to validate how OST's process was implemented. We selected these 40 applicants because they represented a broad mix of categories of applicants and proposed operations. The 40 applicants selected included 15 of the 57 operating airlines, 7 of the 33 airlines that began but ceased operations, 7 of the 33 airlines that were found tentatively fit but had yet to begin operations or had never operated, and 11 of the 47 applicants that had withdrawn their applications or had them dismissed or denied. We did not review any of the 10 pending applications. In addition, we reviewed FAA's criteria, procedures, and other documents used to certify new airlines and discussed them with a selected sample of 37 FAA inspectors working in the flight standards district offices we visited. We also conducted detailed reviews of a judgmental sample of files on 16 of the 57 airlines that began operations after January 1990 in order to validate how FAA's certification process was implemented. We selected the 16 airlines because they represented a mix of carriers, including different types of airlines, fleet sizes, aircraft, and proposed operations. While examining OST's and FAA's criteria, documentation, and procedures for certifying new airlines, we looked for possible deficiencies in the certification processes. Additionally, we interviewed analysts in OST's Air Carrier Fitness Division and FAA inspectors to obtain their views on what deficiencies, if any, existed in the processes and whether any efforts were under way to correct the known problems. To address the third question, we interviewed analysts in the Air Carrier Fitness Division and FAA headquarters officials and field inspectors and reviewed OST and FAA documents to determine the number of staff hours and associated costs required to certify a new airline. We also discussed with the officials how the costs are distributed between the government and applicants. In addition, we reviewed DOT's regulations and the Office of Management and Budget's guidance on charging fees for services provided by the government and the collection of fees by OST and FAA to determine the extent to which the government's certification costs are or should be recouped. We performed our work at the DOT's Air Carrier Fitness Division within OST and at FAA headquarters in Washington, D.C. We also performed work at three of the nine FAA regional offices (Eastern, Southern, and Western Pacific) and six of FAA's 91 flight standard district offices (Reno, Nevada; Scottsdale, Arizona; Chantilly, Virginia; and Orlando, Ft. Lauderdale, and Miami, Florida). We selected the regional and flight standards district offices to obtain geographical diversity and because these locations were responsible for certification efforts for many of the applications that FAA received between January 1990 and July 1995. We conducted our review between October 1994 and December 1995 in accordance with generally accepted government auditing standards. David K. Hooper 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 (202) 512-6000 using a touchtone phone. 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Pursuant to a congressional request, GAO reviewed the Department of Transportation's (DOT) processes for certifying the initial operations of new airlines, focusing on the: (1) number of applicants that applied for and received authorization to begin new airlines since 1990; and (2) cost to certify new airlines and how the cost is distributed between the government and the applicants. GAO found that: (1) from January 1990 to July 1995, 90 of 180 applicants were authorized to begin new airline operations; (2) 33 of these 90 airlines ceased operations prior to July 1995; (3) the 90 remaining applicants were not authorized to begin airline operations because they lacked the financial resources needed to perform proposed services or the DOT Office of the Secretary (OST) had not approved their applications; (4) factors that determine whether applicants receive OST and Federal Aviation Administration (FAA) certification include the completeness of the initial application and applicant's ability to meet operation and financial criteria; (5) OST has tightened its financial standards by requiring applicants to provide third-party verification of their financial plans; (6) FAA has revised its certification process to prevent applicants lacking sufficient financial resources from proceeding into the airline certification process; (7) OST and FAA have established an electronic communication link to share information about airline applicants, but it is unknown how much this will reduce DOT resource waste; (8) applicants pay less than $1,000 to apply for airline certification, while the government pays up to $150,000 to process each application; (9) a portion of the government's cost of certifying new airlines is recouped from ticket and fuel taxes once the applicants begin operations; and (10) OST and FAA must examine the appropriateness of certification fees, since certification costs are not recovered under the fee structure.

Scientific research and projections of the changes taking place in the Arctic vary, but there is a general consensus that Arctic sea ice is diminishing and some scientists have projected that the Arctic will be ice- diminished for periods of time in the summer by as soon as 2040.recently as September 2011, scientists at the U.S. National Snow and Ice Data Center reported that the annual Arctic minimum sea ice extent for 2011 was the second lowest in the satellite record, and 938,000 square miles less than the 1979 to 2000 average annual minimum. These environmental changes in the Arctic are making maritime transit more feasible and are increasing the likelihood of human activity including tourism, oil and gas extraction, commercial shipping, and fishing in the As region.characteristics still provide challenges to surface navigation in the Arctic, including large amounts of winter ice and increased movement of ice from spring to fall. Increased movement of sea ice makes its location less predictable, which is likely to increase the risk for ships to become trapped or damaged by ice impacts. As we reported in September 2010, the Coast Guard faces challenges to Arctic operations including limited maritime domain awareness, assets, and infrastructure. In a 2008 report to Congress, the Coast Guard stated that maritime domain awareness in the Arctic is critical to effective engagement in the Arctic as activity increases. However, several factors--including (1) inadequate Arctic Ocean and weather data, (2) lack of communication infrastructure, (3) limited intelligence information, and (4) lack of a physical presence in the Arctic--create challenges for the Coast Guard in achieving maritime domain awareness in the Arctic. The Coast Guard also faces limitations in assets and infrastructure in the Arctic. These include (1) an inadequate portfolio of small boats for Arctic operations, (2) the environmental impact of Arctic conditions on helicopters and airplanes, and (3) a lack of cutter resources for Arctic patrols. The Coast Guard has taken a variety of actions to identify its Arctic requirements. As we reported in September 2010, these encompass a range of efforts including both routine mission operations and other actions specifically intended to help identify Arctic requirements. Through routine mission operations, the Coast Guard has been able to collect useful information on the capability of its existing assets to operate in cold climates, strategies for overcoming logistical challenges presented by long-distance responses to incidents, and the resources needed to respond to an oil spill in a remote and cold location, among other things. We also reported that the Coast Guard had efforts underway specifically designed to inform its Arctic requirements, including the establishment of seasonal, temporary operating locations in the Arctic and biweekly Arctic overflights. The temporary operating locations were established during the summers of 2008 through 2010, and have helped the Coast Guard identify performance requirements and obstacles associated with the deployment of small boats, aircraft, and support staff above the Arctic Circle. The seasonal (March-November) biweekly Arctic overflights were initiated in October 2007 to increase the agency's maritime domain awareness, test personnel and equipment capabilities in the Arctic, and inform the Coast Guard's Arctic requirements, among other things. As we reported in September 2010, these efforts addressed elements of three key practices for agencies to better define mission requirements and desired outcomes: (1) assessing the environment; (2) involving stakeholders; and (3) aligning activities, core processes, and resources. The Coast Guard's primary analytical effort to identify and report on Arctic requirements, the High Latitude Study (the Study), identifies the Coast Guard's responsibilities in the Polar regions, discusses the nature of the activities it must perform over the next 30 years, and concludes with a high-level summary of the Coast Guard's material and nonmaterial needs to meet the requirements. Specifically, the Study identifies the Coast Guard's current capability gaps in the Arctic and assesses the degree to which these gaps will impact future missions. Of the Coast Guard's 11 mission areas, 9 are expected to experience future demand in the Arctic region. The Study identifies several current capability gaps that affect the majority of these mission areas. Specifically, gaps in communications capabilities affect all 9 mission areas, while deficiencies in the information available about sea ice coverage in the Arctic affects 8 mission areas.The other major gaps that affect the majority of mission areas are related to the lack of polar icebreaking capacity, which will be discussed later in this statement. Of the 9 mission areas that the Coast Guard will need to carry out in the Arctic, the Study identifies 7 mission areas expected to be significantly or moderately impacted by current capability gaps. In general, these missions all address the protection of important national interests in the Arctic or the safety of mariners and the environment. See appendix II for more detail about the degree of impact that current capability and capacity gaps are expected to have on future Coast Guard mission performance. The Study then identifies potential solutions to specifically address gaps in communications and electronic navigation capabilities, recommending that the Coast Guard acquire more than 25 additional communication or navigation facilities for Arctic operations. In addition to these capabilities, the Study compares six different options--identified as Arctic force mixes--to a baseline representing the Coast Guard's current Arctic assets. These force mixes add assets to the existing baseline force mix, and contain different combinations of cutters (including icebreakers), aircraft, and forward operating locations and are designed to mitigate the mission impacts caused by current capability gaps. See appendix III for a description of the assets included in each Arctic force mix. The High Latitude Study also includes a risk analysis that compares the six Arctic force mixes in terms of the ability of each force mix to reduce the risk that is expected to exist in the future Arctic environment. Risk reduction is determined in part by (1) identifying a list of potential Arctic maritime incidents requiring Coast Guard support, such as maritime accidents resulting in multiple casualties or a major oil spill, or both; (2) quantifying the likelihood that these search and rescue and maritime environmental protection incidents could occur and the resulting impact should they occur; and (3) assessing the relative effectiveness, or risk reduction, of force packages the Coast Guard may employ to respond to those incidents. The intent of the analysis is to provide information on risk-reduction alternatives to inform the acquisition process. According to the Study, the baseline Arctic force mix reduces less than 1 percent of risk in the Arctic because this patrol capability cannot reasonably respond to northern area incidents, while the six other Arctic force mixes reduce between 25 and 92 percent of risk annually, though the amount of risk reduced varies by season. See appendix III for the amount of annual risk in the Arctic reduced by each force mix. As we reported in September 2010, administration budget projections indicated that DHS's annual budget was expected to remain constant or decrease over the next 10 years. Moreover, senior Coast Guard officials, based in Alaska, reported that resources for Arctic operations had already been reduced and were inadequate to meet existing mission requirements in Alaska, let alone expanded Arctic operations. These officials also reported a more than 50 percent year-to-year reduction between 2005 and 2009 in the number of large cutters available for operations in their region. Officials also expressed concern that the replacement of the 12 older high-endurance cutters with 8 new cutters may exacerbate this challenge. Given the reductions that have already taken place, as well as the anticipated decrease in DHS's annual budget, the long-term budget outlook for Coast Guard Arctic operations is uncertain. The challenge of addressing Arctic resource requirements in a flat or declining budget environment is further underscored by recent budget requests that have identified the Coast Guard's top priority as the recapitalization of cutters, aircraft, communications, and infrastructure-- particularly with regard to its Deepwater program. Recent budget requests also have not included funding for Arctic priorities, aside from the annual operating costs associated with existing icebreakers. This budget challenge is exacerbated when the costs of the High Latitude Study's proposed resource requirements are taken into account. Specifically, the Study estimates that the cost of acquiring the assets associated with each of the six Arctic force mixes would range from $1.01 billion to $6.08 billion, and their corresponding annual operating costs would range from $72.3 million to $411.3 million. See appendix III for the estimated acquisition cost of each Arctic force mix. Additionally, the estimated cost for the recommended communications and electronic navigation capabilities for Arctic operations is about $23.4 million. Given current budget uncertainty and the Coast Guard's recent acquisition priorities, it may be a significant challenge for the Coast Guard to acquire the assets that the Study recommends. The most significant issue facing the Coast Guard's icebreaker fleet is the growing obsolescence of these vessels and the resulting capability gap caused by their increasingly limited operations. As we noted in our 2010 report, Coast Guard officials reported challenges fulfilling the agency's statutory icebreaking mission, let alone its standing commitment to use the icebreakers to support the Navy as needed. Since then, at least three reports have further identified the Coast Guard's challenges to meeting its current and future icebreaking mission requirements in the Arctic with its existing polar icebreaker fleet, as well as the challenges it faces to acquire new icebreakers. The Coast Guard's existing fleet includes three icebreakers that are capable of operating in the Arctic: Polar Sea (inoperative since 2010): The Polar Sea is a heavy commissioned in 1978 with an expected 30-year icebreaker lifespan. A major service life extension project, completed in 2006, was expected to extend the Polar Sea's service life through 2014. However, in 2010, the Polar Sea experienced major engine problems and is now expected to be decommissioned in 2011. According to a Coast Guard budget official, this will allow its resources to be redirected toward the ongoing service life extension of the Polar Star. Fig. 2 below shows the Polar Sea in dry dock. Polar Star (inoperative since 2006): The Polar Star is a heavy icebreaker commissioned in 1976 with an expected 30-year lifespan. The Polar Star is currently undergoing a $62.8 million service life extension, and is expected to return to service in 2013. The ongoing service life extension is expected to extend the Polar Star's service life through at least 2020. Healy (operative): The Healy is a medium icebreaker, commissioned in 2000, with an expected 30-year lifespan. The Healy is less capable than the heavy icebreakers and is primarily used for scientific missions in the Arctic. As a medium icebreaker, the Healy does not have the same icebreaking capabilities as the Polar Sea and Polar Star. Because of this, it cannot operate independently in the ice conditions in the Antarctic or ensure timely access to some Arctic areas in the winter. ABS Consulting, U.S. Polar Icebreaker Recapitalization: A Comprehensive Analysis and Its Impacts on U.S. Coast Guard Activities, prepared for the United States Coast Guard, (October 2011). icebreakers (Recapitalization report), which assessed options for recapitalizing its existing icebreaker fleet, including building new icebreakers, or reconstructing the Polar Sea and Polar Star to meet mission requirements, among other options. This October 2011 report found that the most cost-effective option would be to build two new heavy icebreakers, while performing minimal maintenance to keep the existing icebreakers operational while construction is taking place. In addition to having the lowest acquisition cost of any option--at $2.12 billion--this option also has the lowest risk due to the complexity (and therefore risk) associated with the other options of performing major service life extensions or reconstructing the Polar Sea and Polar Star. The risk associated with these options is driven by high levels of uncertainty in terms of cost, scheduling, and technical feasibility for reconstructing the existing fleet. Given the time frames associated with building new icebreakers, the Recapitalization report concluded that the Coast Guard must begin planning and budgeting immediately. High Latitude Study. ABS Consulting, High Latitude Study Mission Analysis Report. medium icebreakers). The Study does provide cost estimates for acquiring the recommended icebreakers, but it does not directly assess the feasibility of its recommendations. As mentioned above, the Coast Guard faces budget uncertainty and it may be a significant challenge for the Coast Guard to obtain Arctic capabilities, including icebreakers. Given our analysis of the challenges that the Coast Guard already faces in funding its existing acquisition programs, it is unlikely that the agency's budget could accommodate the level of additional funding (estimated by the High Latitude Study to range from $4.14 billion to $6.9 billion) needed to acquire new icebreakers or reconstruct existing ones. The Recapitalization report similarly concludes that the recapitalization of the polar icebreaker fleet cannot be funded within the existing or projected Coast Guard budget. All three reports reviewed alternative financing options, including the potential for leasing icebreakers, or funding icebreakers through the NSF or DOD. The Recapitalization report noted that a funding approach similar to the approach used for the Healy, which was funded through the fiscal year 1990 DOD appropriations, should be considered.Guard has a more immediate need than DOD to acquire Arctic capabilities, including icebreakers, making it unlikely that a similar funding approach would be feasible at this time. For more details on Coast Guard funding challenges and options specific to icebreakers, see appendix IV. The Coast Guard continues to coordinate with various stakeholders on Arctic operations and policy, including foreign, state, and local governments, Alaskan Native governments and interest groups, and the private sector. In September 2010, we reported that the Coast Guard has been actively involved in both bilateral and multilateral coordination efforts such as the Arctic Council. The Coast Guard also coordinates with state, local, and Alaskan Native governments and interest groups; however, some of these stakeholders reported that they lack information on both the Coast Guard's ongoing planning efforts and future approach in the Arctic. In response to these concerns, in 2010 we recommended that the Commandant of the Coast Guard ensure that the agency communicates with these stakeholders on the process and progress of its Arctic planning efforts. The Coast Guard agreed with our recommendation and is in the process of taking corrective action. For example, in April 2011, the Coast Guard issued a Commandant Instruction that emphasizes the need to enhance partnerships with Arctic stakeholders. Additionally, in August 2011, the Commandant participated in a field hearing in Alaska which included discussion about the Coast Guard's Arctic capability requirements. The Coast Guard also coordinates with federal agencies, such as the NSF, National Oceanic and Atmospheric Administration (NOAA), and DOD, and is involved with several interagency coordination efforts that address aspects of key practices we have previously identified to help enhance and sustain collaboration among federal agencies. For example, as discussed above, the Coast Guard collaborates with the NSF to manage the nation's icebreaker fleet, including scheduling icebreaker time for research activities, while NOAA provides the Coast Guard with weather forecasts and warnings, as well as information about ice concentration and type. Additionally, the Coast Guard is involved with interagency efforts such as the Interagency Policy Committee on the Arctic, created in March 2010 to coordinate governmentwide implementation of National Security Presidential Directive 66 / Homeland Security Presidential Directive 25. Since our September 2010 report, the Coast Guard has partnered with DOD on another interagency coordination effort, the Capabilities Assessment Working Group. DHS and DOD established the working group in May 2011 to identify shared Arctic capability gaps as well as opportunities and approaches to overcome them, to include making recommendations for near-term investments. DHS assigned the Coast Guard lead responsibility for the working group, which was directed to focus on four primary capability areas when identifying potential collaborative efforts to enhance Arctic capabilities, including near-term investments. Those capability areas include maritime domain awareness, communications, infrastructure, and presence. The working group was also directed to identify overlaps and redundancies in established and emerging DOD and DHS Arctic requirements. This working group will address several of the key practices we have identified--articulating a common outcome; identifying and addressing needs by leveraging resources; and reinforcing agency accountability for the effort through a jointly developed report containing near-term investment recommendations. The establishment of the working group helps to ensure that collaboration between the Coast Guard and DOD is taking place to address near-term capabilities in support of current planning and operations; however, upon the completion of the report in January 2012, the working group is expected to be dissolved. GAO is also conducting an ongoing review of DOD's May 2011 Report to Congress on Arctic Operations and the Northwest Passage that was directed by the House Committee on Armed Services and will report on our results in January of next year. That report will assess the extent to which DOD's Arctic Report addressed congressional requirements and DOD's efforts to identify and prioritize the capabilities needed to meet national security objectives in the Arctic, including through collaboration with the Coast Guard. Chairman LoBiondo, Ranking Member Larsen, and Members of the Subcommittee, this completes my prepared statement. I would be happy to respond to any questions you may have at this time. For information about this statement please contact Stephen L. Caldwell, Director, Homeland Security and Justice, at (202) 512-9610, or [email protected]. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this statement. Other individuals making key contributions to this testimony include Dawn Hoff (Assistant Director), Elizabeth Kowalewski (Analyst-In- Charge), Christopher Currie, Katherine Davis, Geoffrey Hamilton, Adam Hoffman, John Pendleton, Timothy Persons, Steven Putansu, Jodie Sandel, David Schmitt, Amie Steele, Esther Toledo, and Suzanne Wren. This appendix provides a map of the Arctic boundary, as defined by the Arctic Research and Policy Act. As discussed in the report, the Coast Guard currently has limited capacity to operate in the waters immediately below the Arctic Circle, such as the Bering Sea. Increasing responsibilities in an even larger geographic area, especially in the harsh and remote conditions of the northern Arctic, will further stretch the agency's capacity. This appendix provides information on the degree to which the Coast Guard's existing capability gaps in the Arctic are expected to impact future mission performance. Of the Coast Guard's 11 mission areas, 9 are expected to experience future demand in the Arctic, and the degree to which existing capability gaps are expected to impact these missions has been classified as Significant, Moderate, or Low. Examples of how these gaps are expected to impact each mission are also included below. This appendix provides information on potential solutions to the Coast Guard's existing capability gaps in the Arctic. The High Latitude Study compares six Arctic force mixes in terms of the ability of each force mix to reduce the risk that is expected to exist in the future Arctic environment. The force mixes add assets to the baseline force mix (which represents the Coast Guard's current Arctic assets) and include different combinations of cutters (including icebreakers), aircraft, and forward operating locations. The specific asset combinations for each force mix are described below. The estimated acquisition cost for each Arctic force mix and the percent of risk the force mix is expected to reduce in the Arctic is also shown below. This appendix provides an overview of the funding challenges the Coast Guard faces related to icebreakers. These include limitations in the Coast Guard's existing and projected budget, as well as alternative financing options. The Coast Guard faces overall budget uncertainty, and it may be a significant challenge for the Coast Guard to obtain Arctic capable resources, including icebreakers. For more than 10 years, we have noted Coast Guard difficulties in funding major acquisitions, particularly when acquiring multiple assets at the same time. For example, in our 1998 report on the Deepwater program, we noted that the agency could face major obstacles in proceeding with that program because it would consume virtually all of the Coast Guard's projected capital spending. In our 2008 testimony on the Coast Guard budget, we again noted that affordability of the Deepwater acquisitions would continue to be a major challenge to the Coast Guard given the other demands upon the agency for both capital and operations spending. In our 2010 testimony on the Coast Guard budget, we noted that maintaining the Deepwater acquisition program was the Coast Guard's top budget priority, but would come at a cost to operational capabilities. This situation, of the Deepwater program crowding out other demands, continued, and in our report of July this year we noted that the Deepwater program of record was not achievable given projected Coast Guard budgets. Given the challenges that the Coast Guard already faces in funding its Deepwater acquisition program, it unlikely that the agency's budget could accommodate the level of additional funding (estimated by the High Latitude Study to range from $4.14 billion to $6.9 billion) needed to acquire new icebreakers or reconstruct existing ones. The U.S. Polar Icebreaker Recapitalization Report contains an analysis of the Coast Guard's budget which also concludes that the recapitalization of the polar icebreaker fleet cannot be funded within the existing or projected Coast Guard budget. This analysis examined the impact that financing a new polar icebreaker would have on Coast Guard operations and maintenance activities, among others. The report found that given the Coast Guard's current and projected budgets, as well as its mandatory budget line items, there are insufficient funds in any one year to fully fund one new polar icebreaker. Additionally, though major acquisitions are usually funded over several years, the incremental funding obtained from reducing or delaying existing acquisition projects would have significant adverse impact on all Coast Guard activities. This means that it is unlikely that the Coast Guard will be able to expand the U.S. icebreaker fleet to meet its statutory requirements as identified the Commandant of by the High Latitude Study. As we reported in 2010, the Coast Guard has recognized these budgetary challenges, noting that the Coast Guard would need to prioritize resource allocations, while accepting risk in areas where resources would be lacking. Given that it takes 8-10 years to build an icebreaker, and the Coast Guard has not yet begun the formal acquisition process, the Coast Guard has already accepted some level of risk that its statutory mission requirements related to icebreakers will continue to go unmet. The three reports discussed earlier in this statement all identify funding as a central issue in addressing the existing and anticipated challenges related to icebreakers. In addition to the Coast Guard budget analysis included in the Recapitalization report, all three reports reviewed alternative financing options, including the potential for leasing icebreakers, or funding icebreakers through the National Science Foundation (NSF) or the Department of Defense (DOD). Although DOD has used leases and charters in the past when procurement funding levels were insufficient to address mission requirements and capabilities, both the Recapitalization report and the High Latitude Study determined that the lack of existing domestic commercial vessels capable of meeting the Coast Guard's mission requirements reduces the availability of leasing options for the Coast Guard. Additionally, an initial cost-benefit analysis of one type of available leasing option included in the Recapitalization report and the High Latitude Study suggests that it may ultimately be more costly to the Coast Guard over the 30-year icebreaker lifespan. Another alternative option addressed by the Recapitalization report would be to fund new icebreakers through the NSF. However, the analysis of this option concluded that funding a new icebreaker through the existing NSF budget would have significant adverse impacts on NSF operations and that the capability needed for Coast Guard requirements would exceed that needed by the NSF. Coast Guard: Action Needed As Approved Deepwater Program Remains Unachievable, GAO-11-743, Washington, D.C.: July 28, 2011. Coast Guard: Efforts to Identify Arctic Requirements Are Ongoing, but More Communication about Agency Planning Efforts Would Be Beneficial, GAO-10-870, Washington, D.C.: September 15, 2010. Coast Guard: Observations on the Requested Fiscal Year 2011 Budget, Past Performance, and Current Challenges, GAO-10-411T, Washington, D.C.: February 25, 2010. Coast Guard: Observations on the Fiscal Year 2010 Budget and Related Performance and Management Challenges, GAO-09-810T, Washington, D.C.: July 7, 2009. Homeland Security: Enhanced National Guard Readiness for Civil Support Missions May Depend on DOD's Implementation of the 2008 National Defense Authorization Act, GAO-08-311, Washington, D.C.: April 16, 2008. Coast Guard: Observations on the Fiscal Year 2009 Budget, Recent Performance, and Related Challenges, GAO-08-494T, Washington, D.C.: March 6, 2008. Results-Oriented Government: Practices That Can Help Enhance and Sustain Collaboration among Federal Agencies, GAO-06-15. Washington, D.C.: October 21, 2005. Coast Guard Acquisition Management: Deepwater Project's Justification and Affordability Need to Be Addressed More Thoroughly, GAO/RCED-99-6, Washington, D.C.: October 26, 1998. Executive Guide: Effectively Implementing the Government Performance and Results Act, GAO/GGD-96-118, Washington D.C.: June 1996. 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 gradual retreat of polar sea ice, combined with an expected increase in human activity--shipping traffic, oil and gas exploration, and tourism in the Arctic region--has increased the strategic interest that the United States and other nations have in the Arctic. As a result, the U.S. Coast Guard, within the Department of Homeland Security (DHS), has responsibilities in the Arctic, which are expected to increase. This testimony provides an update of: (1) the extent to which the Coast Guard has taken actions to identify requirements for future Arctic operations; (2) issues related to the U.S. icebreaking fleet; and (3) the extent to which the Coast Guard is coordinating with stakeholders on Arctic issues. This statement is based on GAO-10-870 , issued in September 2010, and includes selected updates. For the selected updates, GAO analyzed Coast Guard, Department of Defense (DOD,) and other related documents on Arctic operations and capabilities. GAO also interviewed Coast Guard and DOD officials about efforts to identify Arctic requirements and coordinate with stakeholders. The Coast Guard has taken a variety of actions--from routine operations to a major analysis of mission needs in the polar regions--to identify its Arctic requirements. The routine operations have helped the Coast Guard to collect useful information on the capability of its existing assets to operate in cold climates and strategies for overcoming logistical challenges presented by long-distance responses to incidents, among other things. Other operational actions intended to help identify Arctic requirements include the establishment of temporary, seasonal operating locations in the Arctic and seasonal biweekly Arctic overflights, which have helped the Coast Guard to identify performance requirements and test personnel and equipment capabilities in the Arctic. The Coast Guard's primary analytical effort to identify Arctic requirements is the High Latitude Study, a multivolume analysis that is intended to, in part, identify the Coast Guard's current Arctic capability gaps and assess the degree to which these gaps will impact future missions. This study also identifies potential solutions to these gaps and compares six different options--identified as Arctic force mixes--to a baseline representing the Coast Guard's current Arctic assets. However, given current budget uncertainty and the Coast Guard's recent acquisition priorities, it may be a significant challenge for the agency to acquire the assets that the High Latitude Study recommends. The most significant issue facing the Coast Guard's icebreaker fleet is the growing obsolescence of these vessels and the resulting capability gap caused by their increasingly limited operations. In 2010, Coast Guard officials reported challenges fulfilling the agency's statutory icebreaking mission. Since then, at least three reports--by the DHS Inspector General and Coast Guard contractors--have further identified the Coast Guard's challenges to meeting its current and future icebreaking mission requirements in the Arctic with its existing polar icebreaker fleet. Prior GAO work and these reports also identify budgetary challenges the agency faces in acquiring new icebreakers. Given these issues and the current budgetary climate, it is unlikely that the Coast Guard will be able to fund the acquisition of new icebreakers through its own budget, or through alternative financing options. Thus, it is unlikely that the Coast Guard will be able to expand the U.S. icebreaker fleet to meet its statutory requirements, and it may be a significant challenge for it to just maintain its existing level of icebreaking capabilities due to its aging fleet. In 2010, GAO reported the Coast Guard coordinates with various stakeholders on Arctic operations and policy, including foreign, state, and local governments, Alaskan Native governments and interest groups, and the private sector. GAO also reported that the Coast Guard coordinates with federal agencies, such as the National Science Foundation, National Oceanic and Atmospheric Administration, and DOD. More recently, the Coast Guard has partnered with DOD through the Capabilities Assessment Working Group--an interagency coordination group established in May 2011--to identify shared Arctic capability gaps as well as opportunities and approaches to overcome them, to include making recommendations for near-term investments. The establishment of this group helps to ensure collaboration between the Coast Guard and DOD addresses near-term capabilities in support of current planning and operations. GAO is not making new recommendations in this statement. GAO previously recommended that the Coast Guard communicate with key stakeholders on the process and progress of its Arctic planning efforts. DHS concurred with this recommendation and is in the process of taking corrective action.

The program's acquisition approach involves the conversion of Sikorsky S-92A helicopters into VH-92A presidential helicopters by incorporating a unique mission interior that accommodates government-provided equipment such as, communications and mission systems. The program is limiting modifications to the aircraft to avoid a costly airworthiness recertification and reduce investment costs, delivery timelines, and execution risks. As we reported in March 2015, the Navy's approach is to use mature technology; however, a fully configured mission communication system has yet to be tested in an aircraft. We reported last year that the VH-92A program continued to make progress by establishing a knowledge-based business case for entry into system development that included an approved cost, schedule and performance baseline based on actions substantively in line with acquisition best practices. Demonstrating technology maturity, making trade-offs, having reasonable cost and schedule estimates, and holding a system-level preliminary design review (PDR) by the start of system development are all best practices. While the Navy's deferral of a system- level preliminary design review until after the start of system development deviated from acquisition best practices, we reported last year that a number of factors, such as the program's reliance on mature technologies, selection of an in-production aircraft, and award of a fixed price incentive type contract reflect reduced risk in the deferral. A significant risk mitigation factor the Navy has in its favor is its contract with Sikorsky which includes a ceiling price that would limit how much the Navy would have to pay under the contract. To maintain this advantage, the Navy will have to ensure that no requirements changes are made that would require it to negotiate a supplemental agreement for equitable adjustment to the contract. In the past, DOD has typically used cost- reimbursement contracts in which the government generally pays all allowable costs incurred by the contractor. Recent legislation and defense policy now emphasize the use of fixed price development contracts, where warranted, to limit the government's exposure to cost increases. Since the start of development in 2014, the VH-92A program has generally progressed as planned. Through November 2015, Sikorsky has accomplished approximately $239.0 million (22 percent) in development work-leaving about $863.9 million (78 percent) in estimated work to go over the next 5 years. As of December 2015, Sikorsky indicated that, nearly all of the developmental tasks expected to be accomplished by that point had been accomplished at only slightly greater cost than anticipated. The program's current estimates for total program cost suggest shows no overall cost growth. Table 1 compares the program's current estimated quantities and total costs (fiscal year 2016 dollars) to the program's estimates at the start of development. The contractor's November 2015 estimate of the most likely cost at completion for its development efforts, which represent a portion of the program's total research and development cost, suggest a final contract price slightly over the contract's target price (by less than 2 percent) but below its ceiling price. We evaluated the contractor's data through October 1, 2015 and found that the contractor's most likely estimate at completion based on the data at that time was not overly optimistic. In fact, it was slightly higher than our highest estimate. In addition, the program is currently on schedule. In the past year, the program successfully conducted its PDR and carried out a number of other significant development activities including continued development of the mission communications system, prime contractor taking custody of two S-92A aircraft, initial testing of one engineering and developmental model (EDM) aircraft, and initiation of S-92A to VH-92A developmental model helicopter conversions. Though the program is early in development with significant system integration and testing ahead, it currently is on track to accomplish key milestones including completion of a critical design review in July 2016, making an initial production decision, and establishing an initial operational capability as planned, see figure 1. The program passed a significant schedule milestone in August 2015 when it conducted its system-level PDR. The purpose of the PDR was to evaluate the VH-92A preliminary design, assess the likelihood of that design to meet requirements and readiness to move forward into detailed design. The PDR occurred 16 months after development start-1 month ahead of the contractual date for the event. Among other issues, there were 12 requests for actions identified during the review, for example the need to achieve complete alignment in weight management processes between the Naval Air Systems Command and the contractor. All of those requests were subsequently deemed successfully closed after review by Naval Air Systems Command personnel and concurrence of the submitters of those requests. On January 26, 2016 the PDR chairman closed the event stating that PDR was successful in presenting the program status and identifying areas of concern. During the past year, the program continued development of the VH-92A Mission Communications System (MCS), an executive communications suite utilizing existing off-the-shelf components that is to provide passengers and crew with access to on-board and off-board communications services. The government is developing and providing the MCS design and some government furnished equipment to the contractor for integration into the presidential helicopters. Hardware components and architecture were previously defined and the ongoing MCS efforts principally relate to developing communications and monitoring software and integration of the system into the aircraft. Last year, version 0.6 of MCS software was provided to the Navy's systems integration lab and to Lockheed Martin for use in setting up MCS wiring. The program subsequently released version 0.8 of MCS software that includes nearly full functionality (except for that relating to an inter- communications subsystem) and in December 2015, contractor engineers started loading the software at the contractor's system integration lab for testing. Two more MCS software releases are currently anticipated: version 1.0, which is to provide full functionality including the inter- communications subsystem, is expected in April 2016 and at least one follow-on release that will address and incorporate subsequently identified corrections. In addition, the first of two EDM aircraft, arrived at the subcontractor Lockheed Martin's Owego, New York facility in December 2014, underwent subcontractor-led, risk-reduction efforts, including installation of antennas and interference testing and planning for the placement of the wiring needed for the government-furnished mission communications system. The subcontractor used radios and antennas for the mission communications system, power supplies, and instrumentation in support of contractor testing. According to Sikorsky, the testing validated capability predictions. This testing consisted of 89.6 flight test hours and 44.6 ground test hours. Table 2 provides a profile of the total, to date, anticipated test effort that is to utilize the two EDM aircraft and four subsequently developed system demonstration test article aircraft. In September 2015, the program's first S-92A aircraft, which was utilized by Lockheed Martin in its risk reduction efforts, and a second S-92A aircraft were transferred to Sikorsky's Stratford, Connecticut for modifications to become the two planned EDM aircraft. The modification process was started ahead of schedule, reducing schedule risk. As to be expected with a major system development effort, as the program has progressed it has faced a number of design, integration, and technical challenges, some preexisting and others realized during the course of development. Examples of the challenges the program is currently managing include design of the passenger doors, incorporation of titanium framing in the two initial aircraft, and meeting requirements relating to electromagnetic environmental effects (E3) and electromagnetic pulse (EMP), and cybersecurity. Aircraft Door Design: Design of the VH-92A forward and rear doors has proven more challenging and taken longer than the contractor anticipated. For the VH-92A, the forward passenger door in Sikorsky's S-92A helicopter's configuration is being modified to include dual hand rails and timed entry lights. In addition, the VH-92A aircraft requires a second entrance and exit, requiring the design of a new passenger door and stairs in the aircraft to replace the current S-92A rear ramp. Realization of the head clearance requirement for that door necessitated a larger door, increasing its weight. In addition, the weight of both doors went up in the process of redesigning the aircraft to meet other requirements. The increase in the doors' weight in combination with a requirement for a single-person manual open and close capability necessitated an unanticipated redesign of the doors' counterbalance systems and also complicated latch design. Extensive design and structural analysis for the door efforts were needed to resolve those design issues and ensure the new design would not affect the overall airworthiness certification for the aircraft. According to Sikorsky, as of February 2016, 90 out of 105 design drawings for the doors were completed and improvements to the schedule have begun and should continue as the drawings continue to be released. Titanium Framing: The two EDM aircraft are being retrofitted with titanium frames and the remainder of the VH-92A fleet will come with the titanium frames incorporated as part of the Sikorsky S-92A production process. This will improve aircraft performance and fatigue life. As of January 2016, the machining of titanium frames for the first EDM aircraft had been completed and installation had begun. The frames for the second EDM aircraft are in the machining process and are expected to be completed by the end of the second quarter of 2016. The machining process, which involves drilling critical alignment holes into the titanium, has taken longer than anticipated. The contractor realized that this effort would cause schedule delays and worked to mitigate this schedule risk by approving additional engineering and shop hours to insure that the frames were properly machined, finished, and can fit the aircraft upon installation. E3 and EMP: VH-92A aircraft must comply with both commercial and military standards pertaining to electromagnetic environment effects. Achieving those standards involves consideration of the electromagnetic compatibility of equipment used on the aircraft and mitigation of electromagnetic interference caused by that equipment. In addition, developers of military systems, such as the presidential helicopters, may face additional requirements relating to the ability to survive the effects of an electromagnetic pulse. A number of techniques exist to harden aircraft from the effects of an EMP, for example, increasing shielding on equipment and wiring, which are being considered and utilized by the VH- 92A program. As the program has progressed a greater understanding of the effort required to meet the level of EMP survivability required has resulted in increased EMP-related efforts. According to an official from the office of the Director of Operational Testing and Evaluation, the program has been working to help identify what additional measures are needed for EMP survivability. EMP related testing is underway to determine the exact additional measures needed, such as increased shielding or use of EMP limiters that protect electronics from EMP resulting power surges. As of December 2015, one area of concern relating to these efforts was that some of the initially identified EMP limiters may not have provided the needed level of protection. However, the program has continued to work on this issue and believes it has identified workable solutions. According to the program office, they believe these efforts have now resulted in a compliant design for protecting critical systems. Cybersecurity: VH-92A aircraft and systems must meet cybersecurity requirements. In 2014, after the program's initial (June 2013) Test and Evaluation Master Plan was approved, a revised DOD cybersecurity policy and risk management framework were released. The program has subsequently been working to address the changes necessitated by the revised policy and framework including actively pursuing a contract change to migrate from the certification required under the contract to the current certification standard. In addition, changes have been made to the program's Test and Evaluation Master Plan to reflect the changed policy and framework. In his January 2016 PDR closeout assessment, the PDR Chairman stated a cost and scope analysis of the needed migration has occurred and the change will be incorporated into the program baseline with minor impact. He further noted, however, that future evolution in the definition of cyber threats will remain a risk to the program as additional mandates are defined. The program's efforts relating to a sub-component of the government developed VH-92A MCS, the Inter-Communication System (ICS), reflect the challenges associated with meeting updated requirements in support of airworthiness certifications. The ICS supplier is in the process of addressing a Federal Aviation Administration (FAA) standard on software considerations in airborne systems and equipment certifications that changed. The standard is the primary means for meeting airworthiness requirements and obtaining approval of software used in civil aviation products. In November 2015, the Navy, contractor and subject matter experts focused on possible approaches for the ICS supplier to successfully meet the updated standard. In this case, it was determined that the supplier's previous efforts demonstrated the ability to provide the needed capability and additional issue papers that covers the difference between the old and revised standard would be sufficient. The ICS supplier revised their development schedule and the ICS baseline software delivery to Sikorsky and the Navy's MCS system integration laboratory is now set for March 2016. Cost and Performance Trades: The program has been helped looking for opportunities to save cost and schedule to offset increased efforts such as those discussed above. For example, program officials explained that they've identified an opportunity to remove a contractually-required capability as the Marine Corps decided it provided no appreciable advantage. That capability is not inherent in the S-92A aircraft and would have needed to have been designed and integrated into the aircraft. It was a requirement that existed prior to the selection of the replacement helicopter. Subsequent consideration of the requirement based on the operators' concept of operations and the capabilities of the S-92A aircraft led to a determination that the requirement did not provide an appreciable benefit. They explained that given the desire to maximize the overall performance of the aircraft (range, power, etc.), and decrease the overall risk associated with integrating the associated capability, the requirement was removed from the contract. The contractor estimated that dropping this requirement resulted in the elimination of about 20 percent of the total testing for the affected subsystem. Additionally, the Navy and contractor are currently in discussions on a downward adjustment to the contract price to reflect elimination of the requirement. Similarly, the contractor identified an opportunity to save time and money through a change in planned contractor testing. The VH-92A must be certified by the FAA and approved by the Navy for flight in moderate icing conditions, a certification the S-92A baseline aircraft already holds. It was originally thought, though, that icing-related flight testing would be needed to reflect changes made to the baseline aircraft's outer body such as the addition of antennas. However, based on the existing S-92A certifications and data gathered during testing done with the antennas on the first EDM aircraft at Lockheed Martin's Owego facility, Sikorsky and FAA representatives subsequently determined that analysis would suffice toward obtaining FAA certification. This revised approach resulted in a savings of approximately 2 months of schedule and $3 million in cost-- both of which will be applied to other activities within the contract. An earned value management (EVM) system is a project management tool that integrates the technical scope of work with schedule and cost elements for investment planning and control. A well-planned schedule is another management tool that can help government programs use public funds effectively by specifying when work will be performed in the future and measuring program performance against an approved plan. During our review of the program, we compared the prime contractor's EVM system and its Integrated Master Schedule (IMS) to best practices. We found that Sikorsky's EVM system and IMS substantially or fully met best practices. To determine if a contractor is executing the work planned within the funds and time budgeted, the prime contractor produces monthly reports detailing cost and schedule performance in an EVM system. Our research has identified a number of best practices and characteristics that are the basis of effective earned value management and which should result in reliable and valid earned value management data that can be used for making informed decisions. We examined Sikorsky's EVM system in the context of the best practices from the GAO Cost Estimating and Assessment Guide, and overall found that it that it fully or substantially met the three characteristics identified for a reliable EVM system. Specifically, that the EVM system was comprehensive, that data resulting from the system was reliable, and that program management utilized that data for decision-making purposes. See appendix III for a summary assessment of the Sikorsky's EVM practices compared to best practices. We also found that the program's IMS substantially met the best practices for a reliable schedule. The success of programs depend, in part, on having an integrated and reliable master schedule that defines when and how long work will occur and how each activity is related to the others. Such a schedule is necessary for government acquisition programs for many reasons. It provides not only a road map for systematic project execution but also the means by which to gauge progress, identify and resolve potential problems, and promote accountability at all levels of the program. An IMS provides a time sequence for the duration of a program's activities and helps everyone understand both the dates for major milestones and the activities that drive the schedule. A program's IMS is also a vehicle for developing a time-phased budget baseline. Moreover, it is an essential basis for managing tradeoffs between cost, schedule, and scope. Among other things, scheduling allows program management to decide between possible sequences of activities, determine the flexibility of the schedule according to available resources, predict the consequences of managerial action or inaction on events, and allocate contingency plans to mitigate risks. Our research has identified 10 best practices associated with effective schedule estimating that can be collapsed into 4 general characteristics (comprehensive, well- constructed, credible and controlled) for sound schedule estimating. Overall, we found the program's IMS is reliable as it substantially met all four of the characteristics. See appendix IV for a more detailed assessment of the VH-92A program's schedule estimate compared to best practices. While the program had made good progress, it is still early in development with significant system integration and testing ahead. We will continue to monitor the presidential helicopter acquisition as it progresses. We are not making any recommendations in this report. DOD provided written comments on a draft of this report, which are reprinted in appendix V. In its written comments, DOD stated that it believes its efforts on this program are aligned with our best practices and it will continue to monitor the program and ensure that mitigations are in place to address potential risk areas. We will also continue to monitor the program as it moves forward. DOD also provided technical comments that were incorporated, where appropriate. We are sending copies of this report to the appropriate congressional committees; the Secretary of Defense; the Under Secretary of Defense for Acquisition, Technology, and Logistics; and the Secretary of the Navy. In addition, this report will be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions on 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 contributing to this report are listed in appendix VI. To conduct this work, we analyzed program documents (including the acquisition strategy and contractor progress reports) and plans to determine how the program is progressing in terms of its cost, schedule, and performance, and how well the program is adhering to best practices. We interviewed program officials from the Navy's Presidential Helicopter Program Office, as well as officials from the office of the Director of Operational Testing and Evaluation and the office of the Deputy Assistant Secretary of Defense for Developmental Test and Evaluation to discuss the status of the program. To develop the numbers on the cost and cycle time of the VH-92A program in table 1, we obtained and analyzed cost, quantity, and schedule data from the program's Selected Acquisition Report and other information provided by the program. We converted all cost information to fiscal year 2016 dollars using conversion factors from the Department of Defense (DOD) Comptroller's National Defense Budget Estimates for Fiscal Year 2016. Through discussions with DOD officials responsible for the database and confirming selected data with the program office, we determined that the information obtained was sufficiently reliable for the purposes of this report. To understand potential program challenges and steps taken to address those challenges, we examined program and contractor documents and other reports relating to the development effort. We also examined DOD's risk management planning guidance and reviewed a copy of the program's draft risk management plan and the contractors' latest risk assessment. We discussed development challenges and risk management with VH-92A program officials and officials from the Sikorsky Aircraft Corporation and Lockheed Martin. To learn more about the program's earned value management (EVM) system we met with officials from the Defense Contract Management Agency, the government agency responsible for, among other things, ensuring the integrity of the contracting process, and reviewed their Program Assessment Reports on the program to determine if the prime contractor's (Sikorsky), EVM system produced reports that met the criteria for reliable and valid EVM data. Our EVM analysis focused on Sikorsky's Integrated Program Management Report data from September 2014 through October 2015 and the Integrated Master Schedule (IMS) dated October 2015, as well as interviews with the program office, and supporting documentation. Specifically, we compared project documentation with EVM best practices as identified in GAO's Cost Estimating and Assessment Guide. Our research has identified a number of best practices that are the basis of effective earned value management and should result in reliable and valid earned value management data that can be used for making informed decisions. These best practices have been collapsed into three high level characteristics of a reliable earned value management system which are: Establish a comprehensive EVM System: If the EVM data is to be used to manage a program, the contractor's (and subcontractors') EVM system should be certified to ensure that it complies with the agency's implementation of the American National Standards Institute guidelines. In addition to a certified system, an integrated baseline review must be conducted to ensure that the performance measurement baseline accurately captures all of the work to be accomplished. In order to develop the performance measurement baseline, an integrated network schedule should be developed and maintained. This schedule should reflect the program's work breakdown structure, clearly show the logical sequencing of activities, and identify the resources necessary to complete the activities in order to develop the time-phased budget baseline. Lastly, there should be a rigorous EVM system surveillance program in place. Effective surveillance ensures that the contractor is following its own corporate processes and procedures and confirms that the contractor's processes and procedures continue to satisfy the American National Standards Institute guidelines. Ensure that the data resulting from the EVM system are reliable: To ensure the data are reliable, it is important to make sure that the Integrated Program Management Report data make sense and do not contain anomalies that would make them invalid. If errors are not detected, then the data will be skewed, resulting in bad decision- making. In addition to checking for data anomalies, the integrated program management report data between the different formats should be consistent. Reliable EVM data is important in order to generate estimates at completion. Managers should rely on EVM data to generate estimates at completion at least monthly. Estimates at completion are derived from the cost of work completed along with an estimate of what it will cost to complete all unaccomplished work. Ensure that the program management team is using earned value data for decision-making purposes: For EVM data to be useful it must be reviewed regularly. Cost and schedule deviations from the baseline plan give management at all levels information about where corrective actions are needed to bring the program back on track or to update completion dates and estimates at completion. Management should focus on corrective actions and identify ways to manage cost, schedule and technical scope to meet program objectives. Management also needs to ensure that the performance measurement baseline is updated accordingly as changes occur. Because changes are normal, the American National Standards Institute guidelines allow for incorporating changes to the performance measurement baseline. However, it is imperative that changes be incorporated into the EVM system as soon as possible to maintain the validity of the performance measurement baseline. See appendix III for our summary assessment of the VH-92A program's EVM data and practices compared to best practices. EVM data are considered reliable if the overall assessment ratings for each of the three characteristics are substantially or fully met. If any of the characteristics are not met, minimally met, or partially met, then the EVM data cannot be considered reliable. We reviewed the program's IMS and compared it to the GAO Schedule Assessment Guide. Our research has identified 10 best practices associated with effective schedule estimating that can be collapsed into 4 general characteristics for sound schedule estimating: Comprehensive: A comprehensive schedule includes all activities for both the government and its contractors necessary to accomplish a project's objectives as defined in the project's work breakdown structure. The schedule includes the labor, materials, travel, facilities, equipment, and the like needed to do the work and depicts when those resources are needed and when they will be available. It realistically reflects how long each activity will take and allows for discrete progress measurement. Well-constructed: A schedule is well-constructed if all its activities are logically sequenced with the most straightforward logic possible. Unusual or complicated logic techniques are used judiciously and justified in the schedule documentation. The schedule's critical path represents a true model of the activities that drive the project's earliest completion date and total float accurately depicts schedule flexibility. Credible: A schedule that is credible is horizontally traceable--that is, it reflects the order of events necessary to achieve aggregated products or outcomes. It is also vertically traceable: activities in varying levels of the schedule map to one another and key dates presented to management in periodic briefings are in sync with the schedule. Data about risks and opportunities are used to predict a level of confidence in meeting the project's completion date. The level of necessary schedule contingency and high priority risks and opportunities are identified by conducting a robust schedule risk analysis. Controlled: A schedule is controlled if it is updated periodically by trained schedulers using actual progress and logic to realistically forecast dates for program activities. It is compared against a designated baseline schedule to measure, monitor, and report the project's progress. The baseline schedule is accompanied by a baseline document that explains the overall approach to the project, defines ground rules and assumptions, and describes the unique features of the schedule. The baseline schedule and current schedule are subject to a configuration management control process. For our evaluations of the schedule estimates, when the tasks associated with the leading practices that define a characteristic were mostly or completely satisfied, we considered the characteristic to be substantially or fully met. When all four characteristics were at least substantially met, we considered a schedule estimate to be reliable. In addition, we interviewed agency and contractor officials to determine the methodology used to develop the IMS. To assess the schedule, we obtained and reviewed documentation, including the work breakdown structure. See appendix IV for our summary assessment of the VH-92A program's schedule estimate compared to best practices. We conducted this performance audit from July 2015 to April 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Presidential Helicopter Acquisition: Program Established Knowledge- Based Business Case and Entered System Development with Plans for Managing Challenges (GAO-15-392R, April 14, 2015) Presidential Helicopter Acquisition: Update on Program's Progress toward Development Start (GAO-14-358R, April 10, 2014) Department of Defense's Waiver of Competitive Prototyping Requirement for the VXX Presidential Helicopter Replacement Program (GAO-13-826R, September 6, 2013) Presidential Helicopter Acquisition: Program Makes Progress in Balancing Requirements, Costs, and Schedule (GAO-13-257, April 9, 2013) Presidential Helicopter Acquisition: Effort Delayed as DOD Adopts New Approach to Balance Requirements, Costs, and Schedule (GAO-12-381R, February 27, 2012) Defense Acquisitions: Application of Lessons Learned and Best Practices in the Presidential Helicopter Program (GAO-11-380R, March 25, 2011) Best practice The program has a certified EVM system Substantially Met: The contractor's EVM An Integrated Baseline Review was conducted to ensure the performance measurement baseline captures all of the work The schedule reflects the work breakdown structure, the logical sequencing of activities, and the necessary resources EVM surveillance is being performed system has been rated acceptable, indicating that it generally complies with EVM system guidelines. Met: An Integrated Baseline Review was conducted in November 2014 that assessed the technical, schedule, resource, and cost risk associated with the program's various control accounts. Substantially Met: The schedule has a consistent and well-defined work breakdown structure and is complex with few missing logic links; however, the schedule is not fully resource loaded. Met: The Defense Contract Management Agency performs monthly reports regarding the prime contractor and their major subcontractor to the program office. EVM data, including cost and schedule variances, are reviewed on a regular basis Management uses EVM data to develop corrective action plans performance data is consistent between reporting formats, there are many data anomalies that are not explained in the Integrated Program Management Report narrative (Format 5). Met: There are no inconsistencies between the cost and schedule performance data and between the Integrated Program Management Report formats reported. Substantially Met: The contractor estimate at completion is not overly optimistic; in fact, it is greater than the GAO estimate at completion range. Met: The program office and contractor review the cost and schedule and variances and use that information to determine corrective actions for potential cost and schedule overruns. Met: The program office uses the EVM data and variances as a basis to request additional resources. Substantially Met: While the performance management baseline change process is clearly defined and changes are documented in the contractor's monthly reports, there is no explanation for the change in the budget at complete in January 2015. Individual assessment Substantially Met: While the work breakdown structure has a dictionary that defines all the tasks and is consistent between the program management documents and reports, there are cases of tasks that do not have unique names. Partially Met: While the schedule contains some resources, the program office stated that the IMS is not fully resource loaded since this is not a requirement of the Integrated Program Management Report instructions. However, the program office stated that they assess the resources (labor and materials) at the weekly integrated product team meetings. Substantially Met: The durations were established taking into account available resources, productivity and past experience. Additionally, the schedule accounts for holidays and the contractor and subcontractor non-work periods. Substantially Met: The schedule is complex with few missing logic links. For the most part, extensive documentation of the logic anomalies exists; however, any dangling logic can interfere with network analysis and the forecasting ability of the schedule. Thus, the small relative number of dangling logic, but high absolute number precludes a fully met score. Substantially Met: Clear waterfalls of driving paths to engineering development model (EDM) 1 and EDM 2 deliveries as well as Milestone C and program finish exist within the schedule. Detailed documentation of how the critical path is derived is also discussed in the program reviews. However, long duration testing activities are present in the EDM 1 and Milestone C paths and there are some dangling activities that keep this best practice from being fully met. Partially Met: The IMS does not have any negative float and all float values are calculated as days. Although the schedule reflects many activities with high float values, valid justification exists for many. In some cases, it is clear why float is so large, such as high-level program milestones or level of effort activities not having a successor. However, there are instances of high float values that are derived from complete network logic that the program office ignores; in these cases, unreasonable float should be documented and explained. Partially Met: The schedule aligns vertically with the contractor integrated program management reports. However, changes in dates for specific tasks do not show that the schedule is horizontally traceable. Substantially Met: Schedule risk analyses have been performed. However, logic issues cause the schedule risk assessment to not be completely reliable. Partially Met: While the schedule has no date anomalies, it does not maintain a document to track changes in the schedule's logic or provide a schedule narrative that includes key details regarding how the schedule is updated. Substantially Met: While the schedule's government tasks are baselined and have an established process for variance measurement, there is no evidence of a schedule baseline document. In addition to the contact named above, Bruce H. Thomas, Assistant Director; Bonita J. P. Oden, Analyst-in-Charge; William C. Allbritton; Stephanie M. Gustafson; Ozzy Trevino; Jennifer V. Leotta; Juana S. Collymore; Karen A. Richey; Hai V. Tran; Marie P. Ahearn; and Katherine S. Lenane made key contributions to this report.

The mission of the presidential helicopter fleet is to provide safe, reliable, and timely transportation for the President, Vice President, foreign heads of state, and other official parties as directed by the White House Military Office. The Navy plans to acquire VH-92A helicopters to replace its aging fleet. Initial delivery of VH-92A presidential helicopters is scheduled to begin in fiscal year 2020 with production ending in fiscal year 2023. Total program acquisition cost is estimated to be $5.1 billion. This is GAO's seventh report on the program since 2011. The National Defense Authorization Act for Fiscal Year 2014 included a provision that GAO report annually on the acquisition of the VH-92A aircraft. This report discusses (1) the program's cost, schedule, and performance status; (2) challenges it faces in system development; and (3) its adherence to acquisition best practices. To conduct the review, GAO examined program documents, including Navy, contractor, and on-site government program monitor reports. GAO also interviewed officials, reviewed the earned value management system, and assessed the integrated master schedule against GAO best practices. Since 2014, the VH-92A presidential helicopter program has generally progressed as planned. Through November 2015, the contractor accomplished approximately $239.0 million (22 percent) in development work--leaving about $863.9 million (78 percent) in estimated work over the next 5 years. As of December 2015, the prime contractor had accomplished nearly all of the expected developmental tasks at only slightly greater cost than anticipated. The program is currently on track to accomplish key development milestones as planned. In the past year, the program successfully conducted its preliminary design review and carried out a number of other significant development activities, including: continued development of the mission communications system, delivery and initial testing of aircraft for risk-reduction activities, and initiation of the conversion of Sikorsky S-92A helicopters into VH-92A developmental models. As expected with a major system development effort, the program faces a number of design and technical challenges, some preexisting and others realized during the course of development. Those challenges include designing passenger doors, incorporating titanium framing in the two initial aircraft, meeting requirements relating to electromagnetic environmental effects, and cybersecurity. The program took advantage of capability and testing trades that produced cost and schedule savings. For example, the program was able to reduce physical testing by relying on existing information about the aircraft's performance, supplemented by additional information collected during testing and through modeling. When assessed against best practices, GAO found that the contractor's earned value management system, a project management tool for investment planning and control, fully or substantially met the three characteristics for a reliable earned value management system. Similarly, in assessing the program's integrated master schedule against best practices, GAO found that it substantially met all four of the characteristics required for a reliable schedule. GAO is not making recommendations in this report. In commenting on a draft of this report, DOD stated that it believes its efforts on this program are aligned with GAO's best practices and it will continue to monitor the program and ensure that mitigations are in place to address potential risk areas. GAO will also continue to monitor the program as it moves forward.

Over the past few years, both IRS' Office of Internal Audit and we have reported on the need for improved controls to protect against unauthorized accesses of taxpayer data by IRS employees. In October 1992, Internal Audit reported that IRS had limited ability to prevent unauthorized accesses and detect such accesses once they had occurred. In September 1993, we reported that IRS did not adequately monitor the activities of thousands of employees who were authorized to read and change taxpayer files. We noted that the greatest risk involved IRS' Integrated Data Retrieval System (IDRS), which is the primary computer system used by IRS employees to access and adjust taxpayer accounts. In 1994, IRS implemented an automated tool--the Electronic Audit Research Log (EARL)--to monitor and detect unauthorized accesses to data on IDRS. In August 1995, we reported that IRS had taken some actions to, among other things, restrict account access and analyze computer usage. We concluded, however, that IRS still lacked sufficient safeguards to prevent or detect unauthorized accesses of taxpayer information. We noted, for example, that security reports issued to monitor and identify unauthorized accesses were cumbersome and virtually useless to managers responsible for ensuring computer security. In 1996, IRS implemented enhancements to EARL that were designed to improve the quality of data being provided to managers. In April 1997, we reported on continuing shortcomings in IRS' efforts to prevent unauthorized access to confidential taxpayer data. We noted, for example, that IRS did not (1) monitor all employees with access to automated systems and data for evidence of unauthorized access, (2) consistently investigate cases involving unauthorized access, and (3) consistently discipline employees who accessed taxpayer data without authorization. Because of continuing concerns about unauthorized accesses, Public Law 105-35 was signed into law on August 5, 1997. The law made willful unauthorized inspection of taxpayer data illegal. The law provides that a person convicted of unauthorized access shall be subject to a fine of up to $1,000, or imprisonment of not more than 1 year, or both, together with the costs of prosecution. The law also states that an officer or employee of the United States who is convicted of any such violation shall, in addition to any other punishment, be dismissed from office or discharged from employment. In cases where a person is criminally charged with unauthorized access, the law requires that the Secretary of the Treasury notify the taxpayer whose tax information was accessed. To achieve our objectives, we interviewed officials from IRS' Centralized Case Development Center (CCDC), CAU, Office of Systems Standards and Evaluation, and Office of Chief Inspector (we discuss the role of each of these offices later in the report); visited the CCDC in Cincinnati, OH, to observe its operations; analyzed data runs that IRS produced at our request as well as IRS management information system reports on unauthorized access; and reviewed IRS reports and documentation on unauthorized access. Other than checking for consistency, we did not verify the reliability of statistical data provided by IRS. We also did not assess the effectiveness of the various actions taken by IRS since enactment of Public Law 105-35. We requested comments on a draft of this report from IRS and the Acting Treasury Inspector General for Tax Administration. Their comments are discussed near the end of this letter. We did our work from October 1998 through January 1999 in accordance with generally accepted government auditing standards. In an August 1997 report on controlling unauthorized access to taxpayer records, IRS concluded that, in the long run, the best solution was to modernize core IRS systems. According to IRS, modernization will (1) allow it to restrict employees' access to only those taxpayer records that they have a specific work-related reason to look at and (2) enable it to detect unauthorized accesses almost as soon as they happen. However, IRS does not expect to implement those modernization efforts for several years. In the meantime, IRS has taken several steps directed at deterring, preventing, and detecting unauthorized access and ensuring that appropriate disciplinary action is taken when unauthorized access is proven. Some of IRS' actions are intended to deter unauthorized access (i.e., keep employees from trying to access taxpayer data without authorization). These actions focus on awareness. In an attempt to make certain that all employees are explicitly informed about unauthorized access and the related penalties, IRS, among other things, adopted a policy that proven instances of unauthorized access will result in removal from IRS, absent any extenuating circumstances; sent a memo in October 1997 to all IRS employees that discussed, among other things, the penalties associated with unauthorized access; started giving annual agencywide briefings in November 1997 to inform all employees of IRS' unauthorized access policy and the penalties for violations; created a form that is to be signed by employees and managers to acknowledge attendance at a briefing and receipt of guides on what constitutes unauthorized access; created a policy that all employees who join or return to IRS after the annual awareness briefings have been administered will be given their briefing within 30 days; developed a standard message to be given in all training courses in which access to tax information is discussed; developed a video and guides on unauthorized access to ensure that managers deliver a consistent message in briefing employees; and finally, established an unauthorized access steering committee and unauthorized access support team to address questions and issues raised by employees and managers. Other IRS actions are intended to prevent unauthorized access (i.e., stop employees who intentionally or unintentionally try to access taxpayer data without authorization). In that regard, according to IRS, the most effective way to safeguard against unauthorized access is to build controls into automated systems that prevent employees from accessing information they have no need to access. However, according to IRS, its current systems cannot be effectively modified to provide the "need to know" environment that allows employees to access taxpayers' records only when they have a work-related reason to do so. IRS expects to correct this situation as part of its long-term systems modernization effort. In the meantime, IRS has taken some steps to prevent unauthorized access. For example, IRS (1) has incorporated blocks into its systems to prevent employees from accessing their own records and, in some cases, the records of their spouses or ex-spouses and (2) is reviewing the access rights given to individual employees to ensure that they do not have greater access to tax data than is necessary to do their work. Until February 1999, when a new system was implemented, IRS depended primarily on EARL to identify potential instances of unauthorized access through after-the-fact analysis of accesses to data on IDRS. EARL used data analysis techniques based on a few known patterns of abuse to identify potential cases of unauthorized access. When EARL was run, it created lists of potential violations (leads) that were provided to analysts at each of IRS' 10 service centers. The analysts were responsible for researching the lists to determine whether the leads warranted further investigation. An IRS study done in August 1997 concluded that the just- described process did not provide the consistent approach needed to support IRS' policy on unauthorized access of taxpayer records. According to the study report and IRS officials, (1) there was a lack of uniformity in the output produced by EARL because each service center had developed its own computer programs, (2) most EARL leads required labor-intensive research to determine whether unauthorized access likely took place, and (3) each service center had developed its own techniques for developing EARL cases. To correct this lack of a consistent approach to unauthorized access, IRS (1) centralized responsibility for identifying and investigating potential instances of unauthorized access in CCDC, which is located within IRS' Office of the Chief Inspector, and (2) developed a new automated tool to provide better unauthorized access detection capabilities. In May 1997, the Acting Commissioner of Internal Revenue transferred responsibility for the detection of unauthorized access to the Office of the Chief Inspector. In October 1997, the Chief Inspector created CCDC, which is responsible for identifying potential cases of unauthorized access and determining whether they warrant further investigation by the Internal Security Division in the Office of the Chief Inspector. CCDC became operational in February 1998, when it began assuming responsibility from the 10 service centers for analyzing unauthorized access leads. The transition was completed in September 1998. Since then, CCDC has been responsible for reviewing all leads and deciding which, if any, should be referred to Internal Security. The CCDC staff includes forensic data analysts, security analysts, computer programmers, and criminal investigators. In addition to referrals from CCDC, Internal Security also receives allegations of unauthorized access from various other sources, such as calls to the Inspection Service integrity hotline from IRS employees, taxpayers, and tax practitioners. IRS, in February 1999, implemented the Audit Trail Lead Analysis System (ATLAS) to replace EARL. IRS officials stated that ATLAS is an improvement over EARL because ATLAS (1) will provide better unauthorized access detection capabilities and (2) is a national system that will not be subject to local modifications and practices by the 10 service centers. These improvements, according to the Director of CCDC and IRS documents, will produce better leads than those produced by EARL, because they are more indicative of potential unauthorized access. For example, according to IRS, ATLAS is programmed to do an exact match between an employee's name and the names of taxpayers whose tax information the employee has accessed. EARL's name match component, on the other hand, only matched the first six characters of the last names. According to IRS data, of the 5,468 total leads received by the Office of the Chief Inspector between October 1, 1997, and November 30, 1998, EARL's match of the first six characters of an employee's name accounted for 3,793 (69.4 percent). However, of the 338 closed leads that were referred to Internal Security for investigation, only 67 (19.8 percent) were generated by EARL's name match. According to the Director of CCDC and IRS documents, ATLAS' increased precision in matching names should result in fewer leads--because there will now have to be an exact match of last names--but these should be more indicative of potential unauthorized access. Although IRS has taken several steps to identify unauthorized accesses involving IDRS, it has done little to detect accesses involving the estimated 130 other information systems that contain taxpayer information. IRS does not have a system such as EARL or ATLAS to analyze accesses involving these other systems. IRS officials in the Systems Standards and Evaluation Office (the office with overall responsibility for security and privacy within IRS) informed us that this problem is to be corrected as part of IRS' long- term systems modernization efforts. However, these efforts will not be implemented for several years. Meanwhile, according to these officials, they have been looking at the controls in these various information systems to prevent unauthorized access. They also said that they depend on the supervisors of employees who use non-IDRS information systems to be on the alert for unauthorized access. In August 1997, the Office of Systems Standards and Evaluation reported that the handling and tracking of unauthorized access cases had not been consistent. The report further stated that IRS would be better served if key operations were centralized to establish consistency and timeliness in developing cases, making decisions on levels of evidence for removals and legal actions, processing and implementing removals, and tracking and reporting cases. To deal with inconsistencies in case handling and tracking, IRS created CAU within the Labor Relations Office in the National Office. CAU, which became operational in October 1997, is responsible for tracking and reporting the status of all unauthorized access cases; preparing paperwork for all cases, including those in which unauthorized access was not proven; forwarding paperwork on cases to the heads of the appropriate offices for clearance or disciplinary action; and providing consultative support to management in the administration of discipline. To further ensure that consistent disciplinary actions are imposed for proven cases of unauthorized access, the Systems Standards and Evaluation Office is tasked with reviewing those actions. Between October 1, 1997, and November 30, 1998, the Office of the Chief Inspector received 5,468 leads (information indicating potential unauthorized accesses) and completed work on 4,392 of those leads. Of the 4,392 closed leads, 338 (8 percent) resulted in referrals to Internal Security. Table 1 shows the disposition of the 4,054 closed leads not referred for investigation. During the period covered by our review, EARL accounted for a large majority of the leads received by the Office of the Chief Inspector and most of the cases referred to Internal Security for further investigation. Of the 5,468 leads received by the Chief Inspector during the 14 months ending November 30, 1998, 4,742, or 87 percent, were generated by EARL.The other 13 percent came from other sources, such as complaints from taxpayers and IRS employees. Although most of the leads referred to Internal Security also came from EARL (about 56 percent of the 338 referrals), other sources of leads proved to be more productive. In that regard, of the EARL leads closed by the Office of the Chief Inspector, 5 percent were referred for investigation compared with about 22 percent of the leads from other sources. Between October 1, 1997, and November 30, 1998, according to IRS' data, Internal Security opened at least 139 investigations of cases in which unauthorized access was alleged to have occurred after passage of Public Law 105-35. As of November 30, 1998, Internal Security had completed 86 of these investigations, while the other 53 investigations were still ongoing. From October 1, 1997, to January 25, 1999, according to IRS, Internal Security sent CAU 64 cases for adjudication in which unauthorized access was alleged to have taken place after enactment of Public Law 105-35. As of January 25, 1999, action had been completed on 36 of these cases, and 28 remained open. In 15 of the 36 completed cases, IRS determined that an intentional unauthorized access had occurred. Of the remaining 21 cases, IRS determined that 14 involved no unauthorized access, 6 involved accidental accesses that were reported by the employees to their supervisors in accordance with established procedures, and 1 involved an accidental access that was not reported in accordance with established procedures. In the latter case, the employee was reprimanded. As shown in table 2, of the 15 proven intentional unauthorized accesses, 10 involved service center employees, and 5 involved district office employees. According to IRS, the offending employees in those 15 cases either resigned in lieu of termination or were terminated. According to IRS data, proven cases of unauthorized access that occurred after enactment of Public Law 105-35 have generally been referred to U.S. Attorneys for possible prosecution. In almost every case, according to IRS data, the U.S. Attorney declined to prosecute. As of February 2, 1999, one case had been accepted for prosecution. According to IRS, although the case was still open, the employee had been removed from the agency. Pursuant to the law, IRS notified the three taxpayers whose data the employee had accessed. We obtained written comments on a draft of this report from IRS' Chief Information Officer (see app. I) and the Acting Treasury Inspector General for Tax Administration (see app. II). The Chief Information Officer said that IRS agreed with the information in our report. He emphasized that, in some regards, IRS' current weaknesses are associated with its aging systems and that these weaknesses will be corrected as part of IRS' long-term systems modernization plans. In the meantime, according to the Chief Information Officer, IRS (1) has initiated actions to block employees' access to more taxpayer accounts than they are currently restricted from accessing and (2) is reviewing the feasibility of incorporating audit trail records from systems other than IDRS into ATLAS. The Acting Treasury Inspector General for Tax Administration said that the report provides a good summary of the actions taken by his office (formerly the Office of the Chief Inspector) to implement the provisions of Public Law 105-35. He said that the identification and investigation of unlawful accesses of taxpayer information has been and will remain a high priority of his office. As agreed with your office, unless you publicly release its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to Senator William V. Roth, Chairman, and Senator Daniel P. Moynihan, Ranking Minority Member, Senate Committee on Finance; and Representative Bill Archer, Chairman, and Representative Charles B. Rangel, Ranking Minority Member, House Committee on Ways and Means. We will also send copies to the Honorable Robert E. Rubin, Secretary of the Treasury; the Honorable Charles O. Rossotti, Commissioner of Internal Revenue; the Honorable Jacob Lew, Director, Office of Management and Budget; and Mr. Lawrence W. Rogers, Acting Treasury Inspector General for Tax Administration. Copies will be made available to others upon request. Major contributors to this report were David J. Attianese, Assistant Director; and John Lesser, Evaluator-in- Charge. Please contact me on (202) 512-9110 if you have any questions. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touch-tone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO provided information on the Internal Revenue Service's (IRS) implementation of the Taxpayer Browsing Protection Act, focusing on: (1) actions IRS has taken to implement the law; and (2) the number of potential and proven incidents of unauthorized access by IRS employees that IRS has identified since enactment of the law, as well as penalties imposed in cases where unauthorized access was proven. GAO noted that: (1) the IRS has two approaches for implementing the law; (2) over the long term, IRS believes that modernizing its core automated systems offers the best means to prevent and detect unauthorized access to taxpayer data; (3) according to IRS, modernization will: (a) allow it to restrict employees' access to only those taxpayer records that they have a specific work-related reason to look at; and (b) enable it to detect unauthorized accesses almost as soon as they happen; (4) it will be several years, however, before this modernization becomes a reality; (5) in the meantime, IRS has taken several other steps directed at deterring, preventing, and detecting unauthorized access and ensuring that consistent disciplinary action is taken when unauthorized access is proven; (6) between October 1, 1997, and November 30, 1998, the Office of the Chief Inspector identified 5,468 potential instances of unauthorized access and completed preliminary investigative work on 4,392 of those leads; (7) of those 4,392 leads, 338 were determined to warrant further investigation; (8) many of these 338 cases were still under investigation or adjudication as of January 25, 1999; (9) using data provided by IRS, GAO identified 36 cases for which investigation and adjudication had been completed; (10) of those 36 cases, 15 involved an IRS determination that IRS employees had intentionally accessed taxpayer data without authorization; (11) in the other 21 cases, IRS determined that either there was no unauthorized access or the access was accidental; (12) according to IRS, employees involved in the 15 cases of intentional unauthorized access either resigned in lieu of termination or were terminated; (13) according to IRS data, proven cases of unauthorized access that occurred after enactment of Public Law 105-35 have generally been referred to U.S. Attorneys for prosecution, and these U.S. Attorneys have, with one exception, declined to prosecute; (14) according to IRS, the one case that was accepted for prosecution was still open as of February 2, 1999, but the employee had been removed from the agency; and (15) as required by the law, IRS notified the three taxpayers whose data the employee had accessed.

With a few exceptions, the volume of salvage timber the Forest Service has offered for sale has remained fairly constant over the years. However, as the green (or nonsalvage) timber sale program has decreased in size, the salvage sale program has increased as a percentage of the total volume offered for sale. For example, even though the actual salvage timber offered for sale declined from about 2.9 billion board feet to 1.9 billion board feet in 1990 through 1996, it actually increased as a percent of total timber offered for sale from about 26 percent to 48 percent during this same period. The National Forest Management Act of 1976, as amended (16 U.S.C. 472a), established the Salvage Sale Fund as a permanent appropriation, and the Congress appropriated $3 million in fiscal year 1977 to get it started. The act authorized the Secretary of Agriculture to require timber purchasers to make deposits into the Salvage Sale Fund as part of the payment for the timber. Such deposits are then available to replenish the fund and pay for the costs of preparing and administering future salvage sales. As appropriations to fund the overall timber program have decreased, the importance of the Salvage Sale Fund as a source of funding has increased. For example, in fiscal year 1990, moneys from the Salvage Sale Fund represented 20 percent of all funds needed for the green and salvage timber programs, but by fiscal year 1996, the amount had risen to 45 percent. The Salvage Sale Fund is not the only fund in which salvage sale timber receipts are deposited. Salvage sale receipts not used to recover costs may be deposited into (1) the Knutson-Vandenberg (K-V) Fund, where they are used to reforest harvested timberlands, and (2) the National Forest Fund, where they can be used to make required payments to the states, the Roads and Trails Fund, and other obligations. Under federal law, at the end of each fiscal year, 25 percent of all moneys received at each national forest, including moneys received from salvage sales, is to be paid to the state in which the forest is located. These funds are to be expended for public roads and schools. Federal law also requires that at the end of the fiscal year, 10 percent of all moneys received is to be deposited into the Roads and Trails Fund. These funds are to be expended for roads and trails in the forests from which the moneys were derived. The Forest Service's guidelines require that a plan be prepared for each salvage sale or group of small sales. This plan determines the amount of receipts to be deposited into the Salvage Sale Fund to recover the sale's costs. Specifically, the salvage sale plan identifies the sale's volume, the sale's direct and indirect costs, and any additional amount that may be collected to meet future program needs. The salvage sale plan is the only document in which these costs are estimated and identified on a sale-by-sale basis. The Forest Service's accounting systems do not track actual sale-by-sale costs. The history of the Salvage Sale Fund has been one of a growing balance through fiscal year 1993 and then a declining balance for the next 3 years. From the start of fiscal year 1990 through the end of fiscal year 1993, the Salvage Sale Fund's balance more than doubled, from $111 million to a high of $247 million (see table 1). Declines through fiscal year 1996 lowered the balance to $186 million, a drop of 25 percent. The fund's ending balance declined from fiscal years 1994 through 1996 for the following reasons: In fiscal year 1994, $40.2 million of the fund's balance was considered excess to the salvage sale program's anticipated needs and was used for other authorized purposes. During fiscal year 1994, salvage timber offered for sale declined to its lowest level in almost 10 years. As a result, less salvage sale receipts were collected from these sales in fiscal years 1995 and 1996. In fiscal year 1995, the emergency salvage timber sale program was implemented and additional costs were incurred to prepare and administer sales that would generate receipts largely in future years. In fiscal year 1996, as costs for the emergency salvage timber sale program continued to rise, the Forest Service deposited $35.6 million originally intended for the Salvage Sale Fund into the National Forest Fund to cover a shortage in the funds needed to make the payment to the states and other obligations. In addition, Forest Service officials stated that lowered receipts resulted from the volume offered under the emergency salvage program because the salvage timber was of lower quality. Because the fund's balance had declined for 3 years and because the salvage sale program's obligations for the last 2 years exceeded deposits to the Salvage Sale Fund by more than $30 million, we asked Forest Service officials to provide us with information about the agency's ability to meet the salvage sale program's future needs with available funding levels. They told us that the Salvage Sale Fund's obligations for fiscal year 1997 and 1998 will be much lower than those in fiscal year 1996 because they expect a lower volume of salvage timber to be offered for sale. In addition, the Forest Service projects that in fiscal year 1997, about $167 million in salvage sale receipts will be deposited into the fund to cover an estimated $172 million in obligations. Forest Service officials expect the fund's fiscal year 1997 ending balance to be about $182 million, an amount they consider sufficient to meet expected needs of $153 million in fiscal year 1998. Several management practices that affect the flow of salvage sale receipts into the fund need to be improved to ensure more consistency in the salvage sale program. Specifically, these practices include how regions and forests (1) establish priorities for distributing salvage sale receipts, (2) establish estimates of costs to be recovered, (3) review salvage sale plans for completeness and accuracy, and (4) satisfactorily correct deficiencies. When timber sale receipts were at much higher levels, Forest Service regional and forest-level officials decided how to distribute receipts. As a result, none of the four forests we visited distributed salvage sale receipts in the same order or complied with the legislative distribution priorities. Recently, however, declining timber receipts, combined with concerns about meeting all required obligations, resulted in headquarters actions to clarify how receipts should be distributed. It is not yet clear whether these clarifications will ensure that regions and forests handle the distributions of receipts in keeping with the different legislative priorities applicable to salvage and green sale receipts. If the separate legislative priorities are not applied, salvage sale receipts could be used for other purposes before the fund is replenished to cover costs. The first legislative priority for the distribution of timber sale receipts is the required 25-percent payment to the states. Even though the 25-percent requirement applies to receipts from both salvage and green sales, it does not require that the payment be made from the same source that generated the receipts. For example, if the receipts from green sales are sufficient, then they may be used to make the payment to the states that are attributable to salvage sales. There is one basic difference in how salvage sale receipts and green sale receipts are to be handled once the 25-percent requirement is met: Salvage sale receipts must be deposited into the Salvage Sale Fund until the sale's preparation and administration costs are recovered. This deposit must occur from salvage sale receipts because receipts from the sale of green timber may not be deposited to the Salvage Sale Fund. Once salvage sale costs are recovered, any remaining salvage sale receipts may then be deposited in accordance with the priorities attributable to green sales. Since September 1996, the Forest Service has made several attempts to clarify how timber sale receipts should be distributed. These include amendments to the manual and the handbook as well as both interim and draft guidelines. The Forest Service issued interim guidelines in January 1997 to provide guidance until a task force developed and completed national guidelines. This task force issued its first draft in June 1997, a second draft in August, and a final report on August 28, 1997. However, none of these documents--the amendments, the interim or draft guidelines, or the final task force report--clearly illustrated the separate priorities existing for the distribution of salvage and green timber sale receipts. In its report, the task force recommended establishing priority groups to distribute timber receipts. For example, the first priority group includes required commitments for the payments to the states, the payment to roads and trails, the payments for the next year's planned purchaser-elect road program, and the recovery of required K-V reforestation costs. The second priority group includes the regional and local needs of the Salvage Sale Fund and other reforestation activities. However, the priority groupings do not show that, unlike green sale receipts, deposits to the Salvage Sale Fund must be made to recover costs before the identified K-V reforestation requirements are satisfied. If receipts are set aside for other activities before salvage sale costs are recovered, the amount remaining may be insufficient to adequately replenish the fund. The task force's report has been sent to the regions for implementation. How it will be implemented and interpreted remains to be determined. The four regions we reviewed were all responding in different ways to the interim guidance they had received: Officials in the Southern Region stated that because the region has always met the payments to the states and the other required payments, they saw no reason to change their established priorities as a result of the interim guidance. The region and the forests will monitor the situation to ensure that the National Forest Fund can meet all of its obligations, but the forests will continue to decide how to distribute timber sale receipts. The Pacific Northwest Region and the Northern Region have adopted regional policies similar to those in the task force's June draft, except that the priorities within the first category have been reordered. For example, required reforestation is listed before the payments to the states. The Pacific Southwest Region is following the January interim guidance. We reviewed the task force's final report, including the new guidance, which clearly identifies the 25-percent payment to the states as the first priority and the appropriate source of funding for the Roads and Trails Fund, both of which were not always clear in earlier guidance. However, the relative priority of distributing receipts from salvage sales to the Salvage Sale Fund and to the K-V Fund remains unclear. For example, the guidance states that the Salvage Sale Fund takes priority over the K-V Fund for salvage sale receipts but later states that if insufficient value is received on a salvage sale to fund the needs of both the Salvage Sale Fund and the K-V Fund, then a decision must be made as to which fund will take priority. In addition, the transmittal letter leaves the relative priority between the Salvage Sale Fund and K-V Fund to the discretion of the responsible line officer. These statements could easily lead to continued confusion. Consequently, we remain concerned about whether the final version of the guidance will be clear enough to be correctly interpreted or consistently implemented by those who must use it. Our concern stems in part from the variety of regional practices we found for the interpretation and implementation of the interim and draft guidelines as well as for the other problems discussed below. A critical step in replenishing the Salvage Sale Fund is accurately estimating the amounts necessary to reimburse the fund for direct and indirect sale costs. Because the Forest Service does not account for actual costs on a sale-by-sale basis, these costs must be estimated using cost information from previous years. While these estimates are used to determine what can be deposited into the Salvage Sale Fund, the Forest Service has not provided detailed guidance on how these costs should be determined. The method used to estimate costs is left to the regions, which, in turn, often pass this decision along to the individual forests. This practice has led to a variety of cost development methods. At the four forests we reviewed, four different cost development methods were used. For salvage sales awarded in fiscal year 1995, the Clearwater National Forest developed costs using a 3-year average of cost data taken from the accrual-based Timber Sale Program Information and Reporting System; the Umatilla National Forest used fiscal year 1992 expenditure data taken from the cash-based Central Accounting System; the Stanislaus National Forest used a 3-year average of the Central Accounting System expenditure data; and the Homochitto National Forest developed its own cost estimates on the basis of its experience. The Forest Service does not account for costs on a sale-by-sale basis, and as a result, the method chosen to estimate these costs can have a substantial impact on the amount to be deposited in the fund. As the size of the salvage sale program changes, the costs associated with it rise and fall. Thus, the costs selected and the period chosen can have a significant effect on the amount identified as needed to replenish the fund. For example, if the Umatilla National Forest had used the 3-year average method utilized by the Stanislaus National Forest, its identified costs would have been $1.3 million instead of the $367,223 actually claimed. By selecting a method that incorrectly estimates the program's cost, a forest runs the risk of not setting aside the amount necessary to finance the program in the future. (For a table showing the total costs for the sales examined in the four forests we reviewed, see app. II.) Forests need to accurately prepare salvage sale plans because these documents serve as the basis for depositing available receipts to the Salvage Sale Fund. At the four forests we reviewed, however, we found numerous errors. For example, (1) regional and headquarters overhead had not been included in the indirect costs, (2) overhead was calculated on overhead, (3) incorrect volumes were listed, (4) excessive allowable surcharges were calculated, and (5) basic computational errors were made. These errors and omissions point to a lack of adequate review of the salvage sale plans by managers at the forest and regional levels. The effect of these errors varied, understating costs in some places and overstating them in others. For example, of the 16 sales reviewed at the Umatilla National Forest, 6 overstated indirect costs and 7 understated them. The overall impact was an overstatement of about $21,000. At the Stanislaus National Forest, the program's future needs were based on 150 percent of direct and indirect costs instead of the 50 percent permitted by the Forest Service's handbook; this calculation overstated the amounts to be collected for the nine sales reviewed by almost $150,000. Furthermore, this incorrect calculation method has been in effect since at least 1991. We also found instances in which salvage sale plans were never prepared. At the Homochitto National Forest, 3 of the 19 sales we reviewed had no plan. Without a plan, there is no basis for distributing any receipts to the Salvage Sale Fund. This omission at the Homochitto National Forest cost the Salvage Sale Fund about $19,000 in deposits. Over the past 5 years, both the U.S. Department of Agriculture's Office of Inspector General and various regional and headquarters teams within the Forest Service have reviewed the salvage sale program. These reviews have reported many management weaknesses similar to those we identified. However, many of these management weaknesses persist because the Forest Service has not communicated the results of these reviews to all regions or adequately followed up to ensure that corrective actions are taken. In 1992, the Office of Inspector General audited three Forest Service regions to determine whether the salvage sale program complied with the applicable laws and regulations and whether collections and receipts were appropriate. Among other things, the Inspector General found that the guidelines and monitoring of the salvage sale program were inadequate, improvements were needed in the management and in the collection of salvage sale funds, and controls over expenditures charged to the salvage sale program were inadequate. To correct these problems, the Inspector General recommended that the Forest Service provide detailed instructions to its field offices on the management of the salvage sale program and that the program be monitored on a regular basis. The Inspector General also recommended that detailed and specific instructions be established for the preparation of salvage sale plans in addressing allowable direct costs, the calculation of indirect costs, and permissible excess collections. In response to these recommendations, the Forest Service updated and clarified its manual and handbook and agreed to schedule additional reviews of its salvage sale program. However, at the four forests and regions that we reviewed, neither the guidance nor the monitoring is specific enough to address the problems we found. For example, while the guidance requires that estimated costs be included in salvage sale plans, it does not state how estimates should be calculated. The guidance also requires that costs be updated, but it does not state how or on what basis. The monitoring system put in place does not include provisions requiring follow-up to ensure that problems are corrected or that the weaknesses, problems, or best practices identified in one office are communicated throughout the agency so that changes can be made everywhere they are needed. The Forest Service conducts its own reviews of the salvage sale program by annually selecting one or two regional offices for in-depth analysis. During these reviews, headquarters and regional officials visit selected forests and examine guidelines, program direction, and accounting procedures. However, the problems or best practices identified during these reviews are not communicated throughout the agency so that changes can be made where needed. Consequently, the problems identified during a 1992 review were also identified as problems 3 years later in another region. Since 1992, each region that we visited had been selected for review. The Forest Service review teams found many of the same problems we identified, including incorrect calculation and updating of direct and indirect costs, inconsistent priorities in distributing salvage sale funds, failure to update salvage sale plans, and failure to collect the correct amount for the program's future needs. Action plans were prepared to address the problems uncovered by the reviews, but the Forest Service did not share this information with other regions or do the follow-up necessary to ensure that the weaknesses were actually corrected. For example, when we asked Southern Region officials about the status of the action items in their September 1995 review, we were told that many of the items in the review that were targeted for completion by June 1996 were still open in June 1997. Headquarters officials said that because of limited staff, they seldom follow up to ensure that the problems are corrected, and they also do not report the results of their reviews to other regions. They said that they rely on regional officials to report on the status of corrective actions and that they would follow up on specific weaknesses during their next review. The Forest Service has established two task forces whose work may help improve some of the management practices affecting Salvage Sale Fund replenishment. The first task force, dealing with funding priorities, has already been discussed. The other task force is developing directions for calculating indirect costs, improving internal management controls over indirect costs, and identifying ways to best manage the K-V Fund. Forest Service officials expect, however, that some of these findings will be applicable to the management of the Salvage Sale Fund. Forest Service officials stated that the issuance date for the task force's report is uncertain at this time. Over the years, the Forest Service has often used task forces to identify problems and recommend solutions. The results of these task forces' studies, like those of activity reviews, are often thorough and constructive, and they could do much to correct identified problems if the recommendations were communicated and implemented. As we have pointed out, however, regions and forests do not always carry out suggestions or recommendations for change. As we stated in our testimony of July 31, 1997, the highly decentralized management structure of the Forest Service gives managers considerable autonomy and discretion for interpreting and applying the agency's policies and directions. As a result, it will be a significant challenge for the Forest Service to ensure that the recommendations made by the two task forces will be fully and consistently implemented throughout the agency. The actions taken by the Forest Service in the past year to improve the management of the Salvage Sale Fund show a willingness to correct identified weaknesses. Task forces have completed the new guidance for the distribution of timber sale receipts and are identifying ways in which the management of the Salvage Sale Fund can be improved. Substantial progress has been made. The guidance on priorities, however, needs additional clarification to ensure compliance with the legislative priorities for the distribution of salvage sale receipts. In addition, concerns about management practices affecting fund replenishment still need to be resolved and corrective action implemented. The need for consistent action requires that the guidance include the identification of appropriate data sources, cost calculation methods, and specific monitoring and feedback activities. In addition, the correction of individual mistakes or errors may not result in solving systemic problems. When reviews identify best practices or mistakes, some mechanism is needed to communicate this information throughout the agency so that all locations benefit. To help ensure that appropriate and consistent practices are in place to manage the Salvage Sale Fund, we recommend that the Secretary of Agriculture direct the Chief of the Forest Service to take the following actions: Clarify the agency's guidance to emphasize that the Salvage Sale Fund takes priority over the K-V Fund for the distribution of salvage sale receipts until preparation and administration costs have been recovered. Establish national guidance that identifies acceptable data sources and methods for calculating the cost estimates that determine the fund's replenishment requirements. Establish national procedures to ensure that salvage sale plans will be adequately reviewed to detect errors. Develop national follow-up procedures to ensure that errors, problems, or best practices found in one location are communicated, corrected, or implemented everywhere. We provided a draft of this report to the Forest Service for review and comment. The Forest Service said that the report accurately and fairly presented the information about the fund's balance and the management practices affecting the replenishment of the fund. The Forest Service agreed with the recommendations for corrective action. To respond to the assignment objectives, we reviewed pertinent legislation, the agency's guidance, the agency's financial records, monitoring reports, and selected salvage sales. We spoke with representatives from Forest Service headquarters, four regional offices, and four national forest offices to discuss how the Forest Service manages the Salvage Sale Fund. We conducted our work from September 1996 through September 1997 in accordance with generally accepted government auditing standards. Appendix I provides a detailed discussion of our scope and methodology. We are sending copies of this report to the Secretary of Agriculture, the Chief of the Forest Service, the Director, Office of Management and Budget, and appropriate congressional committees. We will also make copies available to others upon request. If you or your staff have any questions about this report, please call me at (206) 287-4810. Major contributors to this report are listed in appendix III. Sales of salvage timber represented nearly half of all timber offered for sale in fiscal year 1996. Because of this increase in salvage sales, the Ranking Minority Member, Subcommittee on Interior and Related Agencies, House Committee on Appropriations, asked us to provide information on the status of the fund's balance and the management practices used by the Forest Service to replenish the Salvage Sale Fund. We agreed to provide this information in two phases. In phase one, we provided information on the uses and status of the fund and compared the timber sales receipts deposited in the Salvage Sale Fund to the outlays from the fund on a national, regional, and forest-level basis for fiscal years 1991 through 1995. The second phase provides a more in-depth assessment of the current status of the fund's balance and the adequacy of the Forest Service's efforts to replenish and manage the fund. To obtain information on the current status of the Salvage Sale Fund's balance, we requested information on fiscal year 1996 receipts, expenditures, and the fund's ending balance and reviewed the Forest Service's fiscal year 1997 projections for salvage sale deposits and obligations. In addition, we spoke with the Department of Agriculture's Office of General Counsel to establish the legislative distribution priorities for salvage sale receipts. To obtain information on the adequacy of management practices affecting the replenishment of the fund, we spoke with agency officials at all organizational levels. We also reviewed the agency's guidance, financial records, and monitoring reports along with applicable laws and their legislative history. Specifically, we interviewed representatives from the Forest Management, Budgeting, and Financial Management offices at Forest Service headquarters, four regional offices, and four forest offices. The four regions we selected were chosen because they had large salvage sale programs, provided wide geographic coverage, and had a variety of salvage conditions ranging from fires to insect infestation. Within each region, one forest was selected for detailed review. Two of the forests--the Clearwater and Stanislaus--were chosen because they were included in our recent review of the emergency salvage sale program. We selected the Homochitto National Forest, within the National Forests in Mississippi, because of the extensive Southern Pine Beetle epidemic in fiscal year 1995 and the resulting large salvage sale program. Finally, we selected the Umatilla National Forest in Oregon because it had a large salvage sale program and had not been reviewed by GAO in recent years. Table I.1 provides the forests' names, locations, and regions. We examined the Forest Service's handbooks and manuals for guidance on how to develop direct and indirect salvage sale cost rates, distribute salvage sales receipts, develop salvage sale program budgets, and prepare individual salvage sale plans. To ascertain how this guidance was used, we performed a detailed review of the salvage sales awarded at the four forests in fiscal year 1995. Fiscal year 1995 was selected because most sales were prepared before the major impact of the emergency salvage sale program and because enough time had elapsed for many of the sales to be completed. For the Clearwater, Stanislaus, and Umatilla National Forests, we selected all salvage sales awarded in fiscal year 1995. Because of the extensive beetle epidemic in 1995, the Homochitto awarded more than 800 timber sale contracts and permits to sell the timber volume necessary to accomplish its salvage sale program. Because we were testing the system rather than extrapolating our findings to the whole, we randomly selected 13 contracts and 6 permits for detailed review. Our review of the salvage sale files also included examining pertinent data on sales volumes, the salvage sales' collection plans, the sale areas' improvement plans, and financial documents showing how the receipts were distributed among the various Forest Service funds. Because the Forest Service does not have a sale-by-sale accounting system, we used data on forest-level obligations as the basis for determining the charges to the Salvage Sale Fund. We did not perform a financial audit of these data, nor did we independently verify or test the reliability of the deposits, the fund's balance, or other Forest Service-supplied data. However, the Forest Service's financial statement audit reports for fiscal years 1992 through 1995 revealed significant internal control weaknesses in various accounting subsystems that resulted in unreliable accounting data, including timber-related data. Even with these weaknesses, we used the data because they were the only data available. We reviewed the agency-conducted activity reviews completed since fiscal year 1992 to determine whether the deficiencies we noted were similar to those identified internally. We then determined whether corrective action plans were developed and implemented. Finally, we reviewed the Department of Agriculture's Office of Inspector General's report issued in 1993 on the Forest Service's Salvage Sale Fund and reviewed the documents provided by the Inspector General that explain the corrective actions taken by the Forest Service in response to the Inspector General's recommendations. We conducted our review from September 1996 through September 1997 in accordance with generally accepted government auditing standards. Clearwater (5 sales) Stanislaus (13 sales) Umatilla (16 sales) Alan R. Kasdan The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO reviewed the status of the Salvage Sale Fund's balance and the management practices affecting the replenishment of the fund. GAO noted that: (1) after reaching a high of $247 million at the end of fiscal year (FY) 1993, the Salvage Sale Fund's balance declined 25 percent to $186 million at the end of FY 1996; (2) the decline occurred for a variety of reasons, and the fund's balance appears to be stabilizing in FY 1997; (3) if the Forest Service's estimates are correct, the Salvage Sale Fund's balance will total about $182 million at the end of FY 1997, a balance the Forest Service believes is sufficient to meet the estimated obligations for FY 1998; (4) several management practices that affect the flow of salvage sale receipts into the Salvage Sale Fund need to be improved; and (5) specifically, these practices include how regions and forests: (a) establish priorities for distributing salvage timber sale receipts; (b) establish estimates of the costs to recovered; (c) review salvage sale plans for completeness and accuracy; and (d) satisfactorily correct deficiencies.

As we discussed in our 2002 report, TPCC member agencies perform functions that include identifying export opportunities, providing financing and insurance, and working to create open markets for U.S. exports and investments. Chaired by the Secretary of Commerce, the TPCC currently has a staff of three Commerce trade professionals who work with other member agency officials on trade promotion initiatives and prepare the national export strategy. The TPCC generally meets once or twice a year at the head-of-agency level and quarterly or monthly at the deputy level (e.g., assistant secretary or under secretary); TPCC member agency staff discuss issues frequently but meet on an ad hoc basis. The TPCC's national export strategies include a table showing member agencies' budget authority for trade promotion activities. Since 2000, this table has included all or part of the budgets of 11 of the TPCC's member agencies--the Departments of Agriculture, Commerce, Energy, Labor, State, and the Treasury; Ex-Im Bank; OPIC; SBA; the U.S. Trade and Development Agency; and the U.S. Trade Representative. Although the TPCC, together with the agencies, determines which agencies' budgets are included in this table, the agencies themselves decide which of their programs or activities constitute trade promotion. However, the tables present only the total trade promotion budget authority for each agency without detailing the programs and activities. The Department of Agriculture counts nine programs as trade promotion, along with salaries and expenses for its Foreign Agricultural Service. The Commerce Department counts three units within its International Trade Administration--Trade Promotion and U.S. and Foreign Commercial Service, Manufacturing and Services, and Market Access and Compliance--and a grant for promoting foreign tourism within the United States. The State Department considers a portion of its budget to be related to trade promotion. This portion includes part of State's budgets for its regional bureaus, some of which have overseas staff in locations with no Foreign Commercial Service officers. It also includes State's budget for trade capacity building, advocacy, and promotion activities performed by, or funded through, department offices such as the Office of Commercial and Business Affairs. The national export strategies' trade promotion program budget authority tables also include the entire budgets of Ex-Im Bank, OPIC, the U.S. Trade and Development Agency, and the U.S. Trade Representative as well as very small amounts of the budgets of the Departments of Energy, Labor, and the Treasury and SBA. To help agencies address barriers to working collaboratively, GAO has previously evaluated efforts such as export promotion that cut across more than one agency. In an October 2005 review of several joint agency efforts that was intended to help agencies address barriers to working collaboratively, we identified eight key practices that can help enhance and sustain interagency collaboration: Define and articulate a common outcome--that is, a measurable goal. Establish mutually reinforcing or joint strategies. Identify and address needs by leveraging resources. Agree on roles and responsibilities. Establish compatible policies, procedures, and other means to operate across agency boundaries. Develop mechanisms to monitor, evaluate, and report on results. Reinforce agency accountability for collaborative efforts through agency plans and reports. Reinforce individual accountability for collaborative efforts through performance management systems. GAO reported on the need for an export strategy before the creation of the TPCC: in 1992, we found significant problems associated with inefficiency, overlap, and duplication of U.S. trade promotion efforts. Since its inception, we have reviewed the TPCC's progress in coordinating trade promotion several times. For example, in 1994, we recommended that the TPCC should establish priorities with a well-reasoned and strong analytical basis, and in 1996, we commented that the TPCC lacked measures of value added by export services and that this limited its ability to contribute to the budget process. We made similar comments in 1998 and 2002. In our 2002 report, we recommended that the Chairman of the TPCC ensure that its national export strategies consistently identify specific goals established by the agencies within the strategies' broad priorities; identify allocation of agencies' resources in support of their specific goals; and analyze the progress made in addressing the recommendations in the TPCC's prior annual strategies. Since 2002, the budget authority for trade promotion reported in the national export strategies has fallen or remained relatively unchanged at TPCC member agencies, but the implication of these trends for agencies' trade promotion activities is not clear. The total reported budget authority for trade promotion fell by more than one-third between fiscal years 2002 and 2007, primarily owing to decreased authority for Agriculture and Ex- Im Bank. At the same time, the trade promotion budget authority for other key TPCC agencies remained relatively flat. (See fig. 1.) The four agencies named in figure 1 account for more than 90 percent of TPCC member agencies' combined budget authority related to trade promotion, which ranged from $2.2 billion in fiscal year 2002 to $1.5 billion in fiscal year 2006 (enacted) and $1.3 (requested) in fiscal year 2007. The Agriculture Department has consistently held the largest share, more than 40 percent over the last 4 years. During this period, Agriculture's share dropped from a high of 63 percent to 44 percent in fiscal year 2007 as funding was reduced or eliminated in three program areas: export credit guarantee programs, Public Law 480 Title I food assistance, and the Market Access Program. The budget authorities related to trade promotion at the Departments of Commerce and State, while remaining relatively steady in dollar terms, rose from 15 to 27 percent and 6 to 15 percent of the total, respectively. Ex-Im Bank's share of the total dropped sharply, from 38 percent in fiscal year 2002 to 4 percent in fiscal year 2004, and has remained at less than 10 percent since then. It is difficult to determine the effect of these budgetary trends on the availability of trade promotion resources. For example: Although Commerce's trade promotion budget authority has not changed significantly, its trade promotion activities may nonetheless be affected by increases in related costs. According to Commerce officials, the Commerce budget data includes budget authority for security at overseas offices. The officials provided us with information showing that security costs for these offices have risen by 8 percent since fiscal year 2005, leaving fewer resources available for trade promotion activities. The decline in Ex-Im Bank's budget authority, shown in figure 1, did not reduce its ability to provide export financing. OMB changed its method for determining expected loss rates for U.S. international credits, which took effect after fiscal year 2002 and contributed to lower Ex-Im Bank projections of subsidy costs and budget needs. Also, Ex-Im Bank had accumulated carryovers from prior years, which resulted in its requesting zero program appropriations beyond administrative expenses in fiscal year 2004 and program appropriations of less than $100 million in fiscal years 2005-2007. In addition, reasons for the national export strategies' inclusion or exclusion of agencies' budget authority as related to trade promotion are not always apparent. For example, until fiscal year 2007, Agriculture's trade promotion budget authority reported in the strategies included Public Law 480 Title I food assistance, although the primary objective of this program is to assist developing countries in obtaining needed resources, rather than promoting trade. Similarly, since 2000, the strategies have excluded the U.S. Agency for International Development (USAID) from the program budget authority table, stating that the agency's activities "support trade promotion indirectly through broad economic growth and reform, unlike other activities that more directly fund trade finance or promotion." However, the 2002 national export strategy included USAID in a letter from 10 key TPCC agencies and portions of the 2002, 2003, and 2004 strategies were devoted to a possible joint USAID- Ex-Im Bank program to support capital projects in developing countries. In addition, the strategies' budget tables include agencies such as the U.S. Trade Representative, Treasury, and Labor, which do not directly fund trade promotion activities. Coordination among TPCC agencies has improved, although there is still room for improvement. However, the national export strategies continue to provide little information on which to base future efforts to establish consistent, shared, measurable goals and align resources in agencies' export promotion programs to focus on results. TPCC's member agencies have pursued a number of efforts to improve coordination of trade promotion activities, responding to recommendations in its 2002 national export strategy. These recommendations resulted from a 2001-2002 survey of more than 3,000 small businesses and other research commissioned by the secretariat. According to agency officials, these efforts included several successful initiatives such as joint training and other activities that leverage resources from other TPCC agencies. For example: Interagency training. Since 2003, the TPCC has sponsored three annual interagency training sessions, attended by a total of 297 people. The sessions have included participants and presenters from a variety of member agencies, including Agriculture, Commerce, Ex-Im Bank, OPIC, SBA, State, the U.S. Trade and Development Agency, and USAID, and according to agency officials have fostered greater cooperation through the sharing of information. In one instance, a State Department official recounted how a training session led by a colleague resulted in collaboration between Commerce and State that (1) improved service to companies seeking U.S. visas for their foreign partners and (2) produced a list of State Foreign Service contacts who could assist exporters in important markets such as Africa, where many countries have no Foreign Commercial Service presence. Joint outreach. Ex-Im Bank and OPIC have partnered with SBA to improve outreach and service to small- and medium-sized businesses. In May 2002, Ex-Im Bank and SBA signed a memorandum of cooperation to increase small businesses' awareness and use of each agency's financing products, and the agencies share the same application form for their respective products. In September 2004, the two agencies signed a memorandum of understanding that provides for a Ex-Im Bank to co- guarantee loans to small-business exporters when SBA has already agreed to guarantee its established maximum amount. In addition, on April 5, 2006, Ex-Im Bank's acting chairman and president announced a new position of Senior Vice President for Small Business and the establishment of a Small Business Committee to coordinate, evaluate, and enhance the agency's services to small businesses. In September 2002, OPIC and SBA formally integrated their efforts to promote the expansion of U.S. small businesses into emerging markets; as part of this effort, each agency is to provide training on its programs to the other's personnel. OPIC and SBA have signed a cooperative agreement, SBA has detailed staff to OPIC, and OPIC has streamlined its approval process for small business clients. Overseas support. In January 2005, State and the Commerce Department's Foreign Commercial Service completed a strategic plan to provide coordinated support at embassies with no Foreign Commercial Service staff. According to State officials, as a result of this plan, 75 percent of State-funded export promotion activities at these embassies are now tied directly to regional Foreign Commercial Service offices, up from 25 percent in 2002. Further, we were told that more of these embassies are submitting the commercial guide for their country via a new, Web-based process to Commerce's market research database, which is accessible to the public via www.Export.gov. State has also linked the embassies electronically to domestic U.S. Export Assistance Centers and recently developed an electronic commercial diplomacy toolbox for its Foreign Service officers in the field that helps them assist U.S. firms seeking to export. The toolbox provides links to joint State-Commerce strategic planning, interagency training, and Commerce and other TPCC agency Web sites that provide guidance on export-related issues such as business travel and export controls. According to State officials, these resources are primarily used by small businesses, which often lack the means to obtain such information on their own. However, despite this progress, coordination problems persist, according to member agency officials. For example, State Department officials said that concurrent realignments of Agriculture and Commerce overseas staff are not being coordinated, a situation that could lead to gaps in country coverage and thereby adversely impact U.S. commercial interests. State officials also described instances of poor coordination between some regional Foreign Commercial Service offices and nearby embassies that lack Commercial Service staff. They said that Commerce is working with State to improve this situation. For example, Commerce's regional office in Johannesburg will host a training program for the 11 embassies in southern Africa without Commercial Service officers. Another agency official told us that staff from at least two TPCC agencies were not aware of how certain other TPCC initiatives or agencies support their own agencies' trade promotion efforts. In addition, according to Agriculture officials, Commerce field staff have not adhered to roles, responsibilities, and procedures outlined in a January 2001 agreement between the two agencies and reiterated in a March 2004 cable. As a result, the officials told us, a joint Agriculture-Commerce effort to help U.S. companies export agricultural goods--described in the 2004 national export strategy as a "huge success"--was never fully implemented. Commerce officials acknowledged these issues but told us that coordination between the two agencies had improved. Citing a June 2005 Commerce report, the Agriculture officials noted that both agencies have formally agreed to increase their joint cooperation. As we found in 2002, the TPCC's annual strategies provide limited information regarding agencies' export promotion goals and progress. In addition, the strategies do not review agencies' budget allocation or represent the goals of some key agencies, and the strategies' focus varies yearly. Consequently, the TPCC's ability to provide in the strategy a plan for coordinating federal trade promotion activities, as directed by Congress, is constrained. As in 2002, the national export strategies do not identify member agencies' goals or assess their progress toward the TPCC's broad trade promotion priorities. According to agency officials, the TPCC secretariat does not systematically collect or compare agency plans and performance measures to define agency goals and assess progress. In addition, the agencies have not articulated mutual, measurable goals for trade promotion. Some member agency officials noted that their agencies' plans and performance evaluations are prepared independently of the TPCC. Although several agencies mention the TPCC in their strategic plans, each agency, as we noted in our 2002 report, generally measures the results of its export promotion activities according to the extent to which its own mandate emphasizes export promotion. Despite the TPCC's mandate to propose an annual unified trade promotion budget, the TPCC's annual strategy does not review member agency budgets in relation to their goals and the agencies do not adjust their budgets to reflect the national export strategy. As we reported in 2002, the TPCC does not have specific authority to direct member agencies' allocation of their resources. Agency representatives told us, as they had during our 2002 review, that they would resist any effort by the TPCC to review their budgets; they said that each agency has its own statutory requirements and that TPCC agencies' budgets are appropriated by different congressional subcommittees. The agencies submit their proposed budgets separately to OMB. TPCC officials told us that the TPCC does not recommend budget priorities to OMB, a practice that, as we noted in our 2002 report, was last performed in 2000. The national export strategies do not represent the goals of some key member agencies. For example, although Agriculture's Foreign Agricultural Service has accounted for about half of TPCC member agencies' combined budget authority over the past 4 years, the 2005 strategy contains only one notable reference to this agency. In addition, the 2005 strategy identifies Brazil as a "spotlight" market, although Agriculture does not consider it a high-priority market because it competes with the United States in exporting agricultural products. Further, the 2005 strategy included very little of the information that the Foreign Agricultural Service provided to the TPCC secretariat in commenting on a draft of the strategy. However, Agriculture officials told us that a draft of the 2006 strategy, due out in May, would likely incorporate more information about their agency. Regarding other agencies, recent strategies have focused on China, a market in which USAID and OPIC do little or no business. The focus of the national export strategies continues to change from year to year with little evaluation of previous efforts' effectiveness. For example, although TPCC officials noted that the national export strategies have consistently focused on China, the strategies describe a series of new China-related initiatives without following up on the outcome of specific activities from one year to the next. The exception to this pattern was a 3- year focus on recommendations from the TPCC's survey and other client research, from 2002 through 2004; however, new areas of focus continued to be introduced. For example, the 2003 strategy introduced capacity building, Russia, and transportation security. The 2004 strategy highlighted China and free trade agreements, as well as coordination in crisis regions (primarily Iraq and Afghanistan), which had resulted from the survey and other information gathering and had been briefly raised in the 2002 and 2003 strategies. The 2005 strategy covered free trade agreements, China, and six "growth markets" (Japan, South Korea, India, Brazil, Russia, and the European Union). Some member agency officials commented on the ad hoc nature of the national export strategies and the lack of staff-level meetings focused on specific issues. Although available data suggest that TPCC member agencies have involved small and medium-sized businesses in trade promotion activities, a lack of systematically collected information makes it difficult to assess progress or trends. First, member agencies measure small and medium- sized businesses' participation in trade promotion activities to varying extents and using various indicators. For example: Department of Commerce. U.S. and Foreign Commercial Service officials stated that they have recorded about 10,000 transaction "successes" a year over the past 5 years involving small and medium-sized business export sales and that they are currently in the process of updating their client management system to enable them to observe a transaction for a given client as it develops over time, progressing through interactions with other TPCC member agencies such as Ex-Im Bank, SBA, and other agencies. The U.S. and Foreign Commercial Service also runs an Advocacy Center, which helps U.S. companies compete for specific foreign sales contracts on a case-by-case basis. According to information posted on the U.S. Government's export-related website (www.Export.gov), the center has helped 28 small and medium-sized enterprises win contracts valued at a total of $637 million since June 2002. Commerce's Office of Trade and Industry Information within its Manufacturing and Services unit compiles detailed statistics on small and medium-sized business exports. Ex-Im Bank. Ex-Im Bank tracks small business' participation in its programs because Congress requires it to make available a certain percentage of its export financing to small businesses. For fiscal years 2000-2005, Ex-Im Bank reported that slightly less than 20 percent of the value of its financing directly benefited small businesses, and in recent years it has reported that about 85 percent of its authorized transactions directly benefited these clients. However, we recently found flaws in the bank's data and methodology, including shortcomings in its system for estimating about one-third of its small business financing annually and conflicting records for the same companies. Department of Agriculture. The Foreign Agricultural Service's Market Development Program tracks a variety of indicators related to small businesses, including the number of its activities that support small businesses, the number of small businesses making a first export sale, the number of small businesses with increased sales of 20 percent or more, and the value of small companies' sales. OPIC. OPIC measures the number of small business projects that result from its outreach through a Small Business Center. OPIC's 2003-2008 strategic goals include supporting these clients and reducing to 60 days the time it takes to process their applications for OPIC assistance. OPIC officials stated that the center targets small businesses with annual revenues of less than $35 million and that since the center's establishment in 2002, the share of OPIC transactions involving such companies increased from 67 percent in 2002 to 80 percent in 2005. Department of State. State does not presently collect data on small and medium-sized businesses' involvement in trade promotion activities. However, according to a State Department official who works with small businesses, the agency has recently initiated a system to track commercial "success stories." The official said the system, which State anticipates will be operational by June 2006, will track requests for help with commercial transactions and will also include data on the requesting companies--such as their number of employees and annual sales--that will enable State to identify small- and medium-sized businesses. Finally, although 2006 TPCC agency goals include increasing the number of small and medium-sized businesses that use member agency programs, the TPCC does not collect information from member agencies on these businesses' participation in agency programs and activities, according to TPCC officials. Moreover, the national export strategies provide anecdotal, rather than systematic, reporting on small and medium-sized business participation in trade promotion activities. Although the national export strategies describe activities such as a cooperative agreement between SBA and OPIC, they provide no comprehensive summary of small and medium-sized business participation in all member agency activities. Further, the strategies do not assess agency reporting on small and medium-sized enterprise participation during the current year or identify trends in such participation. This makes it difficult to assess progress or trends in participation across agencies. Our review of the TPCC's efforts shows it has achieved some important progress. For example, the TPCC has pursued a number of initiatives to improve agency coordination of trade promotion activities. Since our most recent report in 2002, the TPCC has completed and implemented a number of changes as a result of its private sector outreach efforts, including joint training and other activities that leverage resources of other TPCC member agencies. Although coordination challenges continue, there appears to be more discussion among TPCC member agencies and a higher level of awareness of the activities of the other agencies. This is a noteworthy improvement over the situation that existed in the early 1990s, when GAO began to evaluate the federal government's trade promotion efforts. Despite this progress, the TPCC continues to face challenges in its ability to achieve other aspects of its mission of coordinating federal export promotion activities. For example, the TPCC's annual export strategies do not review or assess agency goals or activities. Moreover, despite its mandate to propose a unified federal trade promotion budget, the TPCC continues to have little influence over agencies' allocation of resources for trade promotion. GAO has consistently reported on the TPCC's lack of progress in these fundamental objectives. Based on our long record of oversight over the TPCC, we believe that it can continue to make improvements in agency coordination as well as lead future outreach efforts to the private sector. In addition, we believe that the TPCC can do a better job of tracking small and medium-size businesses' participation in a consistent manner. However, we question whether the TPCC's current structure will allow it to overcome the challenges associated with assessing agency goals and influencing the allocation of resources. We also question whether the TPCC's current move into the office of the Assistant Secretary for Trade Promotion within the Commerce Department will help it overcome these challenges. As we noted in previous reviews of the TPCC, sustained high-level administration involvement is necessary for the TPCC to achieve its fundamental objectives. Mr. Chairman, this concludes my prepared remarks. I would be happy to address any questions that you may have. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

In 1992, Congress established the Trade Promotion Coordinating Committee (TPCC) to provide a unifying interagency framework to coordinate U.S. export promotion activities and to develop a governmentwide strategic plan. TPCC member agencies' activities include providing training, market information, advocacy, trade finance and other services to U.S. companies, especially small- and medium-sized businesses. These U.S. government agencies together have $1.5 billion in budget authority for export promotion programs and activities for fiscal year 2006. Each year, the TPCC submits to Congress a mandated national export strategy, reporting member agencies' activities and trade promotion budget authority and establishing broad priorities. The TPCC secretariat, which has no budget of its own, is housed in the Commerce Department, which chairs the committee. In this testimony, which updates findings from a 2002 report, GAO (1) reports on trends in TPCC member agencies' budget authority; (2) assesses TPCC's coordination of trade promotion and its national export strategies; and (3) discusses small- and medium-sized businesses' participation in trade promotion activities. TPCC's national export strategies for fiscal years 2002-2006 show that agencies' trade promotion-related budget authority dropped by about one third. This resulted mainly from budget changes at the Department of Agriculture and Ex-Im Bank, which account for more than half of U.S. trade promotion budget authority. At the same time, budget authority for two other key agencies, the Departments of Commerce and State, remained relatively steady. However, the effect of these trends on the agencies' trade promotion activities is unclear. For example, the decline in Ex-Im Bank's budget authority did not reduce its ability to provide export financing. TPCC member agencies have taken several steps, such as participating in interagency training and outreach to exporters, to improve coordination of trade promotion efforts. However, coordination challenges persist, for example, among the Departments of Commerce, State, and Agriculture regarding the allocation of overseas staff for trade promotion activities. In addition, as GAO found in 2002, the annual national export strategies have several limitations that affect the TPCC's ability to coordinate trade promotion activities. For example, the strategies do not identify or measure agencies' progress toward mutual goals or review their budget allocations. In addition, they focus on different topics each year without evaluating progress in addressing previous years' topics. GAO has made similar comments in several prior reviews of the TPCC. A lack of systematic information makes it difficult to assess progress or trends in small and medium-sized businesses' participation in trade promotion activities across agencies. TPCC agencies track small-business participation in a variety of ways. The national export strategies provide only anecdotal information on these businesses' participation in trade promotion activities.

The military services annually determine their current and future munition procurement requirements in accordance with the Defense Planning Guidance. Historically, the Defense Planning Guidance has directed the military services to arm a given force structure to win two nearly simultaneous major theaters of war. In recent years, the Department of Defense has engaged in a number of military operations that vary in size and circumstance from a major theater of war; consequently, the current National Military Strategy and the Defense Planning Guidance call for the services to prepare for a number of small-scale contingency operations in addition to the two major theaters of war. The conditions under which small-scale operations are fought may differ from conditions in a major theater war, which may increase the services' requirements for highly technical precision munitions designed to limit loss of life and expensive military assets. The increased use of precision munitions in recent conflicts reduced inventories and raised questions about whether adequate attention had been paid to the impact of small- scale contingencies on the ability of U.S. forces to respond and sustain operations for the two major theaters of war. Of the approximately $4.2 billion of munitions the services are planning to procure in fiscal year 2001, 46 percent (or $1.9 billion) will be used to procure precision munitions designed to reduce the number of conventional munitions needed to defeat enemy targets while at the same time limiting loss of expensive weapons systems and life. By fiscal year 2005, the services are planning to increase their procurement of precision guided munitions by about 5 percent. In 1994, to generate consistent munition requirements Department-wide, and to ensure that the military services have both an adequate supply and the appropriate types of munitions to address changing mission needs, the Department of Defense standardized the process by which the services determine their munition requirements. In 1997, the Department of Defense issued Instruction 3000.4, which sets forth policies, roles and responsibilities, time frames, and procedures to guide the services as they develop their munition requirements. This instruction is referred to as the Capabilities-Based Munitions Requirements process and is the responsibility of the Under Secretary of Defense for Acquisition, Technology and Logistics. The instruction describes a multiphased analytical process that begins when the Under Secretary of Defense for Policy develops, in consultation with the Chairman of the Joint Chiefs of Staff, the military services, and the warfighting Commanders in Chief, policy on munition requirements for the Defense Planning Guidance. The Defense Intelligence Agency uses the Defense Planning Guidance and its accompanying warfighting scenarios as well as other intelligence information to develop a threat assessment. This assessment contains estimates and facts about the potential threats that the United States and allied forces could expect to meet for each of the two major theaters of war scenarios. The warfighting Commanders in Chief, responsible for the major theaters of war scenarios, in coordination with the Joint Chiefs of Staff, use the threat assessment to allocate each service a share of the identified targets by phases of the war. Next, the services develop their combat requirements using battle simulation models and scenarios to determine the number and mix of munitions needed to meet the Commanders in Chief's objectives separately by each major theater of war scenario. To develop these requirements, the services draw upon and integrate data and assumptions from the Defense Planning Guidance requirements, warfighting scenarios, and target allocations, as well as estimates of repair and return rates for enemy targets and projected assessments of damage to enemy targets and installations. Other munition requirements include munitions (1) needed for forces not committed to support combat operations, (2) to provide a post-major theater of war combat capability, and (3) to train the force, support service programs, and peacetime requirements. These requirements, in addition to the combat requirement, comprise the services' total munitions requirement. The total munitions requirement is then balanced along with projected inventory and affordability to determine how many of each munition the services will procure within their specified funding limits and used to develop the services' Program Objectives Memorandum and Presidential budget submission. Despite Department efforts to standardize the process and generate consistent requirements, many questions have been raised about the accuracy or reliability of the requirements determination process. Between the Department of Defense Inspector General and our agency, 20 reports have been issued that state that systemic problems -- such as questionable and inconsistently applied data, inconsistency of processes among and between services, and unclear guidance -- have inflated the services' requirements for certain categories of munitions. A list of these reports is included in appendix II. The Department acknowledged these weaknesses and recognized that inflated requirements can negatively affect munitions planning, programming, and budget decisions, as well as assessments of the size and composition of the industrial production base. As a result, the Defense Planning Guidance for fiscal years 2000-2005, dated April 1998, directed that a Capabilities-Based Munitions Requirements working group develop recommendations to improve the accuracy of the process. In October 1998, the group recommended several corrective actions to address weaknesses identified by both the Inspector General and our agency. Coordinated threat assessment Revised repair rates for damaged targets and target damage Modified the target allocation process Revised risk assessments Based on the recommendations of the Capabilities-Based Munitions Requirements working group, the Department has improved several key components of the requirements determination process. Process improvements include Department-wide coordination of the threat assessment, updated projections as to the amount of time it takes a potential enemy to repair and return damaged targets to the battlefield and target damage assessments, modifications to the target allocation process, and a risk assessment that includes the impact of small-scale contingency operations. The Department expects these improvements to correct weaknesses in the process that can result in over- or understated munition requirements. The Defense Intelligence Agency develops an annual threat assessment that identifies potential threats that the United States and allied forces could expect to meet for each of the two major theaters of war scenarios. The Capabilities-Based Munitions Requirements instruction directs that the Commanders in Chief and the Joint Chiefs of Staff use the threat assessment to allocate targets to each of the services. The Department has identified weaknesses in this area and taken steps to strengthen this assessment. Defense Intelligence Agency officials stated that in the past, the services could, based on input from their own intelligence sources or direction from the warfighting Commanders in Chief, develop an independent threat analysis that could result in the services planning to destroy the same targets and, consequently, overstating munitions requirements. To resolve this issue, the working group directed that the Defense Intelligence Agency fully coordinate the threat assessment with the services and throughout the Defense intelligence communities. In accordance with this directive, the Defense Intelligence Agency coordinated the most recent threat assessment that describes the threat for the fiscal year 2002-2007 planning cycle. By adopting a coordinated threat assessment, the Department expects to be better able to ensure that the services' munition requirements will be more accurate. Repair rates are a projection of the amount of time it takes a potential enemy to repair and return a target to the battlefield and determine the number of attacks needed to destroy a target, which directly influences munition quantities. Since the services use these rates as input into their warfighting simulation models to determine their munition requirements, these rates should be current and reflect a country's existing repair capability. In response to a Department of Defense Inspector General review of this process, the Department has taken steps to address the quality of its data on projected repair rates. A Department of Defense Inspector General audit of service requirements for specific categories of munitions reported that the services used repair rates that overstated the requirement for these munitions. According to an official from the Joint Staff, the services were using repair rates for countries from the Cold War era that were able to repair and return damaged property to the battle more quickly than could countries used in today's war planning scenarios. To address this issue, in December 1999, the Defense Intelligence Agency updated and standardized the repair rates the services used in their battle simulation models, and the Department expects these actions will address the issue of overstated requirements. Battle damage assessments are more critical to munitions requirement planning with the increased use of precision guided munitions and changes in warfighting. Previously, munitions were fired from a range that allowed a visual damage assessment, but precision guided munitions are often fired miles from the target, which eliminates the ability to visually assess whether the target has been damaged or destroyed. Knowing in advance the probability that a specific munition will destroy the target is necessary to accurately determine the number and mix of munitions that will be required. To improve battle damage assessments, the Defense Intelligence Agency developed battle damage assessment factors that measure (1) whether a target was hit, (2) the extent of the damage, and (3) whether the objective was met. These factors are more predictive if the munition has a guidance system that provides damage information to the launch site. According to a Navy official, using the newly developed battle damage assessment factors for the fiscal year 2002-2007 requirements planning cycle significantly reduced the requirement for certain categories of naval munitions. According to an official from the Joint Staff, these assessments have also reduced the potential for overstated munition requirements for the services' air components. Allocating targets to the services is one of the most critical steps in the requirement determination process as it defines the services' role in the war fight and determines the number and type of munitions for which the services need to plan. In accordance with the Capabilities-Based Munitions Requirements instruction, the warfighting Commanders in Chief are required to allocate targets to the services for their area of responsibility. This is an area that has proven problematic in reaching an agreement among the services, but the Joint Chiefs of Staff have provided direction to strengthen the process. In response to a Department of Defense Inspector General audit critical of the Central Command's allocation process, a 1999 pilot project was initiated that transferred the U.S. Central Command's target allocation role to the Joint Chiefs of Staff who, in coordination with the services, developed a methodology to allocate targets. According to officials at the Joint Staff and the Central Command, the methodology was intended to better align the Commanders in Chief's near-term objectives (which generally cover a 2-year period) and the services' long-term planning horizon (which is generally 6 years). Another benefit of the pilot was that the Joint Staff could validate the services' munition requirements by matching requirements to target allocations. The Army, the Navy, and a warfighting Commander in Chief objected to the pilot's results and criticized the methodology used to allocate the targets because it allocated significantly more targets to the Air Force and fewer targets to the Army. Army officials objected that the methodology did not adequately address land warfare, which is significantly different than air warfare. The Navy did not concur with the results, citing the lack of recognition for the advanced capabilities of future munitions. U. S. Central Command officials disagreed with the results, stating that a change in methodology should not in and of itself cause the allocation to shift. In July 2000, citing substantial concerns about the pilot, the Under Secretary of Defense, Acquisition and Technology suspended the target allocation for fiscal year 2000 and directed that the services use the same allocations applied to the fiscal year 2002-2007 Program Objectives Memorandum. In August 2000, the Joint Chiefs of Staff structurally changed the threat allocation process to address the services' and the warfighting Commander in Chief's objections. The warfighting Commanders in Chief will now prepare a near-term target allocation using a methodology developed by the Joint Chiefs. Each warfighting Commander in Chief will develop two allocations--one for strike (air services) forces and one for engagement (land troops) forces for his area of responsibility. The first will allocate specific targets to strike forces under the assumption that the air services can eliminate the majority of enemy targets. The second allocation will assume that less than perfect conditions exist (such as bad weather), which will limit the air services' ability to destroy their assigned targets and require that the engagement force complete the mission. The Commanders in Chief will not assign specific targets to the engagement forces, but they will estimate the size of the expected remaining enemy land force. The Army and the Marines will then be expected to arm themselves to defeat those enemy forces. The Joint Staff will use the Commanders in Chief's near-year threat distribution and extrapolate that information to the last year of the Program Objectives Memorandum for the purpose of the services' munitions requirement planning. The Department expects that these modifications should correct over- or understated requirements and bridge the gap between the warfighting Commanders in Chief's near-term interest and objectives and the services' longer planning horizon. Until recently, the Department lacked an assessment of the impact of small-scale contingencies on munition requirements, and uncertainties existed regarding the impact on service abilities to meet the requirements of the two major theaters of war. However, the Department has taken action to better address this issue. In October 1999, the Joint Requirements Oversight Council directed that the Joint Staff coordinate an assessment of the risk associated with current and projected munition inventories available for two major theaters of war and inventories depleted by a challenging sequence of small-scale contingency operations. According to an official from the Joint Chiefs of Staff, the increased use of precision guided munitions during the contingency operation in Kosovo prompted several Department studies that addressed whether the military services have sufficient munitions to fulfill the two major theaters of war requirement. However, initial studies focused on the difference between the services' two theaters of war requirement and the actual number of munitions procured, but did not demonstrate the impact of shortfalls of specific munitions on the services ability to respond to two major theaters of war. The assessment, completed in April 2000, which focused on inventories of precision guided munitions, concluded that small-scale contingencies would have a negligible impact on the Commanders in Chief's ability to meet the two major theaters of war requirement. An official from the Joint Staff stated that the study's conclusion was based on the assumption that in a major theater war, precision guided munitions might be used during the early phases of the war for critical targets and then other, less accurate munitions could be substituted. However, according to an Air Force official, the assessment did show that small-scale contingency operations negatively affect inventories of some precision munitions, which may limit the Commanders in Chief's flexibility in conducting two major theater wars. Department officials added that the assessment should give the services information they need to plan for inventories of specific munitions that would be affected more than others during contingency operations. The Department is incorporating the actions that have been taken to improve the process into a revised Capabilities-Based Munitions Requirements instruction that it expects to issue in the spring 2001 and to be used to determine the services' fiscal year 2004-2009 requirements. Munitions effectiveness data Warfighting scenarios Notwithstanding the corrective actions the Department has taken or has underway to improve the process, other key components have either not been completed or not been decided upon. The Department has not completed a database listing detailed target characteristics for large enemy installations based on warfighting scenarios and has not developed new munitions effectiveness data to address deficiencies the services and the Commanders in Chief have identified. Completion dates for these tasks have been exceeded or not established. Additionally, the Department has not determined whether to create more detailed warfighting scenarios in the Defense Planning Guidance or to rate scenarios in terms of their probability. Such an action could increase reliability of the requirement determination process and ensure consistency in the services' analyses in support of their requirements. The Department is in the process of incorporating the completed actions into a revised Capabilities-Based Munitions Requirements instruction to be issued in the spring 2001 and used by the services to determine their fiscal year 2004-2009 munitions procurement requirements. However, the Department has no clear plan of action for resolving these issues or a time frame for their completion. Until the remaining tasks are completed and incorporated into the process, questions are likely to remain regarding the accuracy of the munition requirements process as well as the Department's ability to identify munitions most appropriate to defeat potential threats. According to Department officials, the Department lacks a common picture of the number and types of targets on large enemy installations as identified in the warfighting scenarios and as a result, the services have been identifying targets on enemy installations differently. According to an official from the Joint Staff, the Department has been concerned that this lack of common target characteristics could over- or understate requirements for certain munition categories. To resolve this issue, the Joint Chiefs instructed the Defense Intelligence Agency, in coordination with the warfighting Commanders in Chief, to develop target templates that would provide a common picture of the types of potential targets on enemy installations. According to Defense Intelligence Agency officials, the services and the Commanders in Chief could also use this information to attack these targets with munitions that would minimize damage to the installation, reduce reconstruction costs after a conflict, and allow U.S. forces to use it if needed. An official from the Joint Staff stated that while the Defense Intelligence Agency was to complete the target templates by August 31, 2000, it has yet to do so and a specific completion date has not been established. How effective a munition is against a target can predict the number of munitions necessary to defeat it. According to an official at the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics, funding to maintain the manual containing this information has historically been limited. The Department recognizes that munitions effectiveness data is a critical component for requirements planning and that outdated information could over- or understate munition requirements. To address this shortfall, the Department provided $34 million in fiscal year 2001 to update and publish munitions effectiveness data for use by the services in their battle simulation models. At the time of our review, the Department did not know when this project would be completed. The Defense Planning Guidance contains an appendix of warfighting scenarios that detail conditions that may exist during the conduct of the two major theaters of war; these scenarios are developed with input from several sources, including the Defense Intelligence Agency, the Joint Staff, and the services. This appendix provides a common base line from which the services determine their munition requirements. However, according to several Department officials, the warfighting scenarios in the Defense Planning Guidance need to include more detail. Specifically, these officials stated that information about the potential constraints under which the war will be fought and casualty and asset loss guidance can affect the types and numbers of munitions the services plan to procure. Some Department officials stated that the Defense Planning Guidance used to contain specifics on the conduct of the war fight; however, when the Department adopted the Capabilities-Based Munitions Requirements instruction, the detail was eliminated in favor of broader guidance. Conversely, other Department officials disagree with the need for increased guidance. According to an official from the Office of Secretary of Defense, Requirements and Plans, additional guidance and specificity is not necessary because the services should use the scenarios in the Defense Planning Guidance to plan their force structure rather than their munition requirements. Some Air Force and Army officials agree, stating that the Defense Planning Guidance provides sufficient guidance for munition planning for the mandatory two major theaters of war scenarios. The chief of the Army Combat Support War Reserve Branch suggested that specific guidance would only be necessary if the Army was required to plan for small-scale contingencies with restrictions on the conduct of the war fight. However, according to some Department officials, while the Defense Planning Guidance provides the services a basis for their force structure, it is also an integral part of the requirements determination process. From this vantage point, Department officials suggest that if small-scale contingency operations are becoming a part of an overall military strategy then the Defense Planning Guidance should reflect this by incorporating more detailed guidance on the conduct of such operations. By providing additional guidance on the conduct of the war fight, such as limiting loss of weapon systems and lives, the services would be better able to plan their munition requirements to ensure the stated conditions were met. In addition to lacking sufficient specificity on warfighting scenarios, the Defense Planning Guidance does not rank the scenarios by the probability of their occurrence. In 1998, we reported that the services were using the warfighting scenario that supported additional requirements for specific munitions. In addition, the requirement for a specific Army munition was inflated partly because the Army disregarded the Defense Planning Guidance scenarios and instead used two scenarios it had developed independently. Consequently, the requirement for the munition was tripled and the Army's justification for the requirement was inconsistent with the Commanders in Chief's objectives and the Army's doctrine. To ensure that the services plan for the most likely scenario in the Defense Planning Guidance and not use unlikely events to support certain munitions, the Capabilities-Based Munitions Requirements working group requested that the Defense Intelligence Agency develop probability factors for the various warfighting scenarios. While the Defense Intelligence Agency has developed these factors, at the time of our review, the Department was still debating whether to prioritize the scenarios. The Department is working to ensure that the requirements determination process results in accurate numbers and types of munitions necessary to defeat threats as specified in the Defense Planning Guidance. While the Department has made progress and has identified specific areas still requiring attention, there is no clear plan with time frames for resolving key issues. Some of these issues have only been partially completed and others are in the early stages of evolution. Specifically, target templates have not been completed and munitions effectiveness data has not been updated, nor have decisions been made regarding more detailed warfighting scenarios and the ranking of scenarios. Consequently, the reliability of the services' munitions requirements remain uncertain and could adversely affect munitions planning, programming, budgeting, and industrial production base decisions. Until these issues are resolved and a revised Capabilities-Based Management Requirements instruction is issued, the accuracy of the munitions requirements will remain uncertain. To ensure that additional actions are taken to improve the munitions requirements determination process we recommend that the Secretary of Defense direct the Under Secretary of Defense for Acquisition, Technology and Logistics to take the lead in establishing a plan for resolving outstanding issues. Such a plan should include time frames for resolving the outstanding issues, metrics for measuring progress, and milestones for implementing the proposed changes. Specific areas needing attention include completing target templates, publishing the updated munitions effectiveness data, resolving the issues involving the level of detail to include in the Defense Planning Guidance and whether to attach probability data to the warfighting scenarios, incorporating all improvements to the munitions requirement process in a revised Capabilities-Based Munitions Requirements instruction, and establishing a time frame for reassessing munitions requirements once all improvements have been implemented. The Director of Strategic and Tactical Systems in the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics provided written comments to our report, which are included in appendix III. The Department concurred with the report and outlined actions underway addressing all aspects of the report's recommendations such as resolving the issues involving the level of detail to include in the Defense Planning Guidance and whether to attach probability data to the warfighting scenarios, incorporating all improvements to the munitions requirement process in a revised Capabilities-Based Munitions Requirements instruction, and establishing a time frame for reassessing munitions requirements once all improvements have been made. The Department also provided technical comments, which we incorporated in the report as appropriate. We are sending copies of this report to the appropriate congressional committees; the Honorable Donald H. Rumsfeld, Secretary of Defense; the Acting Secretary of the Army, Joseph W. Westphal; the Acting Secretary of the Air Force, Lawrence J. Delaney; the Acting Secretary of the Navy, Robert B. Pirie, Jr.; the Director, Office and Management and Budget, Mitchell E. Daniels, Jr.; and the Director, Defense Intelligence Agency, Vice Admiral Thomas R. Wilson. Please contact me at (202) 512-8412 if you or your staff has any questions concerning this report. Major contributors to this report are listed in appendix IV. To assess the extent to which actions have been taken to improve the munition requirements determination process, we reviewed the Department's Instruction 3000.4, Capabilities-Based Munitions Requirements to ascertain roles and oversight responsibilities and to identify required inputs into the process. We reviewed the Defense Planning Guidance for fiscal years 2000-2005 and the update for fiscal years 2001-2005 to determine what instruction the Department provided to guide the services as they determine their munition requirements. To identify factors that affect the accuracy of the requirements determination process, we reviewed 20 Department of Defense Inspector General and GAO reports relating to the Department's munitions requirements determination process. We also reviewed the Joint Requirements Oversight Council memorandums to determine the focus of the Joint Staff's study on the impact of small-scale contingency operations on inventories of specific munitions. We met with service officials to determine how each service develops its munition requirements and obtained data on the assumptions and inputs that go into its simulation models. We also obtained information on how each service reviews the outcome of its munitions requirement process. In addition, we obtained information on the Commanders in Chief's Operating Plan, Integrated Priority List, and other planning data necessary to assist the services with their requirements planning. To address those areas needing additional action, we met with Department and service officials to obtain their views on the impact of how the unresolved issues could affect the accuracy of the requirements determination process. In addition, we obtained documentation pertaining to the areas still needing action. We met with senior officials and performed work at the Offices of Secretary of Defense, Washington, D.C.; the Joint Chief of Staff, Washington, D.C.; and the Defense Intelligence Agency, Bolling Air Force Base, Washington, D.C. We also interviewed senior officials from Army Combat Support War Reserve Branch, Washington D.C.; Navy Requirements Planning, Naval Air Acquisition Program, and Naval Surface Fire Support, Washington, D.C.; Air Force Munitions Requirements Weapons Division, Crystal City, Virginia; U.S. Pacific Command, Honolulu, Hawaii; U.S. Central Command, McDill Air Force Base, Tampa, Florida; and U.S. Force Korea, Seoul, Korea. We performed our review from December 1999 through November 2000 in accordance with generally accepted government auditing standards. Summary of the DOD Process for Developing Quantitative Munitions Requirements, Department of Defense Inspector General, Feb. 24, 2000. Air Force Munitions Requirements, Department of Defense Inspector General, Sept. 3, 1999. Defense Acquisitions: Reduced Threat Not Reflected in Antiarmor Weapon Acquisitions (GAO/NSIAD-99-105, July 22, 1999). U. S. Special Operations Command Munitions Requirements, Department of Defense Inspector General, May 10, 1999. Marine Corps Quantitative Munitions Requirements Process, Department of Defense Inspector General, Dec. 10, 1998. Weapons Acquisitions: Guided Weapon Plans Need to be Reassessed (GAO/NSIAD-99-32, Dec. 9, 1998). Navy Quantitative Requirements for Munitions, Department of Defense Inspector General, Dec. 3, 1998. Army Quantitative Requirements for Munitions, Department of Defense Inspector General, June 26, 1998. Management Oversight of the Capabilities-Based Munitions Requirements Process, Department of Defense Inspector General, June 22, 1998. Threat Distributions for Requirements Planning at U.S. Central Command and U.S. Forces Korea, Department of Defense Inspector General, May 20, 1998. Army's and Marine Corps' Quantitative Requirements for Blocks I and II Stinger Missiles, Department of Defense Inspector General, June 25, 1996. U.S. Combat Air Power - Reassessing Plans to Modernize Interdiction Capabilities Could Save Billions, Department of Defense Inspector General, May 13, 1996. Summary Report on the Audits of the Anti-Armor Weapon System and Associated Munitions, Department of Defense Inspector General, June 29, 1995. Weapons Acquisition: Precision Guided Munitions in Inventory, Production, and Development (GAO/NSIAD-95-95, June 23, 1995). Acquisition Objectives for Antisubmarine Munitions and Requirements for Shallow Water Oceanography, Department of Defense Inspector General, May 15, 1995. Army's Processes for Determining Quantitative Requirements for Anti-Armor Systems and Munitions, Department of Defense Inspector General, March 29, 1995. The Marine Corps' Process for Determining Quantitative Requirements for Anti-Armor Munitions for Ground Forces, Department of Defense Inspector General, Oct. 24, 1994. The Navy's Process for Determining Quantitative Requirements for Anti-Armor Munitions, Department of Defense Inspector General, Oct. 11, 1994. The Air Force's Process for Determining Quantitative Requirements for Anti-Armor Munitions, Department of Defense Inspector General, June 17, 1994. Coordination of Quantitative Requirements for Anti-Armor Munitions, Department of Defense Inspector General, June 14, 1994. In addition to those named above, Patricia Sari-Spear made key contributions to this report.

To determine the number and type of munitions needed, the military annually evaluates its munition requirements using a multiphase analytical process. The Department of Defense (DOD) is working to ensure that the requirements determination process yields accurate numbers and the types of munitions needed to defeat threats specified in the Defense Planning Guidance. Although DOD has made progress and has identified specific areas still requiring attention, there is no clear plan with time frames for resolving key issues. Some of these issues have only been partially completed and others are in the early stages of evolution. Specifically, target templates have not been completed and munitions effectiveness data has not been updated, nor have decisions been made on more detailed warfighting scenarios and the ranking of scenarios. Consequently, the reliability of the services' munitions requirements remain uncertain and could affect munitions planning, programming, budgeting, and industrial production base decisions. Until these issues are resolved and a revised Capabilities-Based Management Requirements instruction is issued, the accuracy of the munitions requirements will remain uncertain.

DOD has substantially restructured the JSF program over the past 15 months, taking positive actions that should lead to more achievable and predictable outcomes. Restructuring has consequences--higher development costs, fewer aircraft in the near term, training delays, and extended times for testing and delivering capabilities to warfighters. Key restructuring changes include the following: The total system development cost estimate rose to $56.4 billion and its schedule was extended to 2018. This represents a 26 percent increase in cost and a 5-year slip in schedule compared to the current approved program baseline established in 2007. Resources and time were added to development testing. Testing plans were made more robust by adding another development test aircraft and the use of several production aircraft; increasing the number of test flights by one-third; extending development testing to 2016; and reducing its overlap with initial operational testing. Near-term procurement quantities were reduced by 246 aircraft through 2016; the annual rate of increase in production was lowered; and the start of full-rate production moved to 2018, a 5-year slip from the current baseline. The military services were directed to reexamine their initial operational capability (IOC) requirements, the critical need dates when the warfighter must have in place the first increment of operational forces available for combat. We expect the Marine Corps' IOC will slip significantly from its current 2012 date and that the Air Force's and Navy's IOC dates will also slip from the current dates in 2016. To address technical problems and test deficiencies for the Marine Corps' STOVL variant, the department significantly scaled back its procurement quantities and directed a 2-year period for evaluating and engineering technical solutions to inform future decisions on this variant. DOD also "decoupled" STOVL testing from the other two variants so as not to delay them and to allow all three to proceed at their own speeds. The fiscal year 2012 Defense Budget reflects the financial effects from restructuring actions through 2016. Compared to estimates in the fiscal year 2010 future years defense program for the same 5-year period, the department increased development funding by $7.7 billion and decreased procurement funding by $8.4 billion reflecting plans to buy fewer aircraft. Table 1 summarizes the revised funding requirements and annual quantities following the Secretary's reductions. Even after decreasing near-term quantities and lowering the annual rate of increase in production, JSF procurement still escalates significantly. Annual funding levels more than double and quantities more than triple during this period. These numbers do not include the additional orders expected from the international partners. At the time of our review, DOD did not yet know the full impact from restructuring actions on future procurement funding requirements beyond this 5-year period. Cost analysts were still calculating the net effects from deferring the near-term procurement of 246 aircraft to future years and from lowering the annual rate of increased procurement. After a Nunn- McCurdy breach of the critical cost growth threshold and DOD certification, the most recent milestone must be rescinded, the program restructured to address the cause of the breach, and a new acquisition program baseline must be approved that reflects the certification approved by the milestone decision authority. The Secretary has not yet granted new milestone B approval for the JSF nor approved a new acquisition program baseline; officials expect to do so next month. We expect future funding requirements will be somewhat higher than currently projected. This could reduce the quantities considered affordable by the U.S. and allies, further driving up unit costs. Affordability--in terms of the investment costs to acquire the JSF, the continuing costs to operate and maintain it over the life-cycle, and its impact on other defense programs--is a challenging issue. Including the funding added by the restructuring actions, system development cost estimates have increased 64 percent since program start. (Appendix III summarizes the increases in target prices and major cost drivers for the air system and primary engine development contracts.) Also, the estimated average unit procurement price for the JSF has about doubled since program start and current forecasts indicate that life-cycle costs will be substantially higher than the legacy aircraft it replaces. Rising JSF costs erode buying power and may make it difficult for the U.S. and its allies to buy and sustain as many aircraft as planned. Going forward, the JSF will require unprecedented demands for funding in a period of more austere defense budgets where it will have to annually compete with other defense and nondefense priorities for the discretionary federal dollar. Figure 1 illustrates the substantive annual development and procurement funding requirements--almost $13 billion on average through program completion in 2035. This reflects the program's estimate at the time of the fiscal year 2012 budget submission. As discussed earlier, defense cost analysts are still computing the long- term procurement funding requirements reflecting the deferral of aircraft to future years. The JSF program established 12 clearly stated goals in testing, contracting, and manufacturing for completion in calendar year 2010. It had mixed success, achieving 6 goals and making varying degrees of progress on the other 6. For example, the program exceeded its goal for the number of development flight tests but did not deliver as many test and production aircraft as planned. Also, the program awarded its first fixed-price contract on its fourth lot of production aircraft, but did not award the fixed-price engine contract in 2010 as planned. Table 2 summarizes JSF goals and accomplishments for 2010. Although still hampered by the late delivery of test aircraft to testing sites, the development flight test program significantly ramped up operations in 2010, accomplishing 3 times as many test flights as the previous 3 years combined. The Air Force CTOL variant significantly exceeded the annual plan while initial limited testing of the Navy's CV variant was judged satisfactory, below plans for the number and hours of flight but ahead on flight test points flown. The Marine Corps' STOVL, however, substantially underperformed in flight tests, experienced significant down times for maintenance, and was challenged by several technical issues unique to this variant that could add to its weight and cost. The STOVL's problems were a major factor in the Secretary's decision to give the STOVL a 2-year period to solve engineering issues, assess impacts, and inform a future decision as to whether and how to proceed with this variant. Table 3 summarizes 2010 flight test results for each variant. After completing 9 years of system development and 4 years of overlapping production activities, the JSF program has been slow to gain adequate knowledge to ensure its design is stable and the manufacturing process is ready for greater levels of annual production. The JSF program still lags in achieving critical indicators of success expected from well- performing acquisition programs. Specifically, the program has not yet stabilized aircraft designs--engineering changes continue at higher than expected rates long after critical design reviews and well into procurement. Engineering drawings are still being released to the manufacturing floor. More changes are expected as testing accelerates. Also, manufacturing cost increases and delays in delivering test and production aircraft indicate a need for substantial improvements in factory throughput and performance of the global supply chain. Engineering drawings released since design reviews and the number and rate of design changes exceed those planned at program outset and are not in line with best practices. Critical design reviews were completed on the three aircraft variants in 2006 and 2007 and the designs declared mature, but the program continues to experience numerous changes. Since 2007, the program has produced 20,000 additional engineering drawings, a 50-percent increase in total drawings and about five times more than best practices suggest. In addition, changes to drawings have not yet decreased and leveled off as planned. Figure 2 tracks and compares monthly design changes and future forecasts against contractor plans in 2007. The monthly rate in 2009 and 2010 was higher than expected and the program now anticipates more changes over a longer period of time-- about 10,000 more changes through January 2016. With most of development testing still ahead for the JSF, the risk and impact from required design changes are significant. In addition, emerging concerns about the STOVL lift fan and drive shaft, fatigue cracks in a ground test article, and stealth-related issues may drive additional and substantive design changes. Manufacturing and delivering test jets took much more time and money than planned. As in prior years, lingering management inefficiencies, including substantial out-of-station work and part shortages, continued to increase the labor needed to manufacture test aircraft. Although there have been improvements in these factors, final acceptance and delivery of test jets were still delayed. Total labor hours required to produce the test aircraft increased over time. The cumulative actual labor hours through 2010 to complete the 12 test aircraft exceeded the budgeted hours estimated in 2007 by more than 1.5 million hours, a 75 percent increase. Figure 3 depicts forecasted and actual labor hours for building test jets. DOD began procuring production jets in 2007 and has now ordered 58 aircraft on the first four low-rate initial production lots. The JSF program anticipated the delivery of 14 production aircraft through 2010, but none were delivered during that period. Delivery of the two production jets ordered in 2007 has been delayed several times since the contract was signed and the first aircraft was just delivered this month. The prices on each of the first three cost-reimbursable production contracts have increased from the amounts negotiated at contract awards and the completion dates for delivering aircraft have been extended over 9 months on average. We are encouraged by DOD's award of a fixed-price incentive fee contract for lot 4 production and the prospects for the cost study to inform lot 5 negotiations, but we have not examined contract specifications. Accumulating a large backlog of jets on order but undelivered is not an efficient use of federal funds, tying up millions of dollars in obligations ahead of the ability of the manufacturing process to produce. The aircraft and engine manufacturers now have significantly more items in production flow compared to prior years and are making efforts to implement restructuring actions and recommendations from expert defense teams assembled to evaluate and improve production and supply operations. Eight of 20 key recommendations from the independent manufacturing review team have been implemented as of September 2010. Until improvements are fully implemented and demonstrated, the restructuring actions to reduce near term procurement quantities and establish a more achievable ramp rate are appropriate and will provide more time to fully mature manufacturing and supply processes and catch up with aircraft backlogs. Improving factory throughput and controlling costs--driving down labor and material costs and delivering on time-- are essential for efficient manufacturing and timely delivery to the warfighter at the increased production rates planned for the future. Since the first flight in December 2006, only about 4 percent of JSF capabilities have been completely verified by flight tests, lab results, or both. The pace of flight testing accelerated significantly in 2010, but overall progress is still much below plans forecasted several years ago. Furthermore, only a small portion of the extensive network of ground test labs and simulation models are fully accredited to ensure the fidelity of results. Software development--essential for achieving about 80 percent of the JSF functionality--is significantly behind schedule as it enters its most challenging phase. Development flight testing was much more active in 2010 than prior years and had some notable successes, but cumulatively still lagged behind previous expectations. The continuing effects from late delivery of test aircraft and an inability to achieve the planned flying rates per aircraft substantially reduced the amount and pace of testing planned previously. Consequently, even though the flight test program accelerated its pace last year, the total number of flights accomplished during the first 4 years of the test program significantly lagged expectations when the program's 2007 baseline was established. Figure 4 shows that the cumulative number of flights accomplished by the end of 2010 was only about one-fifth the numbers forecast by this time in the 2007 test plan. By the end of 2010, about 10 percent of more than 50,000 planned flight test points had been completed. The majority of the points were earned on airworthiness tests (basic airframe handling characteristics) and in ferrying the planes to test sites. Remaining test points include more complex and stringent requirements, such as mission systems, ship suitability, and weapons integration that have yet to be demonstrated. The JSF test program relies much more heavily than previous weapon systems on its modeling and simulation labs to test and verify aircraft design and subsystem performance. However, only 3 of 32 labs and models have been fully accredited to date. The program had planned to accredit 11 labs and models by now. Accreditation is essential to validate that the models accurately reflect aircraft performance and it largely depends upon flight test data to verify lab results. Moreover, the ability to substitute ground testing for some flight testing is unproven. Contractor officials told us that early results are providing good correlation between ground and flight tests. Software providing essential JSF capability is not mature and releases to the test program are behind schedule. Officials underestimated the time and effort needed to develop and integrate the software, substantially contributing to the program's overall cost and schedule problems and testing delays, and requiring the retention of engineers for longer periods. Significant learning and development work remains before the program can demonstrate the mature software capabilities needed to meet warfighter requirements. The JSF software development effort is one of the largest and most complex in DOD history, providing functionality essential to capabilities such as sensor fusion, weapons and fire control, maintenance diagnostics, and propulsion. JSF has about 8 times more on- board software lines of code than the F/A-18E/F Super Hornet and 4 times for than the F-22A Raptor. While good progress has been reported on the writing of code, total lines of code have grown by 40 percent since preliminary design review and 13 percent since the critical design review. The amount of code needed will likely increase as integration and testing efforts intensify. A second software integration line added as part of the restructuring will improve capacity and output. Delays in developing, integrating, and releasing software to the test program have cascading effects hampering flight tests, training, and lab accreditation. While progress is being made, a substantial amount of software work remains before the program can demonstrate full warfighting capability. The program released its second block, or increment, to flight test nearly 2 years later than the plan set in 2006, largely due to integration problems. Each of the remaining three blocks-- providing full mission systems and warfighting capabilities--are now projected to slip more than 3 years compared to the 2006 plan. Figure 5 illustrates the actual and projected slips for each of the 5 software blocks in delivering software to the test program. Schedule delays require retention of engineering staff for longer periods of time. Also, some capabilities have been moved to future blocks in attempts to meet schedule and mitigate risks. Uncertainties pertaining to critical technologies, including the helmet-mounted display and advanced data links, pose risks for more delays. The JSF program is at a critical juncture--9 years in development and 4 years in limited production-but still early in flight testing to verify aircraft design and performance. If effectively implemented and sustained, the restructuring DOD is conducting should place the JSF program on a firmer footing and lead to more achievable and predictable outcomes. However, restructuring comes with a price--higher development costs, fewer aircraft received in the near term, training delays, prolonged times for testing and delivering the capabilities required by the warfighter, and impacts on other defense programs and priorities. Reducing near-term procurement quantities lessens, but does not eliminate the still substantial and risky concurrency of development and production. Development and testing activities will now overlap 11 years of procurement. Flight testing and production activities are increasing and contractors are improving supply and manufacturing processes, but deliveries are still lagging. Slowed deliveries have led to a growing backlog of jets on order but not delivered. This is not a good use of federal funds, obligating millions of dollars well before the manufacturing process can deliver aircraft. We agree with defense leadership that a renewed and sustained focus on affordability by contractors and the government is critical to moving this important program forward and enabling our military services and our allies to acquire and sustain JSF forces in needed quantities. Maintaining senior leadership's increased focus on program results, holding government and contractors accountable for improving performance, and bringing a more responsible management approach to the JSF to "live within its means" may help limit future cost growth and the consequences for other programs in the portfolio. The JSF acquisition demands an unprecedented share of the DOD's future investment funding. The program's size and priority are such that its cost overruns and extended schedules must either be borne by funding cuts to other programs or else drive increases in the top line of defense spending; the latter may not be an option in a period of more austere budgets. Given the other priorities that DOD must address in a finite budget, JSF affordability is critical and DOD must plan ahead to address and manage JSF challenges and risks in the future. Chairman Levin, Ranking Member McCain, and members of the Senate Armed Services Committee, this completes my prepared statement. I would be pleased to respond to any questions you may have. For further information on this statement, please contact Michael Sullivan 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 statement. Individuals making key contributions to this statement are Bruce Fairbairn, Charlie Shivers, Julie Hadley, Dr. W. Kendal Roberts, LeAnna Parkey, and Matt Lea. development start) December 2003 (replan) April 2010 (initial program baseline) restructure) Start of system development and demonstration approved. Critical technologies needed for key aircraft performance elements are not mature. Program should delay start of system development until critical technologies are mature to acceptable levels. DOD did not delay start of system development and demonstration stating technologies were at acceptable maturity levels and will manage risks in development. The program undergoes re-plan to address higher than expected design weight, which added $7 billion and 18 months to development schedule. We recommended that the program reduce risks and establish executable business case that is knowledge-based with an evolutionary acquisition strategy. DOD partially concurred but does not adjust strategy, believing that their approach is balanced between cost, schedule and technical risk. Program sets in motion plan to enter production in 2007 shortly after first flight of the non-production representative aircraft. The program plans to enter production with less than 1 percent of testing complete. We recommend program delay investing in production until flight testing shows that JSF performs as expected. DOD partially concurred but did not delay start of production because they believe the risk level was appropriate. Congress reduced funding for first two low-rate production buys thereby slowing the ramp up of production. Progress is being made but concerns remained about undue overlap in testing and production. We recommend limits to annual production quantities to 24 a year until flying quantities are demonstrated. DOD non-concurred and felt that the program had an acceptable level of concurrency and an appropriate acquisition strategy. DOD implemented a Mid- Course Risk Reduction Plan to replenish management reserves from about $400 million to about $1 billion by reducing test resources. We believe new plan actually increases risks and DOD should revise the plan to address concerns about testing, use of management reserves, and manufacturing. We determine that the cost estimate is not reliable and that a new cost estimate and schedule risk assessment is needed. DOD did not revise risk plan nor restore testing resources, stating that they will monitor the new plan and adjust it if necessary. Consistent with a report recommendation, a new cost estimate was eventually prepared, but DOD did not do a risk and uncertainty analysis that we felt was important to provide a range estimate of potential outcomes. The program increased the cost estimate and adds a year to development but accelerated the production ramp up. Independent DOD cost estimate (JET I) projects even higher costs and further delays. Because of development problems, we stated that moving forward with an accelerated procurement plan and use of cost reimbursement contracts is very risky. We recommended the program report on the risks and mitigation strategy for this approach. DOD agreed to report its contracting strategy and plans to Congress. In response to our report recommendation, DOD subsequently agreed to do a schedule risk analysis, but still had not done so as of February 2011. In February 2010, the department announced a major restructuring of the JSF program, including reduced procurement and a planned move to fixed-price contracts. The program was restructured to reflect findings of recent independent cost team (JET II) and independent manufacturing review team. As a result, development funds increased, test aircraft were added, the schedule was extended, and the early production rate decreased. Because of additional costs and schedule delays the program's ability to meet warfighter requirements on time is at risk. We recommend the program complete a full comprehensive cost estimate and assess warfighter and IOC requirements. We suggest that Congress require DOD to prepare a "system maturity matrix" - a tool for tying annual procurement requests to demonstrated progress. DOD continued restructuring actions and announced plans to increase test resources and lower the production rate. Independent review teams evaluated aircraft and engine manufacturing processes. As we projected in this report, cost increases later resulted in a Nunn-McCurdy breach. Military services are currently reviewing capability requirements as we recommended. The department and Congress are working on a "system maturity matrix" tool to improve oversight and inform budget deliberations. Average procurement unit cost. Projected development costs for the air system and primary engine comprise nearly 80 percent of total system development funding requirements. Both contracts have experienced significant price increases since contract awards--79 percent and 69 percent respectively. Figures 6 and 7 depict the price histories for these contracts and the reasons behind major price increases. Joint Strike Fighter: Restructuring Places Program on Firmer Footing, but Progress Still Lags. GAO-11-325. Washington, D.C.: April 7, 2011. Joint Strike Fighter: Restructuring Should Improve Outcomes, but Progress Is Still Lagging Overall. GAO-11-450T. Washington, D.C.: March 15, 2011. Tactical Aircraft: Air Force Fighter Force Structure Reports Generally Addressed Congressional Mandates, but Reflected Dated Plans and Guidance, and Limited Analyses. GAO-11-323R. Washington, D.C.: February 24, 2011. Defense Management: DOD Needs to Monitor and Assess Corrective Actions Resulting from Its Corrosion Study of the F-35 Joint Strike Fighter. GAO-11-171R. Washington D.C.: December 16, 2010. Joint Strike Fighter: Assessment of DOD's Funding Projection for the F136 Alternate Engine. GAO-10-1020R. Washington, D.C.: September 15, 2010. Tactical Aircraft: DOD's Ability to Meet Future Requirements is Uncertain, with Key Analyses Needed to Inform Upcoming Investment Decisions. GAO-10-789. Washington, D.C.: July 29, 2010. Defense Acquisitions: Assessments of Selected Weapon Programs. GAO-10-388SP. Washington, D.C.: March 30, 2010. Joint Strike Fighter: Significant Challenges and Decisions Ahead. GAO-10-478T. Washington, D.C.: March 24, 2010. Joint Strike Fighter: Additional Costs and Delays Risk Not Meeting Warfighter Requirements on Time. GAO-10-382. Washington, D.C.: March 19, 2010. Joint Strike Fighter: Significant Challenges Remain as DOD Restructures Program. GAO-10-520T. Washington, D.C.: March 11, 2010. Joint Strike Fighter: Strong Risk Management Essential as Program Enters Most Challenging Phase. GAO-09-711T. Washington, D.C.: May 20, 2009. Defense Acquisitions: Assessments of Selected Weapon Programs. GAO-09-326SP. Washington, D.C.: March 30, 2009. Joint Strike Fighter: Accelerating Procurement before Completing Development Increases the Government's Financial Risk. GAO-09-303. Washington D.C.: March 12, 2009. Defense Acquisitions: Better Weapon Program Outcomes Require Discipline, Accountability, and Fundamental Changes in the Acquisition Environment. GAO-08-782T. Washington, D.C.: June 3, 2008. Defense Acquisitions: Assessments of Selected Weapon Programs. GAO-08-467SP. Washington, D.C.: March 31, 2008. Joint Strike Fighter: Impact of Recent Decisions on Program Risks. GAO-08-569T. Washington, D.C.: March 11, 2008. Joint Strike Fighter: Recent Decisions by DOD Add to Program Risks. GAO-08-388. Washington, D.C.: March 11, 2008. Tactical Aircraft: DOD Needs a Joint and Integrated Investment Strategy. GAO-07-415. Washington, D.C.: April 2, 2007. Defense Acquisitions: Assessments of Selected Weapon Programs. GAO-07-406SP. Washington, D.C.: March 30, 2007. Defense Acquisitions: Analysis of Costs for the Joint Strike Fighter Engine Program. GAO-07-656T. Washington, D.C.: March 22, 2007. Joint Strike Fighter: Progress Made and Challenges Remain. GAO-07-360. Washington, D.C.: March 15, 2007. Tactical Aircraft: DOD's Cancellation of the Joint Strike Fighter Alternate Engine Program Was Not Based on a Comprehensive Analysis. GAO-06-717R. Washington, D.C.: May 22, 2006. Defense Acquisitions: Major Weapon Systems Continue to Experience Cost and Schedule Problems under DOD's Revised Policy. GAO-06-368. Washington, D.C.: April 13, 2006. Defense Acquisitions: Actions Needed to Get Better Results on Weapons Systems Investments. GAO-06-585T. Washington, D.C.: April 5, 2006. Tactical Aircraft: Recapitalization Goals Are Not Supported by Knowledge-Based F-22A and JSF Business Cases. GAO-06-487T. Washington, D.C.: March 16, 2006. Joint Strike Fighter: DOD Plans to Enter Production before Testing Demonstrates Acceptable Performance. GAO-06-356. Washington, D.C.: March 15, 2006. Joint Strike Fighter: Management of the Technology Transfer Process. GAO-06-364. Washington, D.C.: March 14, 2006. Tactical Aircraft: F/A-22 and JSF Acquisition Plans and Implications for Tactical Aircraft Modernization. GAO-05-519T. Washington, D.C: April 6, 2005. Tactical Aircraft: Opportunity to Reduce Risks in the Joint Strike Fighter Program with Different Acquisition Strategy. GAO-05-271. Washington, D.C.: March 15, 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.

The F-35 Lightning II, also known as the Joint Strike Fighter (JSF), is the Department of Defense's (DOD) most costly and ambitious aircraft acquisition, seeking to simultaneously develop and field three aircraft variants for the Air Force, Navy, Marine Corps, and eight international partners. The JSF is critical for recapitalizing tactical air forces and will require a long-term commitment to very large annual funding outlays. The estimated total investment cost is currently about $385 billion to develop and procure 2,457 aircraft. Because of a history of relatively poor cost and schedule outcomes, defense leadership over the past 15 months has directed a comprehensive restructuring of the JSF program that is continuing. This testimony draws substantially from our extensive body of work on the JSF including our April 2011 report, the latest annual review mandated in the National Defense Authorization Act for Fiscal Year 2010, Pub. L. No. 111-84 244 (2009). This testimony discusses (1) program cost and schedule changes and their implications on affordability; (2) progress made during 2010; (3) design and manufacturing maturity; and (4) test plans and progress. GAO's work included analyses of a wide range of program documents and interviews with defense and contractor officials. DOD continues to restructure the JSF program, taking positive, substantial actions that should lead to more achievable and predictable outcomes. Restructuring has consequences--higher up-front development costs, fewer aircraft in the near term, training delays, and extended times for testing and delivering capabilities to warfighters. Total development funding is now estimated at $56.4 billion to complete in 2018, a 26 percent cost increase and a 5-year schedule slip from the current baseline. DOD also reduced procurement quantities by 246 aircraft through 2016, but has not calculated the net effects of restructuring on total procurement costs nor approved a new baseline. Affordability for the U.S. and partners is challenged by a near doubling in average unit prices since program start and higher estimated life-cycle costs. Going forward, the JSF requires unprecedented funding levels in a period of more austere defense budgets. The program had mixed success in 2010, achieving 6 of 12 major goals and progressing in varying degrees on the rest. Successes included the first flight of the carrier variant, award of a fixed-price aircraft procurement contract, and an accelerated pace in development flight tests that accomplished three times as many flights in 2010 as the previous 3 years combined. However, the program did not deliver as many aircraft to test and training sites as planned and made only a partial release of software capabilities. The short takeoff and landing (STOVL) variant had significant technical problems and deficient flight test performance. DOD directed a 2-year period to evaluate and engineer STOVL solutions. After more than 9 years in development and 4 in production, the JSF program has not fully demonstrated that the aircraft design is stable, manufacturing processes are mature, and the system is reliable. Engineering drawings are still being released to the manufacturing floor and design changes continue at higher rates than desired. More changes are expected as testing accelerates. Test and production aircraft cost more and are taking longer to deliver than expected. Manufacturers are improving operations and implemented 8 of 20 recommendations from an expert panel, but have not yet demonstrated a capacity to efficiently produce at higher production rates. Substantial improvements in factory throughput and the global supply chain are needed. Development testing is still early in demonstrating that aircraft will work as intended and meet warfighter requirements. About 4 percent of JSF capabilities have been completely verified by flight tests, lab results, or both. Only 3 of the extensive network of 32 ground test labs and simulation models are fully accredited to ensure the fidelity of results. Software development--essential for achieving about 80 percent of the JSF functionality--is significantly behind schedule as it enters its most challenging phase.

Since the end of the Cold War, the United States has dramatically decreased its overseas basing of military forces. The Air Force's presence in Europe, for example, shrank from 25 bases with 850 aircraft in 1990 to just 6 bases and 174 aircraft in 1999. In preparation for Operation Allied Force, the Air Force augmented its supply of aircraft in the European theater to 207 aircraft at 10 bases in 5 European countries (see fig. 1). By the end of the operation, just 78 days later, NATO had assembled over 1,000 aircraft in the region. Of these, the United States provided over 700, and other NATO allies contributed the remainder. Of the more than 700 U.S. aircraft, over 500 fixed-wing aircraft were deployed at 22 land bases in 8 countries (see fig. 2). Seventy percent of the U.S. land-based aircraft belonged to the Air Force, and 30 percent to the Navy and the Marine Corps. These numbers exclude all helicopters, including the Army Apache helicopters that were deployed to Albania. According to an after-action report by USAFE, in terms of size and resource allocations, Operation Allied Force was the equivalent of a major theater war for the U.S. Air Force. Arranging for combat aircraft basing involves much planning. This planning generally includes working with the host countries and U.S. embassies to obtain permission to base aircraft in specific locations; conducting extensive site visits to determine what improvements must be made to foreign airfields and arranging for the improvements to be completed; ensuring that U.S. aircraft have adequate ramp space, hangars, and fuel; obtaining all the logistics services necessary to sustain and house the personnel who will be deployed at foreign airfields. Because the United States no longer has the large number of established bases it had during the Cold War, experience has shown that it is in the best interest of the United States to work out as many of these details in advance as possible. According to USAFE officials, Status of Forces Agreements with many countries in Europe are very general and provide adequate protections and privileges for official visits, small unit activities, and most short-term exercises and operations. Supplemental agreements, which may be negotiated by DOD in consultation with the Department of State, are useful in addressing the more detailed protections and privileges required for operations approaching the scale of Operation Allied Force. According to EUCOM officials, there was no prepared plan that could be used for executing Operation Allied Force because it was a combination of peacetime and combat operations. At the time of the operation, DOD had detailed war plans for joint military operations written in advance only for two specific major theater wars, neither of which included the European theater. NATO had detailed plans only for what it considered wars in defense of its member partners or for peacetime operations. Thus, the Air Force did not have the benefit of specific advanced determinations of where it could place its combat aircraft quickly and efficiently for Operation Allied Force. The lack of a plan for such operations resulted in ad hoc deployments. Developing detailed plans for every possible contingency throughout Europe would be impractical, but both EUCOM and NATO now recognize that better planning is needed. Because the conflict surrounding Kosovo evolved rapidly, Operation Allied Force required not only that plans be quickly developed but that aircraft basing decisions be repeatedly revised. In fact, the plan for conducting the air campaign was changed 70 times during the 78-day operation, according to EUCOM officials. Each time a change was made, adjustments to basing decisions were also necessary. According to a USAFE after-action report, these constant changes in plans prevented decisionmakers for the initial deployments of aircraft from taking into account what deployments of other aircraft might be needed later. In some cases, aircraft units were deployed only to be moved back to where they had come from. For example, early in the conflict, units from the 48th Fighter Wing, at Lakenheath, England, were deployed to Cervia, Italy, but later on, as additional forces were added, these units were sent back to Lakenheath. Similarly, the 52nd Fighter Wing, located in Spangdahlem, Germany, was initially deployed to Aviano Air Base, Italy, until that base filled to capacity and the wing was returned to Spangdahlem. The lack of a stable plan for combat aircraft basing also affected how airfield space and supplies were provided to U.S. forces deployed during the operation. For example, according to an after-action report by USAFE civil engineers, the lack of a combat aircraft basing plan resulted in the forces first on the ground simply taking the space they needed on a first- come, first-served basis--without thought given to land use, safety, utilities access, or airfield obstructions. An after-action report by USAFE transportation officials said that they had to dramatically tailor the packages of equipment and supplies sent to support troops deployed to combat aircraft bases. This tailoring was necessary because these packages had been planned for operations the size of a major theater war and were not structured into blocks that could be built up as the conflict grew. Finally, details had to be worked out after the conflict began regarding how equipment and supplies destined for aircraft bases could be transported through the countries where U.S. troops were deployed. Exhaustive plans cannot be developed for every possible future contingency. However, EUCOM officials agree that more detailed planning should be done in advance of conflicts such as Operation Allied Force. At the time of our visit, EUCOM was planning to revise a generic plan for operations in support of NATO but said that completing this plan could take 2 years. EUCOM was not yet in a position to state how this new plan would solve problems like the ones encountered during the conflict in Kosovo. The goal is for EUCOM to have a plan that it can use for a future Kosovo-type conflict. NATO has also recognized the need for more planning for future operations like Operation Allied Force and has issued a new strategic concept. At its 50th Anniversary Summit in Washington, D.C., in April 1999, while the conflict was ongoing, NATO addressed the likelihood that future Alliance military operations would be smaller in scale than those that were the basis for Alliance planning during the Cold War. According to DOD's after-action report, NATO's new strategic concept reflects the realistic view that the U.S. role in future NATO operations is likely to fall somewhere between full-scale combat operations in defense of the Alliance and peace support activities. Despite EUCOM's role as the U.S. focal point in the European theater, EUCOM officials told us that they had neither the resources nor the responsibility to work out detailed combat aircraft basing arrangements for the individual services. Also, during Operation Allied Force, no other organization was tasked with responsibility for directing and coordinating the combat aircraft basing for all U.S. military services and the allies. As a result, the services, for the most part, planned their own deployments and worked out individual arrangements with the host countries. While the services did their best to quickly plan all the details necessary to base their aircraft, the lack of a focal point to coordinate the plans resulted in at least some duplication of effort, in last-minute work that could have been done before the conflict began, and in communications problems among U.S. services and agencies and NATO allies concerning what their individual plans were for basing aircraft. The Air Force has recognized the need to do more preparatory work such as airfield site surveys before future conflicts begin. To address this need, it plans to develop a database of airfield information. In countries where the United States has a permanent presence, DOD and the Department of State have generally negotiated agreements with the host countries stipulating which bases may be used in what circumstances. However, during Operation Allied Force, the United States did not have such agreements worked out in advance with many of the countries involved. EUCOM officials maintained that the services should arrange their own aircraft basing because only they knew their detailed basing needs. However, joint doctrine requires that EUCOM's Commander review the requirements of the various service component commands and establish priorities through the deliberate planning process to use supplies, facilities, mobility assets, and personnel effectively. Such coordination should prevent the unnecessary duplication of facilities and overlapping of functions among the services and should include establishing bases and coordinating other logistics requirements. Absent coordination by EUCOM, service officials expressed confusion during the operation about how basing arrangements should be made. A "huge challenge" in making basing arrangements, according to USAFE officials, was in first determining the chain of command to request the use of airfields from host nations. The services did not always know how or when to coordinate with other services, EUCOM, or allied countries. The services also found that each U.S. request for aircraft access was treated differently by each nation. While most countries accepted a U.S. request at the bilateral level, some countries asked that a formal request originate from NATO headquarters. Further confusion arose as countries received requests from individual service components for basing arrangements. Section 112b of title 1 of the United States Code requires that Department of State personnel be kept informed of all agreements being made with host countries. Cases arose, however, in which host nation and U.S. Department of State personnel were not aware of what individual service components were doing. For example: In one case, U.S. aircraft flying from one allied country to another had to turn around in midair because they had not been approved for landing at their destination. In another case, host country officials complained to the U.S. embassy of incessant coordination telephone calls made by U.S. servicemembers. In a third case, confusion arose because Air Force personnel were trying to arrange for aircraft basing just as U.S. State Department personnel were trying to negotiate with the host country themselves. A fourth situation involved a case in which Air Force deployment of fighter aircraft to an allied base was almost underway before the Air Force learned that adequate space was not available because this ally was not planning to move its own aircraft out. The services were expected to do their own site surveys of possible airfield locations to determine where units could base their aircraft. No one organization maintained a database of combat aircraft bases that the services might be able to use. According to USAFE officials, there was relatively little information on many of the airfields within EUCOM's area of responsibility. Some information was available from the U.S. National Imagery and Mapping Agency, but much of this information was obsolete. As the major supplier of aircraft, the Air Force consequently took the lead in doing these site surveys. The process for site surveys entailed determining what information needed to be collected and who should be on the survey teams. After the operation had begun, between April 8 and May 24, 1999, USAFE used over 200 persons to form teams to travel to potential sites and complete 27 site surveys. The USAFE group that took the lead in doing these site surveys said in their after-action report that host nation support was largely undefined and that, as a result, they had to operate under numerous constraints. For example, in anticipation of going into the host countries, site survey teams had to first obtain host country approval for their visits. Also, host countries usually allowed teams only one day to survey airfield sites. In addition, according to USAFE officials, many of the personnel on the teams had never before participated in a site survey. In addition to the efforts of the USAFE teams to do last-minute site surveys, the Marine Corps did its own site surveys. For example, one Marine Corps commanding officer who was planning his unit's deployment to Operation Allied Force formed his own nine-member team to do site surveys of two locations in Hungary. His teams also had only one day to do each site survey, and the commander made his own arrangements with embassy staff to prepare for his unit's deployment. Although this commander told us that he did have access to USAFE's site surveys on these airfields, he found that he still needed to perform a second survey because the Air Force had not gathered all the needed information. Servicemembers throughout the military services worked long and hard to overcome the obstacles cited in this report and to achieve U.S. and NATO objectives in Operation Allied Force. Nevertheless, in response to aircraft basing problems encountered during Operation Allied Force, USAFE officials realized that they needed a better basing strategy. During the conflict, they found that their existing basing structure had not been methodically planned in a way that tied it to probable threats. They decided to do a review of where aircraft should be based in the European theater in anticipation of future threats. As part of this effort, USAFE plans to collect information on each potential air base. The information will include a site survey, base support plans, and host nation agreements. As part of this effort, USAFE also plans to determine what locations could be used as operating bases in the event of future contingency operations. At the time of our visit to Europe, USAFE officials had just briefed EUCOM officials on their proposal for developing a basing strategy, and EUCOM officials had decided to form a working group to develop a similar proposal. According to EUCOM's planned approach, dated November 2000, EUCOM hopes to investigate the leasing of specific facilities, airfields, and equipment for future contingencies, among other things, to establish a theater basing strategy. According to Air Force headquarters officials, it took 17 days to complete each site survey, from its initiation to the host country's approval to use the site. The Air Force believes that these site surveys took far too long to complete. The Air Force has therefore undertaken an effort to build the "Employment Knowledge Base," a database of site surveys that can be accessed when planning a deployment. At present, this is an Air Force- only initiative, though the Marine Corps has expressed interest in it. Part I of a "Survey Tool for Employment Planning" has been developed by a contractor and was fielded in April 2000 to be used as a checklist for persons conducting site surveys. The site survey team can input data into the checklist using a laptop computer. The goal is to have part II of the site survey completed by October 2001. Efforts to update the Employment Knowledge Base from field locations have not yet been funded by the Air Force. The lack of supplemental international agreements during Operation Allied Force made the United States vulnerable to hastily made ad hoc arrangements with some host countries. A USAFE official believes that the United States could have paid excessive prices for supplies and services purchased "in the heat of battle" during Operation Allied Force because the United States had not negotiated supplemental agreements with countries in Europe where the United States based combat aircraft and purchased logistical support. Supplemental agreements addressing basing and logistics details were not in effect with some host nations during Operation Allied Force. Such agreements between the United States and host countries often contain provisions stipulating that the United States will not be charged for airport landing, parking, or overflight. These agreements also often contain a provision stating that U.S. forces will be charged the same rates for logistics supplies and services as the foreign nations' own military forces are charged. While we did not attempt to independently determine whether or not any costs charged the United States during Operation Allied Force were excessive, a USAFE official cited one case in which U.S. aircraft were already enroute when an Air Force sergeant paid a NATO member's airport authority $1.5 million for the use of the destination airport. If a supplemental agreement had been in place prior to Operation Allied Force allowing the United States the use of this airfield, the United States would not have had to pay this fee at all if the airfield was government owned, and any other fees for logistics supplies would have been the same as those charged the host nations' own military forces. The DOD official who is responsible for managing DOD's supplemental agreements worldwide told us that it is not unusual for countries with whom the United States does not have agreements to charge airfield landing and takeoff fees. He cited a case in which a U.S. airplane was not allowed to take off until the United States paid landing fees. This official said that supplemental agreements also typically cover such issues as exemptions from payment for goods and services at rates higher than those charged a country's own armed forces. While generally the United States did not use Partnership for Peace countries for combat aircraft basing, some of these countries provided logistics services for allied forces and may be even more important in future conflicts. Most Partnership for Peace countries had only a very general Status of Forces Agreement with the United States. According to an after-action report written by USAFE's Judge Advocate staff, the Partnership for Peace Status of Forces Agreement does not address the detailed matters required for sustained operations that can be provided in supplemental, country-specific agreements. The agreement provides adequate protections and privileges only for official visits, small unit activities, and most short-term military exercises and operations. The agreement does not include supplemental protections and privileges required for operations approaching the scale of Operation Allied Force, particularly as they relate to the following issues: the status of U.S. contractors and provisions for their logistical support; the use of U.S. contracting procedures for U.S.-funded procurements; exemption from value-added and similar taxes; the automatic waiver of host country criminal jurisdiction over U.S. personnel; exemption from landing fees, navigation fees, and overflight charges; expedited customs inspection procedures for U.S. forces' property; the right to operate post exchanges; banks; post offices; commissaries; and morale, welfare, and recreation activities; responsibility for the perimeter defense of installations and facilities used by U.S. personnel; payment of residual value for improvements to facilities financed by the privately owned vehicles' licensing and registration. Because of the lack of supplemental agreements establishing arrangements for the purchase of goods and services, U.S. military components used the Acquisition and Cross Servicing Agreement Program during Operation Allied Force. This program allows military-to-military exchanges of logistics services and supplies for cash, equal value exchanges, or payment in kind. USAFE officials stressed the value of the program in that it allowed deployed commanders to obtain the necessary host nation support. The program was successfully used to provide parts and services to allies and to the United States. While cross-servicing agreements were critical for U.S. forces to obtain needed host nation services, USAFE officials believe that the use of such agreements made hastily by many different individuals resulted in many inconsistencies in the agreements made. According to the USAFE Judge Advocate's report on Operation Allied Force, as a result of the absence of supplemental agreements with Partnership for Peace nations, some individual services' agreements with host nation individuals and companies were favorable to the United States, but some were not. Often, the terms and duration of these agreements differed from one country to another. According to a DOD official, in 1995 the State Department granted DOD the authority to negotiate supplemental agreements with Partnership for Peace countries that would cover issues that are not included in their Status of Forces Agreements. At the time of Operation Allied Force, DOD had sent out model agreements to various Partnership for Peace countries as the beginnings of negotiations. According to one DOD official, negotiations have taken so long because of limited staff and other priorities. For USAFE officials, Operation Allied Force highlighted the dire need for in-place status and stationing arrangements for immediate use during future military operations in countries where the United States has no permanent presence. Recent history demonstrates that air campaigns are likely to be significant portions of future conflicts the United States can anticipate. While we agree that the Commander of the U.S. European Command cannot prepare detailed plans that cover the specifics for every possible contingency, the kind of ad hoc basing of combat forces that occurred during Operation Allied Force demonstrates that the lack of at least some planning has the potential to result in costly and unnecessary problems and inefficiencies, as was the experience in this operation. Also, because the European Command did not coordinate the movement of all service and host nation participants, confusion arose over who was planning deployments, where airfields were available for basing in the region, and how arrangements should be made. Finally, without supplemental agreements with host nations from whom the United States is likely to request aircraft basing and logistics services during a future contingency, the United States will probably again be in the position of being vulnerable to paying excessive costs for these fees and services. We recommend that the Secretary of Defense direct the Commander of the European Command to develop the most detailed combat aircraft basing plans possible for future conflicts, like Operation Allied Force, that do not fit into the category of a major theater war or a peacekeeping operation. These plans should consider existing NATO plans and entail the appropriate coordination between DOD and the Department of State. They should also address the following issues, as discussed in our report: development of a strategy for basing aircraft that is tied to probable future coordination of all service and host nation arrangements for basing their aircraft during contingencies, and maintaining a database of complete information on available airfields in EUCOM's area of responsibility and providing this information to all the services as needed. To ensure that U.S. forces have access to airfields and bases from which they will need to conduct operations in likely future conflicts, we recommend that the Secretary of Defense direct EUCOM's Commander to work with the Department of State to finalize as many supplemental agreements with host nations as possible. These supplemental agreements should include provisions exempting the United States from being charged overflight, airfield access, and aircraft landing and parking fees. These supplemental agreements should also include a provision stating that U.S. troops should be charged rates for logistics supplies that are comparable to the rates charged the host nation's own armed forces. In written comments on a draft of this report, DOD agreed with the contents of the report and concurred with the recommendations. DOD stated that future aircraft basing plans need to consider operational and political issues that must be overcome with each host nation. Also, host nation agreements should consider existing NATO basing plans. Technical changes were made as appropriate throughout the report. The comments are presented and evaluated in appendix I. To determine what plans were in place to determine where and how to deploy combat aircraft for Operation Allied Force and how combat aircraft basing decisions were coordinated among the services and allied nations, we visited the U.S. European Command in Stuttgart, Germany, and interviewed officials who had participated in the operation. We also visited the U.S. Air Forces, Europe, at Ramstein Air Base, Germany, and interviewed officials in the Offices of Strategy and Deliberate Plans/Engagements, Plans and Doctrine, Logistics, Civil Engineering, Financial Management, and the Air Operations Squadron Plans Division. In addition, we reviewed documentation on Operation Allied Force planning and coordination efforts at these locations. To determine whether the United States had the necessary international agreements in force to enable it to quickly execute plans for Operation Allied Force, we interviewed officials in the Operations Law Division of the Judge Advocate General's Office at the U.S. Air Forces, Europe. We also interviewed officials in the Office of Foreign Military Affairs, Assistant Secretary of Defense (International Security Affairs). To discuss issues involving who may be granted the authority to negotiate supplemental international agreements, we interviewed officials in the Office of Treaty Affairs in the U.S. Department of State. We also reviewed documentation on supplemental international agreements. We conducted our review between September 2000 and June 2001 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Honorable Donald H. Rumsfeld, Secretary of Defense; the Honorable Joseph W. Westphal, Acting Secretary of the Army; the Honorable Robert B. Pirie, Jr., Acting Secretary of the Navy; the Honorable Lawrence J. Delaney, Acting Secretary of the Air Force; General James L. Jones, Commandant of the Marine Corps; the Honorable Colin L. Powell, Secretary of State; and the Honorable Mitchell E. Daniels, Jr., Director of the Office of Management and Budget. We will also make copies available to others upon request. Please contact me at (757) 552-8111 if you or your staff have any questions concerning this report. Key staff who contributed to this report were William Cawood, Donna Rogers, Beverly Schladt, and Nancy Ragsdale. The following are GAO's comments on the Department of Defense's (DOD) letter dated May 10, 2001. 1. We were aware that the military services used Acquisition and Cross Servicing Agreements during Operation Allied Force to purchase host nation goods and services, and we discuss this usage in the body of our report (see p. 14). However, as we state there, U.S. Air Forces in Europe officials told us that the use of such agreements made hastily during Operation Allied Force resulted in inconsistencies in agreements with different countries, some of which were favorable to the United States and some of which were not. We continue to believe that more uniformity and advanced planning for purchasing such items and services could result in lower costs to the United States in future conflicts. 2. We agree that arranging issues of combat basing rights are politically sensitive. We also agree that such arrangements cannot be made on a purely cost savings basis. We did not state in our draft report that cost should be the only consideration, nor do we here. 3. We agree that U.S. European Command's (EUCOM) combat basing plans should consider existing North Atlantic Treaty Organization (NATO) basing plans and have included this wording in our recommendation (see p. 15). 4. We have added language to our recommendation stating that, when making combat aircraft basing plans, including conducting site surveys, DOD should appropriately coordinate with the Department of State (see p. 15). 5. As noted in our draft report, because Operation Allied Force did not fit into the definition of conflicts for which NATO had prepared combat plans, NATO's structure did not apply to Operation Allied Force, and the United States prepared plans for its own participation in the operation after the conflict arose. 6. While we did not evaluate aircraft rebasing in this report, we recognize that a certain amount of rebasing will occur during any conflict. We continue to believe, however, that more advanced planning could have minimized such rebasing during Operation Allied Force. 7. We expect that, as part of its effort to create a database of available airfields, EUCOM will make use of already available resources to minimize or eliminate any duplication of effort. 8. Our recommendation states that the Secretary of Defense should direct EUCOM's Commander to work with the Department of State to finalize as many supplemental agreements as possible. With the Department of State's oversight, DOD can ensure that the scope of possible agreements is weighed against their expected cost and any operational security implications. 9. This statement is added in a footnote on p. 5. 10. This statement is added in a footnote on p. 3.

Following the failure of peace talks and escalating violence against ethnic Albanians in Kosovo, the United States provided military support to the North Atlantic Treaty Organization (NATO) combat operations against Yugoslavia in March 1999. This report reviews how well the United States was prepared for basing its combat aircraft during this operation, called Operation Allied Force. Specifically, GAO determines (1) whether plans were in place to determine where and how to deploy combat aircraft for an operation like Allied Force, (2) how combat aircraft basing decisions were coordinated among the services and allied nations, and (3) whether the United States had the necessary international agreements in place to enable it to quickly execute plans for such an operation. GAO found that the United States had no specific and detailed advanced plans that could be used to determine where and how to deploy its combat aircraft during Operation Allied Force because it was a combination of peacetime and combat operations. Overall plans for operations in defense of NATO members did not apply to this conflict. Although part of the U.S. European Command's mission is to plan for NATO conflicts, the Command had no prepared plan that could be applied to the conflict in Kosovo. Neither the U.S. European Command nor any U.S. military service coordinated combat aircraft basing decisions for all the U.S. service components and for all allies. The U.S. European Command serves as the focal point for American support to NATO, but the services generally planned their own deployments. Finally, the United States had general agreements with most countries involved in Operation Allied Force to cover the legal status and protections of U.S. citizens. However, the United States did not have more specific agreements with many countries on such issues as which host countries would provide what airfield access and what rates would be charged for the logistics services provided.

Overall, our analysis of the $33 billion in reported excess commodity disposals in fiscal years 2002 through 2004 showed that $4 billion related to items in new, unused, and excellent condition. Of the $4 billion, we determined that $3.5 billion (88 percent) included substantial waste and inefficiency because new, unused, and excellent condition items were being transferred or donated outside of DOD, sold on the Internet for pennies on the dollar, or destroyed rather than being reutilized. As discussed in our report, our analysis of $18.6 billion in fiscal year 2002 and 2003 excess commodity disposal activity identified $2.5 billion in excess items that were reported to be in new, unused, and excellent condition (A condition). Although federal regulations and DOD policy require reutilization of excess property in good condition, to the extent possible, our analysis showed that DOD units only reutilized $295 million (12 percent) of these items. The remaining $2.2 billion (88 percent) of the $2.5 billion in disposals of A-condition excess commodities were not reutilized, but instead were transferred, donated, sold, or destroyed. Similarly, our analysis of $14.3 billion in fiscal year 2004 disposal activity identified $1.5 billion in excess commodity items that were reported to be in A condition. Of the $1.5 billion in A-condition excess items, DOD units reutilized $200 million (13 percent) and transferred, donated, sold, or destroyed the remaining $1.3 billion (87 percent). We also found that during fiscal years 2002 and 2003, DOD purchased at least $400 million (over $200 million each year) of identical items instead of reutilizing available excess items in A condition. To illustrate continuing reutilization program waste and inefficiency, we purchased several new and unused excess DOD commodity items that were being purchased by DLA, were currently in use by the military services, or both. Our analysis of transaction data and our tests of controls for inventory accuracy indicate that the magnitude of waste and inefficiency could be much greater due to military units improperly downgrading condition codes of excess items that are in new, unused, and excellent condition to unserviceable and the failure to consistently record national stock numbers (NSN) needed to identify like items. DRMS is responsible for disposing of unusable items, often referred to as "junk," as well as facilitating the reutilization of usable items. Although the majority of DOD's excess property disposals relate to items in unserviceable condition, DOD also disposed of billions of dollars of serviceable items, including excess commodities in A condition from fiscal years 2002 through 2004. Our analysis of DRMS data showed that $28.1 billion of the $33 billion in excess DOD commodity disposals from fiscal year 2002 through fiscal year 2004 consisted of items listed in unserviceable condition, including items needing repair, items that were obsolete, and items that were downgraded to scrap. The remaining $4.9 billion in excess commodity disposals consisted of items reported to be in serviceable condition, including $4 billion in excess commodities reported to be in A condition. However, of the $4 billion, DOD units reutilized only $495 million (12 percent) of these items during the 3-year period. The data reliability issues noted above and our interviews, case studies, and statistical sample results indicate that the magnitude of waste and inefficiency associated with disposals of A-condition items could be much greater. As shown in figure 1, items that were not reutilized by DOD were transferred to federal agencies or special programs, donated to states, sold to the public, or destroyed by demilitarization or through scrap and hazardous materials contractors. We found that the percentage of DOD reutilization of excess property was higher in fiscal year 2002 than in fiscal years 2003 and 2004. According to DRMO officials, reutilization was higher in fiscal year 2002 because excess items were pulled back to support deployment to Afghanistan and Iraq. In fiscal year 2003, procurement to support the war on terrorism began to keep up with the demand for supplies, and reutilization of excess property decreased. DRMS officials attribute the fiscal year 2004 increase in DOD reutilization to the establishment of the Joint Services Nuclear, Biological, and Chemical Equipment Assessment Program (JEAP) to inspect excess military clothing, tents, and other textile items and reissue items in good condition. The increase in disposal activity in fiscal years 2003 and 2004 relates to turn-ins of property used in support of Operation Enduring Freedom and Operation Iraqi Freedom. Table 1 shows disposal activity related to A-condition excess commodities for fiscal years 2002 through 2004. Our analysis of fiscal year 2002 and 2003 DLA commodity purchases and DRMS excess property inventory data identified numerous instances in which the military services ordered and purchased items from DLA at the same time identical items--items with the same NSN--that were reported to be in new, unused, and excellent condition were available for reutilization. We found that DOD purchased at least $400 million of identical items during fiscal years 2002 and 2003--over $200 million each year--instead of using available excess A-condition items. The magnitude of unnecessary purchases could be much greater because NSNs needed to identify identical items were not recorded for all purchase and turn-in transactions. For example, we determined that DLA buyers and item managers did not record NSNs for 87 percent (about $4.9 billion) of the nearly $5.7 billion in medical commodity purchases by military units during fiscal years 2002 and 2003. Further, as discussed later, improper downgrading of condition codes to unserviceable could also result in an understatement of the magnitude of unnecessary purchases. While our statistical tests found a few instances of inaccurate serviceable condition codes, most condition code errors related to the improper downgrading of condition to unserviceable. To determine whether the problems identified in our analysis were continuing, we monitored DRMS commodity disposal activity from May 2004 through April 2005. We found that DOD continued to transfer, donate, and sell excess A-condition items instead of reutilizing them. To illustrate these problems, we requisitioned several excess new and unused items at no cost and purchased other new and unused commodities at minimal cost. We based our case study selections on new, unused items that DOD continued to purchase. As discussed in our report, we used the GSA Federal Disposal System, available to all federal agencies, to requisition several new and unused excess DOD commodity items during our audit in fiscal year 2004 and the first half of fiscal year 2005, including a medical instrument chest, two power supply units, and two circuit cards, at no charge. These items had an original DOD acquisition cost of $55,817, and we paid only $5 shipping cost to obtain all of them. We also purchased, at minimal cost, several excess DOD commodity items in new and unused condition over the Internet at govliquidation.com--the DRMS liquidation contractor's Web site. The items we purchased included tents, boots, three gasoline burners (stove/heating unit), a medical suction apparatus, and bandages and other medical supply items with a total reported acquisition cost of $12,310. We paid a total of $1,466 for these items, about 12 cents on the dollar, including buyer's premium, tax, and shipping cost. From December 2004 through April 2005, we purchased several new, unused excess DOD commodity items, including over 8,000 military badges, medals, and insignias; 8 new, unused Cooper Trendsetter SE tires; and Class A military uniforms. Although these items had a total reported acquisition cost of $11,522, we paid a total of $1,427 for these items, including tax, buyer's premium, and shipping cost. New, unused DOD badges, medals, and insignias. On December 6, 2004, we purchased 8,526 excess DOD badges, medals, and insignias that are used to indicate rank, the unit or program to which a military member or civilian employee is assigned, or service awards. These items had a reported acquisition cost of $9,518. We paid a total of $1,102, including buyer's premium and tax, for these items--about 12 cents on the dollar. Units and program areas designated by the badges and insignias include Army Rangers, Mountain, and Airborne; Air Force Air Traffic Controller; and DOD Scientific Consultant. Rank insignias include Air Force Chief Master Sergeant and Air Force Technical Sergeant; Navy Captain, Midshipman Lieutenant, and Midshipman Lieutenant Commander; and Army Command Sergeant Major and Master Sergeant. The listed condition code of these items ranged from A4 (serviceable, usable condition) to H7 (unserviceable, condemned condition). However, our inspection of the badges and insignias that we purchased showed that none of them had been used, and many of them were in original manufacturer packages. Further, DOD is continuing to purchase and use most of these items. The photograph in figure 2 shows examples of some of the badges, medals, and insignias that we purchased. New, unused excess DOD tires. We purchased eight new, unused Cooper Trendsetter SE 13-inch steel-belted radial tires on February 18, 2005. According to the Army project officer, these tires are used on over- the-road passenger vehicles, and one customer ordered them for use on a forklift. DOD units are continuing to purchase and use these same tires. The most recent purchase of 50 of these tires was made in April 2005. The eight tires had a total reported acquisition value of $404. We paid $113 for the tires, including buyer's premium and tax, and an additional $154 shipping cost. The tires were listed in A4 condition (usable, with some wear). However, we found that the tires still had manufacturer labels on the tread and blue paint over the whitewalls, indicating that they were new and unused. The tires were turned in as excess by the North Island Naval Air Station's Aircraft Intermediate Maintenance Detachment. According to the Army Tank Automotive and Armaments Command Project Officer, the NSN listed on the turn-in document was incorrect. We found that inaccurate item descriptions, including NSNs, prevent items from being selected for reutilization. Figure 3 is a photograph of the excess DOD tires that we purchased over the Internet in February 2005. New, unused Class A military uniforms. We purchased several Class A military uniforms over the Internet on April 7, 2005. The uniforms were listed as being in H7 (unserviceable, condemned) condition. Although the uniforms that we purchased over the Internet from DOD's liquidation contractor had a listed acquisition cost of $1,600, we paid a total of $58, including buyer's premium and sales tax, to acquire them--about 4 cents on the dollar. After receiving our purchase we determined that we had in fact purchased 27 new, unused uniform coats; 4 pairs of new, unused uniform trousers; 54 jackets in excellent condition; 45 pairs of trousers in excellent condition; and 5 women's uniform skirts and 1 pair of slacks in excellent condition. DOD is continuing to purchase and issue two of the four types of trousers that we purchased over the Internet. According to the DLA clothing and textiles product manager for dress uniforms, the Army switched from a matte finish gold button to a shiny sta-briteTM gold button on October 1, 2003. Although the Army ordered and paid for the new replacement buttons for existing dress uniforms, it later determined that hiring a contractor to replace the buttons or sending the coats back to the manufacturers for button replacement would be very expensive. The Army decided to use the coats with the older buttons to fill Reserve and Junior Reserve Officer Training Corps (ROTC and JROTC) orders until current supplies are exhausted. However, our monitoring of DOD liquidation sales found that many class A uniforms with the older buttons are being sold over the Internet for pennies on the dollar instead of being issued to ROTC and JROTC. In addition, we observed the new sta-briteTM buttons being sold over the Internet in May 2005. Figure 4 is a photograph of one of the excess new, unused Class A uniforms with the matte finish buttons that we purchased over the Internet in April 2005. We also purchased an earlier sales lot of the same Class A military uniforms over the Internet on February 16, 2005. Our winning bid was $81 for 166 uniform jackets and trousers, which had a listed acquisition cost of $10,424. However, when we arrived at the Great Lakes sales location near Chicago to pick up the uniforms, DOD liquidation contractor personnel were unable to locate them. Contractor personnel explained that our purchase may have been mistakenly given to another customer. To compensate, we were offered other items available for sale. However, these items were not in A condition. Instead of accepting them, we requested and received a refund. As discussed later, another of our Internet purchases was damaged due to a leaky roof at the Norfolk liquidation sales location. The $3.5 billion in DOD waste and inefficiency that we identified in our analysis of fiscal year 2002 through 2004 excess property disposal activity stemmed from management control breakdowns across DOD. Key factors in the overall DRMS management control environment that contributed to waste and inefficiency in the reutilization program included (1) unreliable excess property inventory data; (2) inadequate DRMS oversight, accountability, physical control, and safeguarding of property; and (3) outdated, nonintegrated excess inventory and supply systems. In addition, for many years our audits of DOD inventory management have reported that continuing unresolved logistics management weaknesses have resulted in DOD purchasing more inventory than it needed. DOD reutilization program waste and inefficiency is symptomatic of the inventory and supply chain management issues that have been considered high risk by GAO since 1990. Our analysis of fiscal year 2002 through fiscal year 2003 excess commodity turn-ins showed that $1.4 billion (40 percent) of the $3.5 billion of A-condition excess items consisted of new, unused DLA supply depot inventory. Our analysis of fiscal year 2004 excess commodity turn-ins showed that $1.3 billion (48 percent) of the $2.7 billion of A-condition excess items consisted of new, unused DLA supply depot inventory. Our interviews, case studies, screening visits, and statistical tests of excess commodity inventory led us to conclude that unreliable data are a key cause of the ineffective excess property reutilization program. GAO's internal control standards require assets to be periodically verified to control records. In addition, DRMS policy requires DRMO personnel to verify turn-in information, including item description, quantity, condition code, and demilitarization code, at the time excess property is received and entered into DRMO inventory. However, we found that DRMS and DLA supply depot management have not enforced this requirement. Further, Army, Navy, and Air Force officials told us that unreliable data are a disincentive to reutilization because of the negative impact on their operations. DLA item managers told us that because military units have lost confidence in the reliability of data on excess property reported by DRMS, for the most part they have requested purchases of new items instead of reutilizing excess items. Military users also cited examples of damage to excess items during shipment that rendered the items unusable. In addition, other reutilization users advised us of problems related to differences in quantities and the types of items ordered and received that could have a negative impact on their operations. Military service officials also told us about the types of problems they have experienced with property acquired from DRMOs. Army, Navy, and Air Force medical officials, in particular, told us that they do not reutilize excess medical items stored at DRMOs because items can become damaged during shipment to and movement within the DRMO warehouses. Other users of excess DOD property, including special program, federal agency, and state officials gave us numerous examples of problems they encountered with requisitions of excess DOD property. Several officials noted that these problems have caused them to lose confidence in the reutilization process. The following examples are typical of what we were told. An Army official told us that he requisitioned 20 excess padlock sets. When he received the padlocks the keys were missing. After his second attempt to requisition excess DOD padlocks with keys failed, he threw the padlocks in a dumpster because they were useless to him and it would cost too much to return them to the DRMO. An Army official told us that items may be in new, unused condition when they leave the DRMO, but are damaged during shipment. The official cited his experience with an order of thin copper sheets for use in testing electronic equipment. The sheeting was shipped on a pallet that was too small and other material was stacked on top of it. A Fairchild Air Force Base official told us that the 92nd Logistics Readiness Squadron requisitioned 80 sleeping bags from the Hawaii DRMO but only received 56 of them. The official told our investigators that the sleeping bags were sealed in heavy-duty plastic bags and were in excellent condition. However, some of the boxes the sleeping bags were shipped in had been damaged by rain and handling by the time he received them. Our statistical tests found significant problems with controls for assuring the accuracy of excess property inventory. Estimated error rates for the five DRMOs we tested ranged from 8 percent at one DRMO to 47 percent at another, and estimated error rates for the five DLA supply depots we tested ranged from 6 percent to 16 percent, including errors related to physical existence of turn-ins and condition code. Our condition code tests determined whether the condition code was accurately recorded as serviceable or unserviceable. We estimated that errors related to condition code accuracy ranged from 6 percent to 26 percent at the 5 DRMOs we tested. Overall, we found that DRMO errors were caused by erroneous turn-in documentation prepared by military units and the failure of DRMO personnel to verify turn-ins at the time they were received and correct errors before recording the receipts in excess inventory. Most DLA supply depot errors related to untimely recording of transactions for changes in inventory status and inaccurate quantities. We did not find problems with condition codes at the DLA depots. An example from our Norfolk DRMO statistical sample illustrates how erroneous inventory data can result in waste and inefficiency. On June 30, 2004, the Navy's Environmental Health Center in Portsmouth, Virginia, turned in six new, unused Level III biological safety cabinets with a total acquisition cost of $120,000. The Navy unit turned in the Level III cabinets as excess because of erroneous specifications that resulted in ordering cabinets that were too large and cumbersome to meet deployment needs. The Navy unit improperly used a local stock number (LSN) to describe the safety cabinets on the turn-in document and a demilitarization code that indicated there were no restrictions on the disposal of these items. However, Level III safety cabinets are subject to trade security controls, and therefore they are required to be identified by an NSN or other information that accurately describes the item, the end item application, and the applicable demilitarization code. Further, the DOD risk assessment performed in response to a recommendation in our November 2003 report called for Level III biological safety cabinets to be destroyed when no longer needed by DOD. Although Norfolk DRMO personnel advised DRMS officials of the need to correct the turn-in document errors in July 2004, as of the end of our audit in February 2005, the information had not been corrected and the safety cabinets had not been posted to the DRMS reutilization Web page to indicate that they were available for reutilization. Our in-house scientists who often meet with DOD scientists at the U.S. Army Biological Warfare Research Center at the Dugway Proving Ground learned that the DOD scientists were planning to purchase a Level III safety cabinet and informed them of the availability of the six Level III safety cabinets at the Norfolk DRMO. The DOD scientists told us that they were unaware the Navy had excessed the safety cabinets and said that they could use all six of them. We subsequently confirmed that as a result of our efforts, the DOD scientists at Dugway had requisitioned the six Level III safety cabinets for reutilization. We found hundreds of millions of dollars in potential waste and inefficiency associated with the failure to safeguard excess property inventory from loss, theft, and damage. As previously discussed, our statistical tests of excess commodity inventory at five DRMOs and five DLA supply depots identified significant numbers of missing items. Because the DRMOs and DLA supply depots had no documentation to show that these items had been requisitioned or sent to disposal contractors, they cannot assure that these items have not been stolen. According to DRMS data, DRMOs and DLA supply depots reported a total of $466 million in excess property losses related to damage, missing items, theft, and unverified adjustments over a period of 3 years. However, as discussed below, we have indications that this number is not complete. Also, because nearly half of the missing items reported involved military and commercial technology that required control to prevent release to unauthorized parties, the types of missing items were often more significant than the number and dollar value of missing items. Weaknesses in accountability that resulted in lost and stolen property contributed to waste and inefficiency in the excess property reutilization program. As shown in table 2, our analysis of reported information on excess property losses at DRMOs and DLA supply depots found that reported losses for fiscal years 2002 through 2004 totaled $466 million. Because 43 percent of the reported losses related to military technology items that required demilitarization controls, these weaknesses also reflect security risks. GAO Standards for Internal Control in the Federal Government require agencies to establish physical control to secure and safeguard assets, including inventories and equipment, which might be vulnerable to risk of loss or unauthorized use. Our investigations of reported losses found that the failure to verify and accurately document transactions and events at the beginning of the disposal process and report and investigate losses as they occur obscures or eliminates the audit trail. Weaknesses in accountability leave DOD vulnerable to the risk of theft, and fraud, waste, and abuse with little risk of detection. DRMO losses. Our statistical samples identified missing turn-ins at two of the five DRMOs we tested and missing quantities at all five DRMOs tested, including many items that were in new, unused, and excellent condition. Because DRMO officials did not have documentation to show whether these items had been reutilized, transferred, sold, or destroyed, there is no assurance of whether the missing items reflected bookkeeping errors or if they related to theft. Missing items in our statistical samples included turn- ins of 72 chemical and biological protective suits, 21 pairs of chemical and biological protective gloves, 47 wet weather parkas that were subject to demilitarization controls, and 7 sleeping bags, a cold weather coat, computer equipment, and various other items. Reported DRMO losses included 76 units of body armor, 75 chemical and biological protective suits (in addition to those identified in our Columbus DRMO sample), 5 guided missile warheads, and hundreds of military cold weather parkas and trousers and camouflage coats and trousers. Three DRMOs-- Kaiserslautern, Meade, and Tobyhanna--accounted for $840,147, or about 45 percent, of the nearly $1.9 million in reported fiscal year 2004 losses of military clothing and equipment items requiring demilitarization. Our follow-up investigations found a pervasive lack of physical accountability over excess inventory, which leaves DOD vulnerable to the risk of theft and fraud, waste, and abuse. In many cases, it is not possible to determine whether discrepancies represent sloppy recordkeeping or the loss or theft of excess property due to the failure to verify turn-in documents and correct errors at the time excess items were received at the DRMOs. In the case of our Columbus DRMO sample, we found that inventory records were not adjusted for missing quantities in our sample. Instead, DRMO personnel recorded the entire amount of the listed quantities as being transferred to either the liquidation sales contractor or the Joint Service Nuclear Biological and Chemical Equipment Assessment Program (JEAP) for inspection and reissue of military clothing and equipment. Our review of transaction data for Columbus DRMO transfers showed that JEAP did not confirm most of the items reported as transferred. For example, JEAP confirmed receiving only 7 of the 17 turn-ins of clothing and textile items. Further, the Columbus DRMO recorded a transaction to show that the 72 chemical and biological protective suits identified as missing during our statistical tests of Columbus DRMO inventory were transferred to JEAP on November 10, 2004. However, our follow-up with JEAP officials found that they have no record of receiving the protective suits. The Columbus DRMO's apparent manipulation of the inventory data avoided reporting the missing items as losses. Our follow-up investigations of other selected DRMO losses found the following. An Air Force turn-in of 75 chemical and biological protective suits was received, placed in the Shaw RIPL (a receipt in place location under authority of the Jackson DRMO) warehouse on May 28, 2002, and subsequently disappeared. DRMO personnel told DRMS investigators that the 75 protective suits may have been included in a November 15, 2002, shipment to the Jackson DRMO in South Carolina. However, because DRMO personnel recorded box counts instead of turn-in document numbers and item counts, there is no detailed record of the items that were shipped between the two excess property warehouses. Twenty units of body armor reported lost at the Meade DRMO initially had been ordered by Israel on November 8, 2000. Our investigators confirmed that the body armor was never picked up for shipment to Israel. According to the loss report, the items were relocated from the shipping area to the demilitarization storage area of the DRMO on May 8, 2002. A loss investigation was initiated by the Area Manager for the Meade DRMO in March 2004. However, because the Meade DRMO contractor had improperly destroyed inventory records after 2 years, attempts to determine the events surrounding the loss were fruitless. Our investigation of 18 reports on a total of 52 units of body armor missing from the Hood DRMO during fiscal years 2002 and 2003 determined that these items were stored outside in an unsecure area resulting in the theft of at least 48 units of body armor. A DRMS investigative report noted that items requiring demilitarization had been stored in this area over a 2-year period, even though the security fence had barbed wire that was cut or missing and the high ground level outside the fence provided easy access. According to a DRMO official, a work order for the fence repair had been submitted but the repairs had not been made. The Naval Operational Logistics Support Center-Ammo, which was responsible for a turn-in of guided missile warheads, the DRMO that received these items, and the Demilitarization Center each recorded a different quantity for the turn-in. However, quantity discrepancies were not resolved at any point during the turn-in and disposal process. As a result, there is no audit trail to determine whether or where, when, or how the reported loss or a recordkeeping error occurred. For example, the Navy unit reported a turn-in of 24 warheads that had been used in testing but were certified as inert. DRMO personnel counted canisters and loose components and determined there were 32 warheads. The Anniston Demilitarization Center reported that a total of 27 warheads were received for destruction. DLA supply depot losses. Our statistical samples showed missing items at four of the five DLA supply depots that we tested. Because depot officials did not have documentation showing that these items had been reutilized or sold, there is no assurance that the missing items did not relate to theft. Missing items in our DLA depot statistical samples included several sensitive items, such as classified radio frequency amplifiers and circuit boards, aircraft parts, and computer equipment that required trade security or demilitarization controls. We obtained DRMS data on DLA supply depot reports of excess property losses, including missing and damaged property and unverified adjustments. We investigated reported losses of selected aircraft parts at two DLA supply depots--Oklahoma City and Warner Robins--that reported the largest amount of depot losses. DLA Directive 5025.30, DLA One Book, includes a section on Inventory Adjustment Research (dated October 21, 2004), which sets inventory accuracy goals for DLA supply depots and requires causative research--an in-depth investigation--of adjustments for selected items and suspected fraud, waste, and abuse to determine why they occurred. A Financial Liability Investigation of Property Loss is required if the adjustment meets specific criteria, including (1) gains or losses of classified or sensitive material; (2) an adjustment in excess of $2,500 for pilferable material; and (3) a loss where there is a suspicion of fraud, theft, or negligence. However, we found that DLA depot personnel did not thoroughly investigate most adjustments related to reported losses of sensitive items with demilitarization controls that we selected for investigation. Supply depot officials told us that they assumed the losses represented inventory recordkeeping errors, even though causative research results were inconclusive. In addition to reported losses, we found significant instances of property damage at DRMS liquidation contractor sales locations. Because the terms and conditions of liquidation sales specify that all property is sold "as is" and assigns all risk of loss to buyers, the buyers have no recourse when property is damaged after being sold or is not in the advertised condition. As a result, customers who have lost money on bids related to damaged and unusable items might not bid again, or they may scale back on the amount of their bids in the future, affecting both the volume of excess DOD items liquidated and sales proceeds. On October 7, 2004, we purchased numerous usable items in original manufacturer packaging, including 35 boxes of bandages, 31 boxes of gauze sponges and surgical sponges, 12 boxes of latex gloves, and 2 boxes of tracheostomy care sets. We paid a total of $167, including buyer's premium, tax, and transportation cost, for these items, which had a reported total acquisition cost of $3,290. However, these items had become damaged due to rain and a leaky roof at the Norfolk, Virginia, liquidation sales location. The majority of property damage that we observed at liquidation contractor sales locations is primarily the result of DRMS management decisions to send excess DLA supply depot property to two national liquidation sales locations without assuring that its contractor had sufficient human capital resources and warehouse capacity to process, properly store, and sell the volume of property received. For example, excess DOD property sent to the Huntsville, Alabama, liquidation sales location was stored outside unprotected from weather, including sun, wind, rain, and hurricanes during the summer and fall of 2004. The liquidation contractor's failure to record these items in sales inventory at the time they were received, when combined with lost and illegible property labels due to weather damage, resulted in a significant loss of accountability for many of these items. Inefficient, nonintegrated excess inventory and supply management systems lack controls necessary to prevent waste and inefficiency in the reutilization program. For example, because the DRMS Automated Inventory System (DAISY) and DLA's Standard Automated Materiel Management System (SAMMS) are outdated and nonintegrated, they do not share information necessary to (1) identify and alert DLA item managers of excess property that is available to fill supply orders and (2) prevent purchases of new items when A-condition excess items are available for reutilization. We have continued to report that long-standing weaknesses with DLA's inventory systems related to outdated, nonintegrated legacy systems and processes result in DOD and military units not knowing how many items they have and where these items are located. DLA has acknowledged serious deficiencies in its automated inventory management systems. Although DLA has an effort under way to replace SAMMS with the Business Systems Modernization (BSM) and DRMS has a Reutilization Modernization Program (RMP) under way to upgrade DAISY, so far these have been separate, uncoordinated efforts and they do not adequately address identified process deficiencies. While the systems improvement efforts are intended to integrate supply and excess inventory systems to support the reutilization program, they are not focused on resolving long- standing problems related to unreliable condition code data and incomplete data on NSNs. The accuracy of these two data elements is critical to the ability to identify like items that are available for reutilization at the time purchases are made. To effectively address problems with reutilization program waste and inefficiency, DRMS and DLA will need to exercise strong leadership and accountability to improve the reliability of excess property data; establish effective oversight and physical inventory control; and develop effective integrated systems and processes for identifying and reutilizing excess property. In addition, the military services will need to provide accurate information on excess property turn-in documentation, particularly data on condition codes, and item descriptions, including NSNs that are key to identifying items for reutilization. Improved management of DOD's excess property and a strong reutilization program would help save taxpayers hundreds of millions of dollars annually. Mr. Chairman and Members of the Subcommittee, this concludes my prepared statement. We would be pleased to answer any questions that you may have. For more information regarding this testimony, please contact Gregory D. Kutz at (202) 512-9505, or [email protected] or Keith A. Rhodes at (202) 512- 6412, or [email protected]. Individuals making key contributions to this testimony included Mario Artesiano, Stephen P. Donahue, Gayle L. Fischer, Jason Kelly, Richard C. Newbold, Ramon Rodriguez, and John Ryan. Numerous other individuals contributed to our audit and investigation and are listed in our companion report. Technical expertise was provided by Sushil K. Sharma, PhD, DrPH. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

GAO was asked to assess the overall economy and efficiency of the Department of Defense (DOD) program for excess property reutilization (reuse). Specifically, GAO was asked to determine (1) whether and to what extent the program included waste and inefficiency and (2) root causes of any waste and inefficiency. GAO was also asked to provide detailed examples of waste and inefficiency and the related causes. GAO's methodology included an assessment of controls, analysis of DOD excess inventory data, statistical sampling at selected sites, and detailed case studies of many items. DOD does not have management controls in place to assure that excess inventory is reutilized to the maximum extent possible. Of $33 billion in excess commodity disposals in fiscal years 2002 through 2004, $4 billion were reported to be in new, unused, and excellent condition. DOD units reutilized only $495 million (12 percent) of these items. The remaining $3.5 billion (88 percent) includes significant waste and inefficiency because new, unused, and excellent condition items were transferred and donated outside of DOD, sold for pennies on the dollar, or destroyed. DOD units continued to buy many of these same items. GAO identified at least $400 million of fiscal year 2002 and 2003 commodity purchases when identical new, unused, and excellent condition items were available for reutilization. GAO also identified hundreds of millions of dollars in reported lost, damaged, or stolen excess property, including sensitive military technology items, which contributed to reutilization program waste and inefficiency. Further, excess property improperly stored outdoors for several months was damaged by wind, rain, and hurricanes. GAO ordered and purchased at little or no cost several new and unused excess commodities that DOD continued to buy and utilize, including tents, boots, power supplies, circuit cards, and medical supplies. GAO paid a total of $2,898, including tax and shipping cost, for these items, which had an original DOD acquisition cost of $79,649. Root causes for reutilization program waste and inefficiency included (1) unreliable excess property inventory data; (2) inadequate oversight and physical inventory control; and (3) outdated, nonintegrated excess inventory and supply management systems. Procurement of inventory in excess of requirements also was a significant contributing factor. Improved management of DOD's excess property could save taxpayers at least hundreds of millions of dollars annually.

When selecting contractors, the FAR generally requires agencies to consider past performance as a factor in most competitive procurements. During source selection, contracting officials often rely on various sources of past performance information, such as the prospective contractor's performance on prior government or industry contracts for efforts similar to the government's requirements, and the past performance information housed in the government-wide PPIRS database. FAR SS 42.1502(a) and (b). Currently, the dollar threshold for simplified acquisitions, with limited exceptions, is $150,000. FAR SS 2.101. The FAR has separate assessment thresholds of $650,000 and $30,000 for construction and architect-engineer services contracts respectively. FAR SS 42.1502(e) and (f). Navy, the system incorporates processes and procedures for drafting and finalizing evaluations, which are described in the CPARS Guide. In May 2010, OFPP designated CPARS as the single government-wide system for entering evaluations and by October 2010 all agencies had transitioned to using CPARS. In completing past performance evaluations, the assessing official rates the contractor on various elements such as quality of the product or service, schedule, cost control, management, and small business utilization. For each applicable rating element, the assessing official determines a rating based on definitions from the CPARS Guide that generally relates to how well the contractor met the contract requirements and responded to problems. In addition, for each rating element, a narrative is to provide support for the rating assigned. Once draft evaluations have been completed by the assessing official, the contractor is notified that the evaluation is available for review and comment through CPARS. After receiving and reviewing a contractor's comments and any additional information, the assessing official may revise the evaluation and supporting narrative. If there is disagreement with the evaluation, the reviewing official--generally a government official at a level above the contracting officer--will review and finalize the evaluation. Section 806 of the National Defense Authorization Act (NDAA) for Fiscal Year 2012 required DOD to develop a strategy to ensure that evaluations in past performance databases used for making source selection decisions are complete, timely, and accurate.process was also to be revised so that contractor past performance evaluations are posted to the databases used for source selection decisions no more than 14 days after the performance information is provided to the contractor. In June 2013, we reported on the status of Its contractor comment DOD's actions to improve the quality and timeliness of past performance information and implement provisions of the NDAA for Fiscal Year 2012. OFPP's strategy to improve past performance information and respond to section 853 of the NDAA for Fiscal Year 2013 is to increase oversight of contractor performance evaluations, develop government-wide past performance guidance, and revise the FAR. Since 2009, OFPP has taken a number of actions, in conjunction with other organizations, to improve the amount and quality of past performance information available, including emphasizing reporting requirements; assessing the level of compliance and quality of evaluations; developing a compliance tracking tool; setting agency performance targets; consolidating systems used to enter past performance information; and developing government-wide past performance guidance. In addition, OFPP worked with the FAR Council to revise the FAR to implement provisions of the NDAAs for Fiscal Years 2012 and 2013 related to assigning responsibility and accountability; implementing standards for complete evaluations; and ensuring submissions are consistent with award fee evaluations. Revisions by OFPP and the FAR Council to the timing of the contractor comment process in accordance with the acts became effective in July 2014. In 2009, the Deputy Administrator of OFPP issued a memorandum to Chief Acquisition Officers and Senior Procurement Executives emphasizing changes to the FAR such as submitting contractor performance into PPIRS and identifying agency officials who must prepare such evaluations. In addition, the memo outlined actions that agency officials must take to help implement these practices. OFPP also announced plans to conduct regular compliance assessments and quality reviews to ensure that agencies submit timely performance information to PPIRS on required contracts, and provide clear, comprehensive, and constructive information useful for making future contract award decisions. In early 2011, an OFPP review highlighted the need to improve the quantity and quality of information in PPIRS. To see how well agencies managed their efforts to improve submission of past performance evaluations, OFPP assessed the compliance with reporting requirements and the quality of evaluations for the ten agencies that do the most contracting: OFPP found that agencies generally did not meet the requirement to evaluate contractor performance. OFPP's comparison of data from the Federal Procurement Data System-Next Generation and PPIRS indicated that past performance evaluations were completed for only a small percentage of contracts requiring an evaluation, especially in civilian agencies. To assess the quality of the evaluations, OFPP reviewed a sample to see how well various rating elements were addressed. They found the evaluations generally lacked sufficient information--such as details about how the contractor exceeded expectations or corrected poor performance-- to support the rating, or did not include a rating for all performance areas. To improve the collection of contractor past performance information, agencies were asked to review their past performance reporting guidance to ensure it contained key characteristics and to improve management controls by using several strategies to improve compliance and increase the quality of the evaluations. To increase management oversight of contractor performance evaluations, OFPP worked with the PPIRS program office to develop a compliance tracking tool within PPIRS for measuring and managing agency reporting efforts. This was made available to all agencies in early 2011. The compliance tool allows managers to monitor compliance at the department, agency, or contracting office level. In addition, the tool allows agency officials to identify the compliance of specific contracts or orders that meet the reporting criteria. In March 2013, OFPP issued a policy memo to establish annual past performance reporting compliance targets for Chief Financial Officer (CFO) Act agencies. In establishing these targets, OFPP reviewed the compliance rates of agencies and found that the level of compliance varied widely. In order to make the compliance targets realistic and achievable, OFPP set differing fiscal year 2013 and 2014 targets by agency based on the agency's level of compliance at the end of fiscal year 2012, with the expectation that all agencies will reach full compliance by the end of fiscal year 2015, as shown in table 1. To assist CFO Act agencies in meeting these annual targets, the policy memo required that all of them establish their past performance reporting baselines, and set aggressive quarterly targets that reflect a strategy for meeting the annual performance targets. The memo also highlighted training opportunities for agencies' acquisition workforces on documenting contractor performance. OFPP has also sought to improve contractor performance information and implement provisions of the NDAA for Fiscal Year 2013 by working with the General Services Administration's Integrated Award Environment, the CPARS program office, and the FAR Council to consolidate systems for entering past performance information and to develop government-wide past performance guidance, enhance FAR requirements, and change the contractor comment process. To standardize the past performance documentation process, the OFPP Administrator identified CPARS as the government-wide system for collecting contractor performance information, and by October 2010 agencies using other systems transitioned to CPARS. We previously reported that the various systems used to collect past performance information and the lack of standardized evaluation factors and rating scales limited the usefulness of the information in PPIRS. Because the CPARS Policy Guide was specific to DOD, the OFPP worked with the Integrated Award Environment, the CPARS program office, and an interagency working group to update the guide. A government-wide CPARS Guide was released in November 2012. In addition, OFPP worked with the FAR Council to revise the FAR in September 2013 to enhance various elements of documenting contractor performance and implement provisions of the NDAA for Fiscal Year 2013 and the NDAA for Fiscal Year 2012. The FAR was revised and the CPARS Guide was updated to implement these acts as follows: Standards for timeliness: The FAR does not include a timeframe for completing evaluations. However, the CPARS Guide includes a standard that evaluations should be completed within 120 days after the end of the evaluation period. Standards for completeness: Evaluation factors for each assessment must include, at a minimum: quality of product or service; cost control (where applicable); schedule/timeliness; management or business relations; and small business subcontracting (where applicable), and other (for example, late payments or nonpayment to subcontractors or tax delinquency). Assigning responsibility for completeness of evaluations: The requirement that agency procedures identify roles and responsibilities was expanded to include preparing and reviewing evaluations. Also, the FAR now provides a default that the contracting officer is responsible for completing evaluations if agency procedures do not specify that role. Management accountability: Agencies are required to evaluate compliance and assign responsibility and management accountability for completeness of performance submissions. Ensuring past performance submissions are consistent with award fee evaluations: Award and incentive fee evaluations and adjectival ratings are to be included as part of the past performance evaluations. OFPP, in conjunction with the FAR Council, recently implemented provisions of the acts related to changing the timing for obtaining contractor comments. Previously, contractors were allowed a minimum of 30 days to provide comments, rebuttals, or additional information. On May 30, 2014, the final rule changing the contractor comment process was issued with an effective date of July 1, 2014. The rule provides that contractors will have no more than 14 days from the date of notification of the availability of the evaluation to provide comments, rebuttals, or other information before the evaluation is posted to PPIRS, where it is available government-wide for source selection purposes for 3 years after the contract performance completion date.this deadline, its comments will be added to the evaluation after it has moved into PPIRS, as well as any agency review of the comments. Although agencies have generally improved their level of compliance with the reporting requirements over the last year, that rate varies greatly by agency and most have not met the targets set by OFPP. As shown in table 2, all of the top 10 agencies, based on number of contracts or orders with an evaluation due in PPIRS, showed improvement in reporting compliance from 2013 to 2014, but the compliance rate varied from 13 percent to 83 percent as of April 2014. According to OFPP's annual reporting performance targets, as shown in table 1, all CFO Act agencies should have been at least 65 percent compliant by the end of fiscal year 2013, but only two of the top 10 agencies were above 65 percent compliance as of April 2014. According to an OFPP official, some agencies placed greater emphasis on improving timely reporting and have increased their management oversight, issued guidance, diligently monitored compliance, and frequently conduct internal meetings with management and accountable staff about reporting activity and responsibilities. However, the official noted that some agencies report workforce shortages, work priorities, and time constraints as hindering better compliance. Some contracting officers also reported that they had difficulty in obtaining timely feedback from other parts of the acquisition workforce so that they could complete the evaluation due to shifting workloads, retirements, and relocations. The OFPP official stated the office plans to continue its efforts to improve past performance information and strengthen reporting compliance, by taking the following actions: collaborating with agency senior procurement executives to increase management oversight and leadership; working with the FAR Council on the development of additional regulatory guidance, as necessary, to standardize reporting practices and improve agency consideration of past performance information; directing the Federal Acquisition Institute to develop useful training aids to ensure agencies know how to consider performance information prior to contract award and rate a contractor's performance during the post-award process; overseeing the General Services Administration's Integrated Award Environment on system enhancements to ensure agencies have a practical reporting tool with useful performance metrics to manage and monitor not only reporting compliance but also quality reporting of performance information; and conducting outreach with internal and external stakeholders to garner their thoughts on ways to improve past performance information reporting. We are not making recommendations in this report. We requested comments on a draft of this report from OFPP and DOD. On July 24, 2014, an OFPP Procurement Policy Analyst provided comments by e- mail. OFPP concurred with the findings of the draft report, and provided technical comments, which we incorporated as appropriate. DOD also provided technical comments by e-mail, which we incorporated as appropriate. We are sending this report to appropriate congressional committees, the Director of the Office of Management and Budget, the Secretary of Defense, and other interested parties. The report will also be available at no charge at the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. LaTonya Miller, Assistant Director; Julia Kennon; Robert Swierczek; Bradley Terry; and Alyssa Weir made key contributions to this report. Over the past five years, OFPP has issued additional policy guidance to strengthen agency use of past performance information and improve agency reporting compliance and documentation. Making Better Use of Contractor Performance Information (July 10, 2014): Enhances agencies' use of performance information when making source selection decisions on high-risk programs, major acquisitions, and other complex contract actions by directing agencies to conduct additional research and outreach to make more informed decisions, including obtaining as much relevant and recent performance information about a contractor's performance beyond what is in the Past Performance Information Retrieval System (PPIRS). http://www.whitehouse.gov/sites/default/files/omb/procurement/memo/ma king-better-use-of-contractor-performance-information.pdf. Improving the Collection and Use of Information about Contractor Performance and Integrity (March 6, 2013): Requested agencies to: (1) establish a baseline for reporting compliance, (2) set aggressive performance targets that agencies can use to monitor and measure reporting compliance, and (3) ensure the workforce is trained to properly report and use this information to improve the collection and use of performance and integrity information. http://www.whitehouse.gov/sites/default/files/omb/procurement/memo/imp roving-the-collection-and-use-of-information-about-contractor- performance-and-integrity.pdf. Improving Contractor Past Performance Assessments: Summary of the Office of Federal Procurement Policy's Review, and Strategies for Improvement (January 21, 2011): Included OFPP's initial assessment of agencies' reporting of contractor performance information and additional steps and strategies for improving the collection of past performance information. http://www.whitehouse.gov/sites/default/files/omb/procurement/contract_p erf/PastPerformanceMemo-21-Jan-2011.pdf. Improving the Use of Contractor Performance Information (July 29, 2009): Described new FAR requirements to strengthen the use of contractor performance information, included agency management responsibilities to support robust implementation, and established OFPP's review process for evaluating agencies' reporting of contractor performance information. http://www.whitehouse.gov/sites/default/files/omb/assets/procurement/im proving_use_of_contractor_perf_info.pdf. The FAR Council, chaired by the Administrator of OFPP, has recently amended the FAR to strengthen the collection of contractor past performance information, including: FAR Case 2012-028, Contractor Comment Period, Past Performance Evaluations: Implements section 806(c) the National Defense Authorization Act (NDAA) for Fiscal Year 2012, Pub. L. No. 112-81 (2011) and section 853(c) of the NDAA for Fiscal Year 2013, Pub. L. No. 112- 239. The final rule provides that contractors will have no more than 14 days from the date of notification of the availability of the evaluation to provide comments, rebuttals, or other information before the evaluation is posted to PPIRS. The final rule was published in the Federal Register on May 30, 2014, at 79 Fed. Reg. 31,197, and was effective July 1, 2014. FAR Case 2012-009, Documenting Contractor Performance: Implements parts of section 806 of NDAA for Fiscal Year 2012, Pub. L. No. 112-81, and establishes standards of completeness of past performance evaluations, strengthens assignment of responsibility and management accountability for submitting assessments, and requires that past performance submissions include incentive/award fee information, where appropriate. This rule also incorporates certain requirements from section 853 of the NDAA for Fiscal Year 2013, Pub. L. No. 112-239. This final rule was published in the Federal Register on August 1, 2013, at 78 Fed. Reg. 46,783 and was effective on September 3, 2013. FAR Cases 2008-016, Termination for Default Reporting: Establishes procedures for contracting officers to provide contractor information, such as terminations for cause or default and defective cost or pricing data, into PPIRS and Federal Awardee Performance and Integrity Information System module within PPIRS. This final rule was published in the Federal Register on September 29, 2010, at 75 Fed. Reg. 60,258, and effective October 29, 2010. FAR Case 2008-027, Federal Awardee Performance and Integrity Information System: Amends the FAR to implement the Federal Awardee Performance and Integrity Information System. The system is designed to significantly enhance the Government's ability to evaluate the business ethics and quality of prospective contractors competing for Federal contracts and to protect taxpayers from doing business with contractors that are not responsible sources. This final rule was published in the Federal Register on March 23, 2010, at 75 Fed. Reg. 14,059, and was effective April 22, 2010.

Having complete, timely, and accurate information on contractor performance allows officials responsible for awarding new federal contracts to make informed decisions. Agencies generally are required to document contractor performance on contracts or orders exceeding certain dollar thresholds. Section 853 of the National Defense Authorization Act for Fiscal Year 2013 required the development of a strategy to ensure that timely, accurate, and complete information on contractor performance is included in past performance databases. The act also required a change to the timeframes allowed for contractors to provide comments, rebuttals, or additional information pertaining to past performance information. The act required GAO to report on the actions taken in response to these requirements. For this report, GAO identified (1) the OFPP strategy to improve the number and quality of contractor past performance evaluations and implement provisions of the act, and (2) changes in the compliance rates for required performance evaluations from April 2013 to April 2014 for selected agencies. GAO reviewed OFPP memos and reports, government-wide guidance, and recent changes to the Federal Acquisition Regulation and interviewed an OFPP official. GAO also reviewed past performance reporting compliance data for 2013 and 2014. GAO is not making any recommendations. OFPP concurred with GAO's findings. The Office of Federal Procurement Policy's (OFPP) strategy to improve the reporting of past performance information relies on increased oversight and enhancements to guidance and acquisition regulations. Since 2009, OFPP has taken several actions to increase the number and quality of past performance submissions available to source selection officials, including: emphasizing reporting requirements through memos to agency officials; assessing and reporting on the level of compliance and quality of evaluations; directing the development of a compliance tracking tool; setting performance targets for certain agencies; directing the consolidation of systems for entering past performance information; and developing government-wide past performance guidance. To implement provisions of the act, OFPP and the Federal Acquisition Regulatory Council (FAR Council) worked to enhance requirements for assigning responsibility and accountability; implement standards for complete evaluations; and ensure submissions are consistent with award fee evaluations. Recently, OFPP and the FAR Council revised the timelines for the contractor comment process in accordance with the 2013 statutory requirement. Although agencies generally have improved their level of compliance with past performance reporting requirements, the rate of compliance varies widely by agency and most have not met OFPP targets. For the top 10 agencies, based on the number of contracts requiring an evaluation, the compliance rate ranged from 13 to 83 percent as of April 2014. According to an OFPP official, some agencies placed greater emphasis on documenting contractor performance, but workforce shortages and work priorities may hinder better compliance. The official said that OFPP plans to continue its oversight and provide additional training and guidance.

Transitional Medicaid assistance offers families moving from cash assistance to employment the opportunity to maintain health insurance coverage under Medicaid, a joint federal-state health insurance program. Medicaid spent about $216 billion in fiscal year 2001 on coverage for certain low-income individuals. Transitional Medicaid assistance provides certain families losing Medicaid as a result of employment or increased income with up to 1 year of Medicaid coverage. Families moving from cash assistance to work are entitled to an initial 6 months of Medicaid coverage without regard to the amount of their earned income, and 6 additional months of coverage if family earnings, minus child care costs, do not exceed 185 percent of the federal poverty level. To qualify for either 6- month period, a family must have received Medicaid in 3 of the 6 months immediately before becoming ineligible as a result of increased income. When federal welfare reform was enacted in 1996, states implemented a variety of initiatives intended to help families move from welfare to the workforce. Welfare reform provided states additional flexibility in helping cash assistance recipients to both find work and achieve family independence. As a result, states have expanded and intensified their provision of work support services such as those for job search, job placement, and job readiness. Many individuals in this population had low skills and faced a number of barriers to maintaining work and independence. For example, our work has shown that factors such as limited English proficiency, poor health, and the presence of a disability were some of the factors that affected the extent to which former cash assistance recipients were able to find and keep employment. Maintaining health insurance coverage is important to persons entering the workforce because there are important adverse health and financial consequences to living without health insurance. The availability of health insurance enhances access to preventive, diagnostic, and treatment services as well as provides financial security against potential catastrophic costs associated with medical care. Research has demonstrated that uninsured individuals are less likely than individuals with insurance to have a usual source of care, are more likely to have difficulty in accessing health care, and generally have lower utilization rates for all major health care services. Uninsured individuals are more likely than those insured to forgo services such as periodic check-ups and preventive services, well-child visits, prescription drugs, dental care, and eyeglasses. As a result, individuals not covered by health insurance may need acute, costly medical attention for conditions that might have been preventable or minimized with early detection and treatment. Limitations in private sources of coverage underscore the importance of transitional Medicaid assistance as an option for those moving from cash assistance to employment. Private health insurance is not accessible to or affordable for everyone. Although most working Americans and their families obtain health insurance through employers, many workers do not have coverage because their employers do not offer it or the coverage offered is limited or unaffordable. Lack of insurance is more common among certain types of workers, employers, and industries and may disproportionately represent individuals transitioning from cash assistance to work. For example, individuals who work part-time or are employed in low-wage jobs are less likely to have access to affordable employer- sponsored coverage. Furthermore, those who do not have employer- sponsored coverage may find alternative sources of coverage, such as the individual insurance market, expensive or altogether unavailable. Without continued access to Medicaid, some of these individuals, who are often in low-wage jobs, will have limited or no access to alternative coverage and could end up uninsured. Employment-based coverage is the primary means for nonelderly Americans to obtain health insurance, and over two-thirds of nonelderly adults obtained their coverage through an employer in 2000. However, a significant number of workers do not have health insurance because either their employers do not offer it or they choose not to purchase it. In 2000, 30 million nonelderly adults were uninsured, even though 75 percent worked for some period during the year. (See fig. 1.) Lack of insurance coverage is more common among certain types of workers, employers, and industries. Part-time employees and employees of small firms (fewer than 10 employees) are more likely to be uninsured than employees who work full-time or for a large company. Individuals working in certain industries are less likely to be offered health insurance. For example, in 1999, more than 30 percent of workers in the construction, agriculture, and natural resources (for example, mining, forestry, and fisheries) industries were uninsured, as were about 25 percent of workers in wholesale or retail trade. In contrast, 10 percent or less of workers in the finance, insurance, real estate, and public employment sectors were uninsured. These patterns may disproportionately affect individuals leaving cash assistance because they often work in low-wage jobs, part- time, or in industries such as retail that often do not provide health coverage. Young adults, aged 18 to 24, are more likely than any other age group to be uninsured, largely because certain characteristics of their transition to the workforce--working part-time or for low wages, changing jobs frequently, and working for small employers--make them less likely to be eligible for employer-based coverage. Among those aged 18 to 24, 27 percent were uninsured, and among those aged 25 to 34, 21 percent were uninsured in 2000. (See fig. 2.) Even when employer-sponsored coverage is available, its costs may be prohibitive or its benefits very limited. Employer-sponsored health plans may not subsidize coverage for dependents, may restrict or exclude certain benefits, or may subject participants to out-of-pocket costs either through premium contributions or cost-sharing provisions that low-wage workers may find unaffordable. For example, a 2001 survey by Mercer/Foster Higgins found that, on average, large employers (500 or more employees) require employees enrolled in preferred provider organizations (PPO) to contribute $56 each month for employee-only coverage, or $191 each month for family coverage. For lower-wage workers, such as individuals leaving cash assistance and entering the workforce, even coverage that is affordable for a worker may be too expensive for covering the rest of the family members. Those without access to employer-sponsored coverage may look to the individual insurance market to obtain coverage, and in 2000, 5 percent of nonelderly Americans (or 12.6 million individuals) relied on individual health insurance as their only source of coverage. However, restrictions on who may qualify for coverage and the premium prices charged can have direct implications for consumers. For example, depending on their health status and demographic characteristics such as age, gender, and geographic location, individuals in the majority of states may be denied coverage in the private insurance market or have only limited benefit coverage available to them. In addition, while all members of an employer- sponsored group health plan typically pay the same premium for employment-based insurance regardless of age or health status, in most states individual insurance premiums are higher for older or sicker individuals than for younger or healthier individuals, potentially making this option unaffordable. For example, a recent study examined individual insurers' treatment of applicants with certain preexisting health conditions, such as hay fever. The study of insurers in eight localities found that for applicants with hay fever, 8 percent would decline coverage; 87 percent would offer coverage with a premium increase, benefit limit, or both; and 5 percent would offer full coverage at the standard rate. Cost differences are often exacerbated by the fact that individuals must absorb the entire cost of their health coverage, whereas employers usually pay for a substantial portion of their employees' coverage. Because of limitations in the availability of private insurance--especially for low-paid, part-time workers and those in certain industry sectors that often characterize jobs available to individuals moving from cash assistance to work--transitional Medicaid assistance is an important option for health insurance coverage. Individuals with lower incomes have a much higher than average probability of being uninsured. (See fig. 3.) Typically, former welfare recipients entering the workforce work part-time or in low-wage jobs that are less likely to provide health coverage or only provide coverage at a prohibitive cost. For example, we noted in our 1999 report on states' experiences in implementing transitional Medicaid assistance that one state found that out of nearly l,600 former welfare recipients surveyed, 43 percent of the heads of households worked fewer than 32 hours per week and did not have health insurance, and 32 percent held low-wage jobs, such as in retail stores, hotels, restaurants, and health care establishments. In addition, although some employers of former cash assistance recipients may not offer health insurance, numerous studies have shown that a significant number of these individuals have access to employer coverage but choose not to accept it. For example, a recent study showed that although about 50 percent of individuals transitioning from cash assistance to employment had access to employer coverage, only about one-third opted to participate in the employer-sponsored plan. The relatively low "take-up" rate is due largely to the high costs of many employer health plans. Transitioning workers, who commonly earn between $7 and $8 an hour, may simply be unable to afford their share of the premium, since their annual earnings range from 73 percent to 111 percent of the federal poverty level. (See table 1.) While the Medicaid statute provides families moving from welfare to work with up to 12 months of transitional Medicaid coverage, we have reported that certain states had obtained waivers from HCFA to extend the length of coverage provided, and that the share of eligible families that actually received this entitlement varied significantly by state. States offered from 1 to 3 years of transitional Medicaid assistance in 1999. In the several states that were able to provide data on participation in transitional Medicaid assistance, we found that participation rates among newly working Medicaid beneficiaries ranged from 4 to 94 percent. Several states had made efforts to facilitate beneficiaries' participation in transitional Medicaid. For example, nine states reported developing outreach and education materials to inform families and eligibility determination workers about transitional Medicaid assistance. While such approaches helped make transitional Medicaid more available, beneficiaries' failure to report income as required often resulted in their losing eligibility after the first 6 months. States' implementation of transitional Medicaid coverage varied, resulting in differing lengths of time for which coverage was provided and differing rates of family participation. As of 1999, the most current national data reported, 10 states--Arizona, Connecticut, Delaware, Nebraska, New Jersey, Rhode Island, South Carolina, Tennessee, Utah, and Vermont-- provided over 1 year of coverage, while the remaining states provided 1 year of coverage. (See fig. 4.) In the several states that were able to provide such data, transitional Medicaid participation rates ranged from about 4 percent of the families moving from cash assistance in one state to 94 percent of such cases in another. However, low participation rates in transitional Medicaid assistance did not always indicate that families had lost Medicaid coverage altogether. For example, officials in the state with a 4 percent participation rate said that most families losing cash assistance were still enrolled in Medicaid through other eligibility categories for low- income families. We found that several states had initiatives in place to facilitate beneficiaries' access to transitional Medicaid assistance. The following are examples of such initiatives. Nine states reported developing specific materials regarding transitional Medicaid assistance in easy-to-understand language for eligibility determination workers and beneficiaries. One state revised its computer systems so that eligible families leaving cash assistance due to employment were automatically transferred to transitional Medicaid assistance coverage. In addition, this state's eligibility workers randomly contacted families who were leaving cash assistance to determine their health insurance status and to ensure that they obtained the additional months of Medicaid coverage for which they were eligible. As a result of this state's efforts, about 70 percent of the families leaving cash assistance or Medicaid received transitional Medicaid coverage. Officials in three other states encouraged increased participation in transitional Medicaid assistance by contacting families with closed cash assistance cases to determine whether these families had obtained the additional months of Medicaid coverage if so entitled. One of these states, which also provided 24 months of transitional Medicaid assistance, reported that 77 percent of eligible families were receiving this benefit. However, even with such successful enrollment efforts, many families did not receive the full transitional Medicaid assistance benefits because they failed to periodically report their income as required. The Medicaid statute requires that beneficiaries report their income three times during the 12 months of transitional Medicaid assistance: once in the first 6-month period and twice in the second 6-month period. Failure to report income status in either of these 6-month periods results in termination of transitional Medicaid benefits. In 1999, we reported that families' failure to periodically submit required income reports often resulted in their not receiving transitional Medicaid coverage for the full period of eligibility. For example, officials in three states we reviewed told us that families typically received only 6 months of transitional Medicaid, generally because they failed to submit the required income reports--and not because of a change in income that made them ineligible for transitional Medicaid. In contrast, the state that had a 94 percent participation rate for transitional Medicaid offered coverage for 24 months and had received HCFA approval to waive the periodic income- reporting requirements. Overall, we found that states that waived income- reporting requirements reported higher participation rates than states that did not. In implementing public programs such as Medicaid, difficult trade-offs often exist between ease of enrollment for eligible individuals and program integrity efforts to ensure that benefits are provided only to those who are eligible. The experience of some states in easing statutory periodic income-reporting requirements proved successful in increasing participation for eligible beneficiaries. In view of concerns that beneficiary reporting requirements were limiting the use of the transitional Medicaid benefit, HCFA proposed legislation to eliminate beneficiary reporting requirements for the full period of eligibility (up to 1 year). To date, no action has been taken on this proposal. In our earlier report we recommended that the Congress may wish to consider allowing states to lessen or eliminate periodic income-reporting requirements for families receiving transitional Medicaid assistance, provided that states offer adequate assurances that the benefits are extended to those who are eligible. Precedent for a full year of coverage in Medicaid has been provided in other aspects of the Medicaid program. For example, the Balanced Budget Act of 1997 allowed states to guarantee a longer period of Medicaid coverage for children, such as 12 months, regardless of changes in a family's financial status. As of July 2000, 14 states had implemented this option. A similar approach could facilitate uninterrupted health insurance coverage for families that are moving from cash assistance to the workforce. Transitional Medicaid assistance can play an important role in helping individuals move successfully from cash assistance to employment, thus further advancing the goals of welfare reform. Without access to Medicaid coverage, these individuals, who are often in low-wage jobs, might have limited or no alternative health coverage and join the ranks of the uninsured. While our earlier work demonstrated that states varied in the extent to which families were participating in transitional Medicaid assistance, states that worked to minimize obstacles--particularly by reducing or eliminating income-reporting requirements--had higher participation rates. Removing periodic reporting requirements would help further increase the use of transitional Medicaid assistance, provided that sufficient safeguards remained in place to ensure that only qualified individuals receive the benefits. 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 more information regarding this testimony, please contact William J. Scanlon at (202) 512-7114 or Carolyn L. Yocom at (202) 512-4931. Susan Anthony, Karen Doran, JoAnn Martinez-Shriver, and Behn Miller made key contributions to this statement.

Welfare reform significantly changed federal policy for low-income families with children and established a five-year lifetime limit on cash assistance. Welfare reform also extended transitional Medicaid assistance through 2001. States have implemented various initiatives to help families move from cash assistance to the workforce, including some enhancements to transitional Medicaid. These initiatives likely helped to cut cash assistance caseloads by more than half from 1996 through mid-2001. Low-wage or part-time jobs--which are common for newly working individuals--often do not come with affordable health insurance, thus making transitional Medicaid coverage an important option. The implementation of transitional Medicaid assistance varied across the 21 states that GAO reviewed. State practices enhanced beneficiaries' ability to retain Medicaid coverage. However, many families did not receive their full transitional Medicaid assistance benefits because they failed to report their income three times during the 12-month period of coverage. Amending the Medicaid statute to provide states with greater flexibility to ease income-reporting requirements, as has been done for other aspects of the Medicaid program, could facilitate uninterrupted health insurance coverage for families moving from cash assistance to the workforce.

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 the closure of federal offices in the Washington, D.C., area in September 2003 due to Hurricane Isabel; and building- level events, such as asbestos contamination at the Department of the Interior's headquarters. 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 the Federal Emergency Management Agency (FEMA)--which is responsible for responding to, planning for, recovering from, and mitigating against disasters-- as the executive agent for federal COOP planning across the federal executive branch. FEMA was an independent agency until March 2003, when it became part of the Department of Homeland Security (DHS), reporting to the Under Secretary for Emergency Preparedness and Response. Under PDD 67, its 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. According to FEMA officials, the directive also required that agencies have COOP plans in place by October 1999. In July 1999, FEMA first issued Federal Preparedness Circular (FPC) 65. FPC 65 is guidance to the federal executive branch for use in developing viable and executable contingency plans that facilitate the performance of essential functions during any emergency. Specifically, the guidance * established the identification of essential functions as the basis for * defined essential functions as those that enable agencies to provide vital services, exercise civil authority, maintain safety, and sustain the economy during an emergency; * defined the elements of a viable continuity of operations capability according to eight topic areas: identification of essential functions; development of plans and procedures; identification of orders of succession; delegations of authority; provision for alternate facilities; provision of interoperable communications; availability of vital records; and conduct of regular tests, training, and exercises; and * set up an interagency working group to coordinate continuity planning. FPC 65 applies to all federal executive branch departments and agencies at all levels, including locations outside Washington, D.C. It directed the heads of each agency to assume responsibilities including * developing, approving, and maintaining agency continuity plans and * developing a COOP multiyear strategy and program management * conducting tests and training of agency continuity plans, contingency staffs, and essential systems and equipment. At your request, we previously reported on federal agency headquarters contingency plans in place in October 2002. At that time, we determined that most agencies identified at least one function as essential, but the functions varied in number and apparent importance. Furthermore, while 20 of 23 agencies had documented COOP plans, none addressed all the guidance in FPC 65. We identified inadequate guidance and oversight as factors contributing to these weaknesses, and recommended that DHS (1) ensure that agencies without plans develop them, (2) ensure that agencies address weaknesses in their plans, and (3) conduct assessments of plans that included an independent verification of agency-provided data and an assessment of identified essential functions. In response to these recommendations, DHS reported in July 2004 that it (1) was developing an online system to collect data from agencies on the readiness of their continuity plans that would evaluate compliance with the guidance, (2) had conducted an interagency exercise, and (3) had developed a training program for agency continuity planning managers. DHS added that it planned to conduct an independent validation of each agency's self-assessment after deployment of the readiness system. Based on an analysis of published literature and in consultation with experts on continuity planning, we identified eight sound practices related to essential functions that organizations should use when developing their COOP plans. These practices, listed in table 1, constitute an ongoing process that includes identifying and validating essential functions. With regard to COOP plans in place on May 1, 2004, many of the 23 agencies reported using some of the sound practices in developing plans, included identifying and validating essential functions, but few provided documentation sufficient for us to validate their responses. This indicates that agencies--although aware of these practices--may not have followed them thoroughly or effectively. For example, it is unlikely that a thorough risk analysis of essential functions could be performed without being documented. Further, the essential functions identified by agencies varied widely: the number of functions identified in each plan ranged from 3 to 538. In addition, the apparent importance of the functions was not consistent. For example, a number of essential functions were of clear importance, such as * "conduct payments to security holders" and * "carry out a rapid and effective response to all hazards, emergencies, and disasters." Other identified functions appeared vague or of questionable importance: * "champion decision-making decisions" and * "provide advice to the Under Secretary." The high level of generality in FEMA's guidance on essential functions contributed to the inconsistencies in agencies' identification of these functions. As was the case during our 2002 review, the version of FPC 65 in place on May 1, 2004, defined essential functions as those that enable agencies to provide vital services, exercise civil authority, maintain safety, and sustain the economy during an emergency. The document did not, however, define a process that agencies could use to select their essential functions. In June 2004, FEMA released an updated version of FPC 65, providing additional guidance to agencies on each of the topics covered in the original guidance, including an annex on essential functions. The annex lists several categories that agencies must consider when determining which functions are essential, including * functions that must continue with minimal interruption or cannot be interrupted for more than 12 hours without compromising the organization's ability to perform its mission and * functions assigned to the agency by federal law or by order of the President. The new guidance goes on to outline steps addressing the prioritization of selected functions as well as the identification of resources necessary to accomplish them and of interdependencies with other agencies. On January 10, 2005, the Assistant to the President for Homeland Security issued a memorandum outlining additional guidance on essential functions and initiated a process to identify and validate agency-level functions. The memorandum noted that in the past many departments and agencies had had difficulty clearly identifying and articulating their essential functions. It attributed this difficulty, in part, to the lack of a defined set of national-level essential functions to guide agency continuity planning, resulting in multiple efforts to develop agency essential functions for different specific purposes (e.g., planning for Year 2000 computer continuity, information technology planning, and critical infrastructure planning). Further, it noted that departments and agencies sometimes do not distinguish between a "function" and the specific activities necessary to perform the function. To address these issues, the memorandum identified eight National Essential Functions that are necessary to lead and sustain the country during an emergency and, therefore, must be supported through continuity capabilities. Table 2 lists the eight National Essential Functions. The memorandum asked major agencies to identify their Priority Mission Essential Functions--those functions that must be performed to support or implement the National Essential Functions before, during, and in the immediate aftermath of an emergency. The document stated that, generally, priority functions must be uninterrupted or resumed during the first 24 to 48 hours after the occurrence of an emergency and continued through full resumption of all government functions. When identifying their functions, agencies were asked to also identify the National Essential Function that each priority function supports, the time in which the priority function must be accomplished, and the partners necessary to perform the priority function. The memorandum asked agencies to reply by February 18, 2005. The memorandum emphasized the need for the involvement of senior-level agency officials, calling for each agency's functions to be first approved by an official with agencywide responsibilities. The memorandum then laid out a process by which the functions would be validated by an interagency group within the Homeland Security Council. According to FEMA officials, two agencies' essential functions have already been reviewed, and there are plans to complete all agency reviews by the end of the summer. The validated functions would then be used to support development of a new continuity policy and would be used to develop and implement improved requirements for capabilities, inform the annual budget process, establish program metrics, and guide training and exercises and other continuity program activities. The memorandum did not set any time frames for these later steps. Together, FEMA's revised guidance and the guidance from the White House significantly address the best practices that we identified. For example: * Both documents call for agencies to identify dependencies necessary to perform the functions. * FEMA's guidance calls for agencies to prioritize their essential functions and identify the resources necessary to perform them. * The White House guidance calls on agencies to identify the recovery time necessary for each function and outlines a process to validate the initial list of functions. If implemented effectively, the new guidance and the review process conducted by the White House could result in more consistent identification of essential functions across the executive branch. The functions could then form the basis for better plans for continuing the most critical functions following a disruption to normal operations. However, without time frames for completing the outlined process, it is unclear when the expected improvement will occur. When compared with our prior assessment, agency continuity plans in place on May 1, 2004, showed improved compliance with FEMA's guidance in two ways: * One agency and nine component agencies that did not have documented continuity plans in place at the time of our 2002 had put such plans in place by May 1. For each of the topic areas outlined in generally made progress in increasing compliance. owever, two major agencies did not have plans in place on May 1, H 2004. As of April 2005, one of these two had finalized its plan. In addition, after analyzing these plans, we found that none in place on May 1 followed all of FEMA's guidance. Of the eight topic areas identified in FPC 65, these 45 COOP plans generally complied with the guidance in two areas (developing plans and procedures and order of succession); generally did not comply in one area (tests, training, and exercises); and showed mixed compliance in the other five areas. Specifically, when examining the governmentwide results of our analysis of the eight planning topics outlined in FPC 65, we determined the following: * Essential functions. Most agency plans identified at least one unction as essential and identified which functions must be f continued under all circumstances. However, less than half th e COOP plans identified interdependencies among the functions, established staffing and resource requirements, or identified themission-critical systems and data needed to perform the function s. Plans and procedures. Most plans followed the guidance in this area including establishing a roster of COOP personnel, activation , procedures, and the appropriate planning time frame (12 hours to 30 days). * Orders of succession. All but a few agency plans identified an order of succession to the agency head. Most plans included orders of succession for other key officials or included officials outside of the local area in the succession to the agency head. Many plans did not include the orders of succession in the agency's vital records or document training for successors on their emergency duties. * Delegations of authority. Few plans adequately documented the legal authority for officials to make policy decisions in an emergency. * Alternate facilities. Most plans documented the acquisition of at least one alternate facility, and many included alternate facilities inside and outside of the local area. However, few plans documented that agencies had sufficient space for staff, pre- positioned equipment, or appropriate communications capabilities at their alternate facilities. * Redundant emergency communications. Most plans identified at least two independent media for voice communication. Less than half of the plans included adequate contact information, and few provided information on backup data links. * Vital records. Less than half of the plans fully identified the agency's vital records. Few plans documented the locations of all vital records or procedures for updating them. * Tests, training, and exercises. While many agencies documented some training, very few agencies documented that they had conducted tests, training, and exercises at the recommended frequency. During our prior review of 2002 plans, we found that insufficient oversight by FEMA contributed to agencies' lack of compliance with the guidance. Specifically, we noted that FEMA had not conducted an assessment of agency contingency plans since 1999. As a result, we recommended that it conduct assessments of agency continuity plans that include independent verification of agency-reported information. In response, DHS reported that it was developing a readiness reporting system to assist it in assessing agency plans and planned to verify the information reported by the agencies. Although neither of these planned actions was completed by May 1, 2004, FEMA has made subsequent efforts to improve its oversight. According to FEMA officials, development of the readiness reporting system was completed in March 2005, and the system is expected to be operational and certified by October 2005, at which time there will be seven locations (including two FEMA locations) using the system. They added that once the system becomes fully operational, agencies will be required to periodically provide updated information on their compliance with FEMA's guidance. These officials also reported that the agency had taken additional steps to improve readiness. Specifically, they stated that the interagency exercise held in mid-May 2004 successfully activated and tested agency plans; they based this assessment on reports provided by the agencies. Furthermore, FEMA has begun planning for another interagency exercise in 2006. In addition, as of April 2005, FEMA had provided training to 682 federal, state, and local officials from 30 major federal departments and agencies and 209 smaller agencies--including state, local, and tribal entities. FEMA officials stated that because of these additional successful efforts to improve readiness, they no longer planned to verify agency-reported readiness data. While the revised guidance, recent exercise, and ongoing training should help ensure that agency continuity plans follow FEMA's guidance, FEMA's ongoing ability to oversee agency continuity planning activities will be limited by its reliance on agency-provided data. Without verification of such data, FEMA lacks assurance that agency plans are compliant and that the procedures outlined in those plans will allow agencies to effectively continue to perform their essential functions following a disruption. Telework, also referred to as telecommuting or flexiplace, 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 the Office of Personnel Management (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." As we reported in an April 2004 report, telework is an important and viable option for federal agencies in COOP planning and implementation efforts, especially as the duration of an emergency event is extended. In a July 2003 GAO report, we defined 25 key telework practices for implementation of successful federal telework programs. Although not required to do so, 1 of the 21 agency continuity plans in place on May 1, 2004, documented plans to address some essential functions through telework. Two other agencies reported that they planned to use telework to fulfill their essential functions, and eight agencies reported that they planned for nonessential staff to telework during a COOP event, but their continuity plans do not specifically mention telework. However, none of the agencies that are planning to use telework during a COOP event documented that the necessary preparations had taken place. These preparations--derived from the 25 key telework practices for the development of an effective telework program--include informing and training the staff, ensuring that there is adequate technological capacity for telework, providing technological assistance, and testing the ability to telework. In summary, Mr. Chairman, although agency COOP plans have shown improvement since our prior assessment of 2002 plans, most plans in place on May 1, 2004, continued to exhibit inconsistencies in the identification of essential functions and significant lack of compliance with FEMA's guidance. Both FEMA's revision to this guidance and a recently initiated White House effort have the potential, if effectively implemented, to help agencies better identify their essential functions and thus develop better continuity plans. However, the lack of a schedule to complete the White House effort makes it unclear when these improvements might take place. Agencies' efforts to develop continuity plans could also be aided by FEMA's efforts to develop a readiness reporting system, conduct a governmentwide exercise, and train agency COOP planners, as well as by any guidance or policies that result from the White House effort. Finally, even though FEMA's continuity planning guidance in place in May 2004 did not address telework, one agency's continuity plan at that time included plans to use telework in response to an emergency. In addition, 10 agencies reported that they planned to use telework following a COOP event, but their plans were not clearly documented. In our report, we make recommendations aimed at helping to ensure that agencies are adequately prepared to perform essential functions following an emergency. We recommended that the Assistant to the President for Homeland Security establish a schedule for the completion of the recently initiated effort to validate agency essential functions and refine federal continuity of operations policy. We also recommended that the Secretary of Homeland Security direct the Under Secretary for Emergency Preparedness and Response to * develop a strategy for short-term oversight that ensures that agencies are prepared for a disruption in essential functions while the current effort to identify essential functions and develop new guidance is ongoing; * develop and implement procedures that verify the agency-reported data used in oversight of agency continuity of operations planning; and * 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. In commenting on our findings and recommendations, the Under Secretary for Emergency Preparedness and Response of DHS stated that the department agreed that there has been improvement in COOP plans and attributed that improvement to a renewed emphasis by DHS and the White House. The department also agreed with the need for additional oversight and noted that FEMA had begun conducting COOP site assessments at departments and agencies to improve readiness. The Under Secretary's letter drew attention to a number of actions taken after the May 1, 2004, cutoff date for our assessment. Finally, the Under Secretary pointed out that the readiness reporting system that FEMA is developing was not intended to be a COOP plan assessment tool, but that it instead provides key officials with the ability to determine plan status in near real time. We continue to believe that it is important for FEMA to assess agency plans as part of its oversight responsibilities. Regardless of the system's intended use, we believe its capabilities, as described by FEMA, make it a valuable tool that the agency should use when exercising these responsibilities. 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], or James R. Sweetman at (202) 512-3347 or [email protected]. Other key contributors to this testimony include Barbara Collier, Mike Dolak, Nick Marinos, and Jessica Waselkow. 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 plans. According to guidance from the Federal Emergency Management Agency (FEMA), which is responsible for providing guidance for and assessing agency continuity plans, a key element of a viable capability is the proper identification of essential functions. GAO previously reported on agency continuity plan compliance, and determined that a number of agencies and their components did not have continuity plans in place on October 1, 2002, and those that were in place did not generally comply with FEMA's guidance. GAO was asked to testify on its most recent work in continuity planning, which is discussed in a separate report, being released today (GAO-05-577). In this report, GAO reviewed to what extent (1) major federal agencies used sound practices to identify and validate their essential functions, (2) agencies had made progress since 2002 in improving compliance with FEMA guidance, and (3) agency continuity of operations plans addressed the use of telework arrangements (in which work is performed at an employee's home or at a work location other than a traditional office) during emergencies. Many of the 23 agencies that GAO reviewed reported using sound practices for identifying and validating essential functions, but few provided documentation sufficient for GAO to confirm their responses. (GAO identified these sound practices based on published literature and in consultation with experts on continuity planning.) Agency responses indicate that--although aware of the practices--agencies may not have followed them thoroughly or effectively. Further, the essential functions identified by agencies varied widely: the number of functions identified in each plan ranged from 3 to 538 and included ones that appeared to be of secondary importance. The absence in FEMA's guidance of specific criteria for identifying essential functions contributed to this condition. Subsequent guidance significantly addresses the sound practices that GAO identified. Also, the White House has begun a process to improve continuity planning. If this guidance and process are implemented effectively, they could lead to improved identification of essential functions in the executive branch. As of May 1, 2004, agencies had made progress in improving compliance with FEMA guidance, but significant weaknesses remained. Agencies that had plans in place in both years showed significant improvement in the area of tests, training, and exercises. However, although some improvement occurred for other planning areas, important weaknesses remained: for example, 31 of 45 plans did not fully identify mission-critical systems and data necessary to conduct essential functions. Inadequate oversight by FEMA contributed to the level of weaknesses in agency continuity plans. FEMA plans to improve oversight using an online readiness reporting system, which it plans to have fully operational later this year, and it has already taken other steps to help agencies improve their plans, such as conducting an interagency exercise. However, FEMA does not plan to verify the readiness information that agencies will report in the system. Finally, even though FEMA's continuity planning guidance in place in May 2004 did not address telework, one agency's continuity plan at that time included plans to use telework in response to an emergency. In addition, 10 agencies reported that they planned to use telework following a COOP event, but their plans were not clearly documented. In its report, GAO made recommendations aimed at helping to improve continuity planning. These included establishing a schedule for the completion of recently initiated efforts, developing a strategy for short-term oversight in the meantime, and developing and implementing procedures that verify the agency-reported data used in oversight of agency continuity of operations planning. The report includes comments from FEMA. In commenting, FEMA agreed that there has been improvement in COOP plans and that additional oversight is needed.

HUD's purchase card program is part of the governmentwide commercial credit card program established to simplify federal agency acquisition processes by providing a low-cost, efficient vehicle for obtaining goods and services from vendors. According to Federal Acquisition Regulation (FAR) Part 13.201(b), government purchase cards should be used for micropurchases, which are purchases up to $2,500. The Department of the Treasury also requires agencies to establish approved uses and limitations on the types of purchases and spending limits. GSA administers the master contract and HUD's purchase card policy was derived from the GSA governmentwide credit card program and tailored by HUD to meet its specific needs. During the period of our review--October 2000 through September 2001--HUD was operating under a policy dated October 1995. HUD is currently updating its purchase card policy. HUD's purchase card policy states that purchase cards are intended to procure general-purpose office supplies and other support needs. The policy requires each approving official to develop a preapproval process to ensure that all purchase card transactions are authorized and in accordance with departmental and other federal regulations. The approving official signifies that a cardholder's purchases are appropriate by reviewing and signing monthly statements. As required by the Department of the Treasury, HUD's purchase card policy established approved uses and limitations on the types of purchases and dollar amounts in its purchase card policy. This policy also includes a detailed list of items that cardholders are prohibited from buying with their government purchase cards. For example, purchase or rental of nonexpendable property (generally defined as property of a durable nature with a life expectancy of at least 1 year), meals, drinks, entertainment or lodging, and construction costs exceeding $2,000 are generally prohibited. Fiscal year 2001 single purchase limits for individual cardholders, which are required to be established by the approving officials and approved by the departmental directors, ranged from $100 to $80,000, and their monthly limits ranged from $100 to $300,000. HUD was in the process of reevaluating and where applicable, lowering these limits. Bank One currently services the purchase card program at HUD. Internal control is a major part of managing an organization and is key to ensuring proper use of government resources. As mandated by 31 U.S.C. 3512, commonly known as the Federal Managers' Financial Integrity Act of 1982, the Comptroller General issues standards for internal control in the federal government. These standards provide the overall framework for establishing and maintaining internal control and for identifying and addressing major performance and management challenges and areas at greatest risk of fraud, waste, abuse, and mismanagement. According to these standards, internal control comprises the plans, methods, and procedures used to meet missions, goals, and objectives. Control activities are the policies, procedures, techniques, and mechanisms that enforce management's directives and help ensure that actions are taken to address risks. Control activities are an integral part of an entity's planning, implementation, review, and accountability for stewardship of government resources and achieving effective results. They include a wide range of diverse activities. Some examples of control activities include controls over information processing, physical control over vulnerable assets, segregation of duties, proper execution of transactions and events, and access restrictions to and accountability for resources and records. To determine whether HUD's existing controls over the purchase card program provided assurance that improper purchases would be detected or prevented in the normal course of business, we interviewed HUD staff and performed walk-throughs of the process. We reviewed HUD's policies and procedures and prior GAO reports as well as reports by HUD's Office of Inspector General (OIG) and independent auditors on this topic. To test the effectiveness of internal controls, we selected a stratified random sample of 222 purchase card transactions made during fiscal year 2001 totaling over $1.8 million from a population of purchase card transactions totaling $10.6 million. To identify potential improper purchases we requested and obtained fiscal year 2001 transaction data from Bank One and used data mining techniques and other computer analyses to identify unusual transactions and payment patterns in HUD's fiscal year 2001 purchase card transaction data that may be indicative of improper purchases. In order to determine if fiscal year 2001 purchases were adequately supported and for a valid government use, we requested and analyzed supporting documentation for those transactions that we identified as potentially improper and questionable. While we identified some improper, potentially improper, and questionable purchases, our work was not designed to determine the full extent of improper purchases. We requested comments from the Secretary of Housing and Urban Development. We conducted our work from November 2001 through November 2002 in accordance with generally accepted government auditing standards, and we performed our investigative work in accordance with standards prescribed by the President's Council on Integrity and Efficiency. HUD staff did not comply with key elements of its purchase card policies that would have helped minimize the risk of improper purchases, including (1) obtaining preapproval for purchases, (2) retaining adequate supporting documentation, (3) conducting supervisory review of all purchases, and (4) periodically reviewing purchase card transactions to ensure compliance with key aspects of the department's policy. This created an environment where improper purchases could be made with little risk of detection and likely contributed to the $2.3 million in improper, potentially improper, and questionable purchases we identified through our data mining efforts. GAO's Standards for Internal Control in the Federal Government states that transactions and other significant events should be authorized and executed only by persons acting within the scope of their authority. This is the principal means of assuring that only valid transactions to exchange, transfer, use, or commit resources and other events are initiated or entered into. To address these internal control standards, HUD's purchase card policy contains fundamental controls designed to minimize the agency's exposure to improper purchases. HUD's policy requires each approving official to establish a preapproval process for each cardholder to ensure that all purchases are appropriate and for official government use. Further, HUD's policy states that the approving official is required to review, certify, and monitor all cardholder purchases to ensure that they have the necessary approvals before purchases are made. Additionally, HUD's purchase card policy requires that approving officials review each purchase along with the applicable supporting documentation in order to certify that the purchases were appropriate and a valid use of government funds. Based on our review of HUD's purchase card process, we found that most approving officials had not established a preapproval process to ensure the appropriateness of purchases before they are made. Only the Information Technology Office routinely obtained authorization prior to purchasing items with the purchase card. The approving official's review of each purchase card transaction is one of the most important controls to ensure that all purchases are a valid use of government funds. We found that this critical control was seriously compromised because of inadequate supervisory review of supporting documentation by approving officials. To test the effectiveness of this key internal control, we selected and tested a stratified random sample of 222 purchase card transactions made during fiscal year 2001. Of the total $1.8 million purchase card transactions selected in the statistical sample, $1.4 million lacked adequate supporting documentation for the approving official to determine the validity of the purchase. Based on the results of this sample, we estimate that $4,753,253 of the total sampled population of purchases ($10,590,461) made during fiscal year 2001 lacked adequate supporting documentation. Our Standards for Internal Control in the Federal Government states that internal control activities help ensure that management's directives are carried out. One such activity is the appropriate documentation of transactions. Internal control and all transactions and other significant events need to be clearly documented, and the documentation should be readily available for examination. All documentation should be properly managed and maintained. We determined that some of HUD's records supporting the purchase card program were not properly managed or maintained. For instance, HUD could not provide a complete and accurate list of all approving officials. When we attempted to contact cardholders and their respective approving officials to request supporting documentation using the list the agency provided, at least 28 approving officials provided written notification that cardholders assigned to them according to HUD records were not their responsibility. According to HUD officials, the purchase card program administrator is not routinely informed of changes in approving officials and often does not have the time to update the list regularly. Because HUD does not know who should be approving purchases, there is an increased risk of collusion as well as a general lack of accountability for ensuring the proper use of government funds. Another control activity that was available but not being used by HUD is blocking Merchant Category Codes (MCC). Blocking categories of merchants allows agencies to prohibit certain types of transactions that are clearly not business related, such as purchases from jewelry stores or entertainment establishments. During our review, we found that HUD was not blocking any MCCs. These blocks are available as part of HUD's purchase card task order, under the GSA SmartPay Master Contract with Bank One. Because HUD did not take advantage of this control, there were no restrictions on the types of purchases employees could make during fiscal year 2001--the period of our audit. As a result of our audit work, on March 6, 2002, HUD began using selected MCC blocks. Our Standards for Internal Control in the Federal Government states that internal control should generally be designed to assure that ongoing monitoring occurs in the course of normal operations. Internal control monitoring should assess the quality of performance over time and ensure that findings of audits and other reviews are promptly resolved. Program and operational managers should monitor the effectiveness of control activities as part of their regular duties. HUD's purchase card policy requires the department to perform annual program reviews and report the results, including findings and recommendations, to the purchase card program administrator. However, HUD officials could locate only one such report. This November 2001 report, prepared by a consultant, identified problems that were similar to the findings previously reported by the OIG in February 1999. Both reports documented problems with weak internal controls and insufficient supporting documentation. The consultant's report also noted that HUD was not performing the periodic program reviews required by its policies and that employees were making improper split purchases. HUD management agreed with the findings in the OIG report and developed and implemented an action plan to address the identified weaknesses. According to HUD OIG staff, its recommendations were implemented and have been closed since September 30, 2000. However, based on our findings, corrective actions taken at that time were not effective. The results of our control testing indicate that HUD's lack of internal control over the purchase card process allows continued vulnerability to wasteful, fraudulent, or otherwise improper purchases by employees using government purchase cards. Poor internal controls created an environment where improper purchases could be made with little risk of detection. We define improper purchases as those purchases that include errors, such as duplicate charges and miscalculations; charges for services not rendered; multiple charges to the same vendor for a single purchase to circumvent existing single purchase limits--known as split purchases; and purchases resulting from fraud and abuse. We define questionable purchases as those that, while authorized, were for items purchased for a questionable government need as well as transactions for which HUD could not provide adequate supporting documentation to enable us to determine whether the purchases were valid. We identified 88 transactions totaling about $112,000 that were improper split purchases. For example, one cardholder purchased nine personal digital assistants and the related accessories from a single vendor on the same day in two separate transactions just 5 minutes apart. Because the total purchase price of $3,788 exceeded the cardholder's single purchase limit of $2,500, the purchase was split into two transactions of $2,388 and $1,400, respectively. These improper split purchases violate provisions of the Federal Acquisition Regulation and HUD's own purchase card policy, which prohibits splitting purchases into more than one transaction to circumvent single purchase limits. We received documentation from some cardholders confirming that they split their purchases because they exceeded their single purchase limits, while one cardholder claimed the vendor independently split the purchases. We identified an additional 465 purchases totaling over $913,000 where HUD employees made multiple purchases from a vendor on the same day. Specifically, cardholders made multiple purchases totaling over $2,500 on the same day from the same vendor. Although we were unable to determine definitively whether these purchases were improper, based on the available supporting documentation, these transactions share similar characteristics with the 88 split purchases, and therefore we consider these transactions to be potentially improper. We also found 2,507 transactions, totaling about $1.3 million, with vendors that would not routinely be expected to engage in commerce with HUD. In order to determine whether these questionable purchases were a valid use of government funds, we requested supporting documentation for each purchase. HUD was able to provide us with adequate supporting documentation for 1,324 transactions totaling about $412,000. The department was unable, however, to provide adequate support for the remaining 1,183 transactions (47 percent of total transactions requested) totaling about $869,000 (67 percent of total dollars requested). Additionally, we found 940 transactions, totaling about $554,000, where the purchases were made either on a weekend or holiday. We requested supporting documentation for each of these transactions. HUD was able to provide us with adequate support for 645 transactions totaling about $189,000. HUD was unable to provide adequate support for the remaining 295 transactions (31 percent of total transactions requested) totaling over $364,000 (66 percent of total dollars requested). In these instances, we were unable to determine what was purchased, for whom, and why. Some examples of the questionable vendor transactions for which we did not receive adequate support included over $27,000 to various department stores such as Best Buy, Circuit City, Dillard's, JCPenney, Lord & Taylor, Macy's, and Sears; over $8,900 to several music and audio stores including Sound Craft Systems, J&R's Music Store, Guitar Source, and Clean Cuts Music; and over $9,700 to various restaurants such as Legal Sea Food, Levis Restaurant, The Cheesecake Factory, and TGI Fridays. Additional examples of questionable or potentially improper purchases we found include $25,400 of "no show" hotel charges for HUD employees who did not attend scheduled training and $21,400 of purchases from vendors who appear to have been out of business prior to the purchase. Because HUD was unable to provide adequate documentation for these purchases, we consider them to be a questionable use of government funds and therefore potentially improper purchases. We also have concerns about HUD's accountability for computer and related computer equipment bought with purchase cards because of the large volume of transactions for which it did not have appropriate documentation. For example, our testing revealed that HUD employees used their purchase cards to buy portable assets, such as computer equipment and digital cameras, totaling over $74,500 for which they have provided either no support or inadequate support. In HUD's August 28, 2002, purchase card remedial action plan, discussed in more detail in the next section, HUD acknowledged that items bought with purchase cards were not being consistently entered in the department's asset management system. As a result, portable assets became vulnerable to loss or theft. In our follow-up work, we plan to determine whether these items are included in HUD's asset management system and are being appropriately safeguarded. OMB's April 18, 2002 memorandum, M-02-05, requires all agencies to develop remedial action plans to manage the risk associated with purchase card usage. Agencies were required to submit their plans to the Office of Federal Procurement Policy no later than June 1, 2002. HUD's remedial action plan was submitted to OMB on May 31, 2002. Our review of HUD's remedial purchase card action plan found that it did not address all the weaknesses we identified. Although HUD's plan includes steps for resolving and preventing a number of potential problem areas, including the need for (1) adequate monitoring, (2) more frequent internal audits, (3) accountability and penalties for misuse of cards, (4) updating the agency handbook, (5) spending limits in line with purchasing requirements, (6) adequate program records, including proper approving officials, and (7) entering property purchased with purchase cards in the inventory system, the plan falls short in other key areas. For example, the plan did not include requirements for (1) a robust review and approval function for purchase card transactions, focusing on identifying split purchases and other inappropriate transactions, (2) a process to periodically assess the effectiveness of the review and approval process, and (3) specific documentation and records to support the purchase card transactions. In addition, the remedial plan lacked specifics as to how and when HUD would implement it. On August 16, 2002, OMB returned HUD's remedial action plan and asked that a timeline be incorporated. HUD submitted a new plan to OMB on August 28, 2002. While the revised remedial action plan includes a broad timeline for completion of each objective, we found that it still does not adequately address key control weaknesses we identified, in part because it lacks specific steps necessary to fully address identified problem areas. In addition, the revised remedial action plan does not require the program administration staff to begin designing a monitoring plan to assess HUD's compliance with key aspects of its purchase card policy until the second quarter of fiscal year 2003 and does not give an estimated date for when this key internal control will be implemented. Additionally, the revised plan does not specifically identify who is responsible for developing or implementing any of the proposed improvements. The problems we identified with HUD's purchase card program leave the agency vulnerable to wasteful, fraudulent, or otherwise improper purchases. The remedial action plan prepared by HUD is an important first step toward addressing the control weaknesses we identified. At the same time, much still remains to be done to effectively control the inherent risk in HUD's purchase card program. HUD management will have to effectively follow through on its implementation plan and expand the plan to improve its review and approval process, requirements for documentation and record retention, monitoring process, and remedial action plan or HUD will continue to be susceptible to misuse of government funds. To strengthen its internal control over the purchase card program and reduce HUD's vulnerability to improper purchases, we recommend that the Secretary direct the Assistant Secretary for the Office of Administration to take the following actions: implement the preapproval requirement in the existing purchase card develop and implement a robust review and approval function for purchase card transactions, focusing on identifying split purchases and other inappropriate transactions, and on performing a detailed review of relevant supporting documentation for each purchase; update the list of approving officials and their designated cardholders quarterly to ensure accuracy and completeness; establish specific requirements for documentation and records to support all purchase card purchases; develop and implement a formal monitoring process to periodically assess the effectiveness of the enhanced review and approval process; revise the remedial action plan for purchase cards to include the specific steps necessary to fully implement the above five recommendations; and follow up on the purchases we identified for which cardholders did not provide adequate supporting documentation to determine the validity and the propriety of the purchases. In written comments on a draft of this report, which are reprinted in appendix I, HUD agreed that further improvements are needed to strengthen the department's purchase card controls. Although HUD did not specifically agree or disagree with our individual recommendations, the actions being taken or planned by the agency address five of our seven recommendations. For example, in response to our recommendation to implement the preapproval requirement in the existing purchase card program, HUD stated that it has always had an effective preapproval process in its field offices through the Automated Client Response System (ACRS). While we agree that this system is available for use, during our review of supporting documentation, we found no evidence that cardholders were utilizing this system. To improve its preapproval process at its headquarters, HUD stated that it has implemented the mandatory use of HUD Form 10.4, Requisition for Supplies, Equipment, Forms, Publications, and Procurement Services. In addition, to enhance its review and approval function, HUD said it had provided mandatory training in January 2003 to approving officials on the procedures for reviewing and approving cardholder statements. HUD also said that it was working with Bank One to provide training to cardholders and approving officials on the use of the automated purchase card system and the monitoring tools available through Bank One. HUD also stated that as of January 2003, a review of the approving officials will be performed and the Agency Program Coordinator will make the necessary changes quarterly to ensure the list is accurate and complete. To ensure proper supporting documentation is maintained for all purchases, HUD also noted that it provided training to cardholders and approving officials starting in January 2003. Additionally, HUD stated that in October 2002, a staff person was assigned to begin performing planned internal reviews and random spot reviews of purchase card transactions with reports to be issued on an interim basis as the reviews are completed to ensure that proper management and internal controls are maintained over the authorization of purchases and use of the purchase card. These actions will be helpful in strengthening the purchase card controls at HUD. HUD did not state what, if any, action it planned to take regarding the two remaining recommendations. Regarding our recommendation to revise its remedial action plan, HUD stated that the plan adequately met the requirements set forth by OMB. While the plan may address the elements required by OMB, we do not believe it lays out an adequate approach for resolving identified control weaknesses. As discussed in the report, the plan lacks the specific steps necessary to fully implement the proposed changes to strengthen internal controls. Concerning follow-up on inadequately supported purchases we identified, HUD stated that it had provided documentation when asked and would provide more if necessary. On July 8, 2002, we provided HUD with a compact disk containing all transactions for which we received either no support or inadequate support during our fieldwork and allowed an additional 3 weeks for the agency to provide the supporting documentation. We have not received any additional supporting documentation since then. It is our view that HUD has a fiduciary duty to follow up on the inadequately supported purchases, which total about $2.1 million and represent 57 percent of the total purchase transactions we tested, to ensure their propriety. HUD offered several additional technical comments, which have been incorporated into this report as appropriate. This report contains recommendations to you. The head of a federal agency is required by 31 U.S.C. 720 to submit a written statement on actions taken on these recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight within 60 days of the date of this report. You must also send a written statement to the House and Senate Committees on Appropriations with the agency's first request for appropriations more than 60 days after the date of this report. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Committee on Governmental Affairs and the House Committee on Government Reform, the Director of Office of Management and Budget; and other interested parties. 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. Should you or your staff have any questions on matters discussed in this report, please contact me at (202) 512-8341 or by E-mail at [email protected]. In addition to the contact named above, Sharon Byrd, Lisa Crye, Sharon Loftin, and Julie Matta made key contributions to this report. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. 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Due to the Department of Housing and Urban Development's (HUD) increasing use of purchase cards and the inherent risk associated with their use, Congress asked GAO to audit the purchase card program concentrating on assessing internal controls and determining whether purchases being made are a valid use of government funds. Significant internal control weaknesses in HUD's approximately $10.6 million purchase card program resulted in improper, potentially improper, and questionable purchases in fiscal year 2001. Because of these internal control weaknesses, there was often inadequate documentation supporting many purchases GAO reviewed, and as a result, GAO was unable to determine whether these purchases were a valid use of government funds. GAO also found that HUD's remedial action plan for its purchase card program does not adequately address all the control weaknesses we identified. These weaknesses created an environment in which improper purchases could be made with little risk of detection and likely contributed to the $2.3 million in improper, potentially improper, and questionable purchases GAO identified. GAO found improper and potentially improper purchases totaling about $1 million where HUD employees either split or appeared to have split purchases into multiple transactions to circumvent cardholder limits. GAO also found that HUD employees lacked adequate supporting documentation for about $1.3 million in questionable purchases including those from vendors not expected to engage in commerce with HUD, purchases made on holidays and weekends, and $74,500 in portable assets such as computer equipment and digital cameras. In these instances, it was not possible to determine what was purchased, for whom, and why. The problems GAO identified with HUD's purchase card program leave the agency vulnerable to wasteful, fraudulent, or otherwise improper purchases. Unless HUD makes specific improvements to its review and approval process, requirements for documentation and record retention, monitoring process, and remedial action plan, the department remains susceptible to fraud, waste, and abuse.

GPRA is intended to shift the focus of government decisionmaking, management, and accountability from activities and processes to the results and outcomes achieved by federal programs. New and valuable information on the plans, goals, and strategies of federal agencies has been provided since federal agencies began implementing GPRA. Under GPRA, annual performance plans are to clearly inform the Congress and the public of (1) the annual performance goals for agencies' major programs and activities, (2) the measures that will be used to gauge performance, (3) the strategies and resources required to achieve the performance goals, and (4) the procedures that will be used to verify and validate performance information. These annual plans, issued soon after the transmittal of the President's budget, provide a direct linkage between an agency's longer-term goals and mission and day-to-day activities. Annual performance reports are to subsequently report on the degree to which performance goals were met. The issuance of the agencies' performance reports, due by March 31, represents a new and potentially more substantive phase in the implementation of GPRA--the opportunity to assess federal agencies' actual performance for the prior fiscal year and to consider what steps are needed to improve performance and reduce costs in the future. SBA is responsible for aiding, counseling, assisting, and protecting the interests of the nation's small businesses and for helping businesses and families recover from natural disasters. SBA is also a financial institution with significant commitments and exposure. As of September 30, 2000, SBA's total portfolio was about $52 billion, including $45 billion in direct and guaranteed small business loans and other guarantees and $7 billion in disaster loans. Since its inception, SBA has, among other things, made 1.1 million small business loans and has approved 1.4 million disaster loans to individual homeowners, renters, and businesses of all sizes. SBA also administers the 8(a) business development program, which is designed to assist small disadvantaged businesses become successful through counseling, training and assistance in obtaining federal contracts. SBA also provides entrepreneurial assistance through partnerships with private entities that offer small businesses counseling and technical assistance. This section discusses our analysis of SBA's performance in achieving its selected key outcomes and the strategies the agency has in place, particularly strategic human capital management and information technology, for achieving these outcomes. In discussing these outcomes, we have also provided information drawn from our prior work on the extent to which the agency provided assurance that the performance information it is reporting is credible. SBA's performance in achieving the goal of helping small businesses succeed is mixed. SBA reported that it met about half of its quantifiable measures relating to this goal. When goals were not met, SBA did not identify strategies for achieving the unmet goals in the future. At the time SBA issued its fiscal year 2000 report, data were not yet available for the percentage increase of federal prime contracts to small businesses, small disadvantaged businesses, women-owned businesses, and HUBZone small businesses. SBA provided us with data that showed that it met only the small disadvantaged business goal. We had difficulty assessing SBA's progress for this outcome because SBA continues to use output measures without showing how strategies and measures relate to helping businesses succeed. In support of this goal, SBA lists four strategies, but does not provide an explanation as to how these strategies support the overall goal accomplishment of helping businesses succeed. In addition, SBA included several measures of the number of loans, but often did not correlate the impact of increasing the number of loans on small business success. For example, one goal is increasing the number of loans to veteran-owned businesses to 7,395. The narrative does not explain why this number is important. In the area of access to business development, SBA measures the number of clients being counseled or trained, but does not include outcome information on the impacts of the counseling or training. SBA's IG suggested that SBA redefine current output measures because inconsistencies in the methods used to count clients mean that one client may be counted more than once. SBA recognizes that it still relies on output measures, and that for future reports, it will make an effort to explain how the accomplishment of these output measures support the established outcome. In addition, two of the performance indicators -- "expand research, analyses, and publication of information," and "improve small business impact analyses of regulatory alternatives" - were stated as qualitative indicators and the actual performance stated as "achieved" at 100 percent. However, SBA did not provide criteria or a performance indicator that would explain how it assessed accomplishment of these goals. SBA's performance report includes the following strategies for the accomplishment of this outcome: (1) improving access to capital and credit, (2) increasing access to procurement opportunities, (3) act as a voice for America's small businesses, and (4) providing access to entrepreneurial development assistance. These strategies were shown as goals in SBA's fiscal year 1999 report. Because of the lack of explanation in the plan and report regarding how these strategies relate to helping businesses succeed, we were unable to assess whether they are clear and reasonable. SBA's performance plan does not generally categorize its human capital or information technology strategies by outcome, so we could not determine specifically how this outcome of helping businesses succeed is impacted by these strategies. However, in its plan, SBA states that automation and asset sales will allow staff to shift their attention from the processing of transactions to using information to analyze programs, activities, and performance. SBA states that it plans to continue to develop and deliver training in marketing and outreach, commercial credit analysis, lender oversight, and lender relations. Additional strategies for human capital and information technology are discussed in the plan and reports as part of SBA's overall internal goal of "improving SBA management." In its performance plan, SBA provides a description of its use of interagency coordination as a strategy for this outcome. For example, SBA states that it meets regularly with the Commerce-directed Trade Promotion Coordinating Committee to discuss challenges, propose program initiatives, work on developing new products, and avoid duplication of effort. SBA reported that it succeeded in meeting its fiscal year 2000 goal of providing timely service to disaster victims, yet we have concerns about the quality of SBA's measures. For example, while SBA's fiscal year 2000 performance report shows that it met its 3-day field presence measure, SBA's IG determined that this measure has not consistently been applied by disaster area offices. For example, two disaster area offices defined field presence as the date they arrived at the disaster scene, while one area office defined the term as the date it was available to assist disaster victims. SBA did not address this discrepancy in its performance report. Also, for fiscal years 1999 and 2000, SBA's performance report shows that it met its underwriting compliance rate goal. However, SBA's IG reported that it did not consider the underwriting compliance rate to be an objective indicator. SBA did not provide a discussion on this issue in its fiscal year 2000 performance report. Furthermore, as shown in table 1, SBA adjusted its target goal annually for its measure of processing disaster loans within 21 days, depending on the extent to which the goal was accomplished in the previous year. In its performance report, SBA explained that its performance deteriorated because of the need to respond to widespread multiple disasters in fiscal years 1998 and 1999, including Hurricane Floyd, that affected 10 states along the East Coast and caused major widespread flooding in Texas. However, the report does not explain SBA's justification for changing its target goal rates in order to align them with their actual annual performance. SBA's fiscal year 2000 report acknowledges that SBA considers the disaster assistance goal difficult to achieve, due to the unpredictability of disaster activity. Our 2001 Performance and Accountability Series Report on SBA pointed out that one step that would assist SBA in stabilizing the indicator for this goal would be to modernize its loan processing in order to consistently meet its timeliness goals. Presently, few of the processes followed by SBA loan officers are automated in an integrated manner, and this lack of automation contributes to processing time. SBA officials said that they are taking various actions to revise and/or clarify the measures for the disaster assistance goal. For example, the 2002 performance plan states that SBA has developed a draft definition of "effective field presence" to be applied by its Area Directors. Also, SBA plans to incorporate a "customer satisfaction indicator" as a measure for this goal, which will be designed to assess issues related to the quality and timeliness of services provided. In its 5-year strategic plan, SBA refers to two completed evaluations to assist in formulating its strategies for establishing this indicator. One survey evaluated customer satisfaction with the services provided to recipients of disaster loans approved after Hurricane George. Another survey was also done to measure the customer satisfaction level during the disaster loan making process. According to the strategic plan, the surveys indicated a high customer satisfaction rate. However, we identified the following limitations with the results from SBA's disaster loan making survey: (1) the survey population may not have been representative of all recipients, (2) those who were denied loans were not surveyed, (3) the survey response rate was low, and (4) the selection of response categories may have skewed the responses toward higher ratings. Neither SBA's plan nor its report discusses strategies for accomplishing this goal. However, SBA's Strategic Plan for fiscal years 2001 through 2006 mentions strategies that include (1) developing a flexible infrastructure of resources that can be applied to a disaster area, (2) using the Internet to facilitate the disaster home loan application process, and (3) outsourcing disaster home loan servicing and carrying out asset sales. Since these strategies were not discussed in the plan and report, we could not determine how they relate directly to goal accomplishment. SBA's performance plan does not generally categorize its human capital or information technology strategies by outcome, so we could not determine specifically how this outcome of providing assistance to families and businesses recovering from disasters is impacted by these strategies. Additional strategies for human capital and information technology are a part of SBA's overall internal goal of "improving SBA management." In its performance plan, SBA provides a description of its use of interagency coordination activities as a strategy for this outcome. For example, SBA states that systematic coordination among federal, state, and local agencies is necessary before and during a disaster to promote efficient, consistent action. SBA states that this coordination is described in the federal response plan and is overseen by the Federal Emergency Management Agency. SBA's reported success in achieving the portion of its outcome that more eligible small disadvantaged businesses participate in its programs was mixed. SBA reported that it met its output measure that at least 60 percent of small disadvantaged firms (including 8(a) firms) receive federal contracts and its measure that at least 3.4 percent of 8(a) firms receive mentoring. However, SBA reported that it did not meet its measure of certifying a total of 12,000 small disadvantaged business firms as being eligible to receive price credits when bidding on prime contracts or to perform as subcontractors in certain industries. SBA said that it is reevaluating its goal for the number of small disadvantaged business firms it will certify because the number of firms seeking certification was much smaller than projected. SBA does not explain the strategies it is using to reevaluate this goal. SBA's original projection of the number of firms it would certify was based on the number of firms that had previously self- certified as small disadvantaged businesses. Our work has shown that a variety of factors, including uncertainty about the program, the administrative and financial burden of applying, and questions regarding the benefits of the program may have contributed to the number of small disadvantaged business certifications being lower than anticipated by SBA. It is not possible to determine SBA's progress in accomplishing the portion of its outcome that more eligible small disadvantaged businesses will become more successful because SBA's current success measure is not aligned with the mission of the 8(a) business development program, SBA's key program in this area. SBA's measure for the 8(a) business development program does not capture program success in terms of the number of competitive firms that exit the program without being unreasonably reliant on 8(a) and that can compete in the mainstream economy, as required by the Small Business Act, as amended. SBA's performance report states that it will measure achievement by the percentage of firms that are economically viable 3 years after graduation and states that SBA began capturing the data for this measure in fiscal year 2000. SBA's basis for reporting that it has just begun to collect this data is unclear because SBA reported on actual performance in previous years. SBA includes this outcome in its plan as a part of its outcome of helping businesses succeed. The strategies include: (1) developing methods to improve access to contracting opportunities for 8(a) firms; (2) working with other agencies to reform and improve the program; and (3) developing legislative, regulatory, and procedural documentation for the reform recommendations. In the human capital area, SBA noted, among other things, that it plans to provide sufficient financial and analytical training to Business Opportunity Specialists to help them more accurately evaluate a company's business profile and competitive potential. SBA's performance plan does not generally categorize its information technology strategies by outcome, so we could not determine specifically how it is impacted by this strategy. Additional strategies for information technology are a part of SBA's overall internal goal of "improving SBA management." In its performance plan, SBA provides a description of its use of interagency coordination activities as strategies for this outcome. For example, SBA states that it participates in monthly meetings with other federal agencies to discuss strategies to increase small business participation in federal contracts. For the selected key outcomes, this section describes major improvements or remaining weaknesses in SBA's (1) fiscal year 2000 performance report in comparison with its fiscal year 1999 report and (2) fiscal year 2002 performance plan in comparison with its fiscal year 2001 plan. This section also discusses the degree to which SBA's fiscal year 2000 report addresses concerns and recommendations by the Congress, us, SBA's IG, and others. SBA made some improvements in its performance reporting, but in certain areas, additional effort is warranted. The fiscal year 2000 performance report includes more clearly labeled headings and provides more guidance so that the reader can quickly identify specific information. For example, the 2000 performance report includes a section that summarizes SBA's programs and a section that exclusively discusses SBA's goals, resources, and outcomes. Another strength of the 2000 report is that it concisely presents SBA's status in responding to management challenges identified by SBA's IG, documents ongoing and closed GAO and IG reviews, as well as the number of recommendations associated with each. However, several weaknesses we previously noted remain in SBA's report. For example, the 1999 performance report did not discuss data limitations that could affect the quality of data used by SBA to assess performance. Also, although the 1999 report generally discussed the reasons certain goals were not met, it did not include time frames or schedules for achieving the unmet goals. In comparison, the 2000 performance report did discuss data limitations, but did not include time frames or schedules for achieving the unmet goals. The 2000 performance report does include a narrative explanation of why the goal accomplishment fell short, but as with the 1999 report, it does not provide strategies for meeting unmet goals. In addition, SBA does not sufficiently link its strategies to indicators and measures and does not consistently provide summarized explanations about the data that are presented. Another limitation of the fiscal year 2000 report is that it did not provide a brief summarization in its section that addresses the number of indicators that were met. SBA did present this information in its fiscal year 1999 report. Although this information is included elsewhere in the report, we believe that such a narrative leading into the 'Performance Indicators' section for the 2000 report would have been helpful in determining SBA's approach in presenting these indicators. For example, in fiscal year 1999, SBA had a total of 59 indicators, and in 2000, it only had 16. Since the data are presented without SBA's explanation for the substantial reduction of indicators, we did not have any insight into SBA's rationale for doing so. We believe that the lack of a discussion on this action inhibits our capability to track a clear link between the identified strategies and the corresponding indicators and measures in order for decisionmakers to determine if progress has been made in achieving outcomes. We noted that SBA's presentation of information in the plan was an improvement from the fiscal year 2001 plan. The layout of data was better designed, and SBA included its organizational chart, as well as more graphics to illustrate its points. Also, the fiscal year 2002 plan addresses SBA's mission, strategic goals and objectives, core values, and budgetary requirements. Another improvement from the fiscal year 2001 plan is that SBA's fiscal year 2002 plan generally discusses SBA's crosscutting activities with other agencies and discusses human capital resources needed to achieve SBA's planned performance. However, the plan lacks a clear link of how strategies relate to outcomes and how they link to indicators and measures. Specifically, it is difficult to ascertain how SBA's measures will indicate successful performance beyond meeting output targets. We have identified two governmentwide, high-risk areas: strategic human capital management and information security. Regarding strategic human capital management, we found that SBA's performance plan did have goals, but not measures, related to strategic human capital management, but SBA's performance report explained its progress in resolving strategic human capital management challenges. For example, in July 2000, we said that SBA had begun to take the steps necessary to better manage its human capital activities, but needed to do more. SBA reported that, among other things, it has (1) issued a comprehensive workforce transformation plan, (2) issued a contract to conduct a workload and staffing analysis of SBA headquarters, and (3) provided leadership training to executives and senior managers. With respect to information security, we found that SBA's performance plan did have goals, but not measures, related to information security, and SBA's performance report explained its progress in resolving its information security challenges. For example, SBA stated that it has, among other things, (1) committed more than $1.2 million in personnel and contract support to enhance computer security, (2) increased the number of authorized personnel for information technology security, and (3) issued an updated computer security policy document. As shown in table 2, we identified four major management challenges facing SBA. We found that SBA's performance report discussed progress in resolving many of the challenges we identified, but it did not discuss SBA's progress in resolving the challenge of streamlining and automating disaster loan assistance to improve timeliness. Of the four major management challenges we identified, SBA's performance plan had (1) a goal and measures related to one of the challenges; (2) a goal, but no measures, directly related to one of the challenges; (3) a goal and measures indirectly applicable to one of the challenges; and (4) had no goals and measures related to the last challenge. GPRA is intended to shift the focus of government decisionmaking, management, and accountability from activities and processes to the results and outcomes achieved by federal programs. In order for such a shift to occur, the information presented in GPRA plans and reports needs to be presented in a logical format that allows the reader to easily discern how the agency plans to accomplish its goals and objectives and how the measures will indicate successful performance beyond meeting output targets. We had significant difficulty assessing SBA's progress in achieving its outcomes because of weaknesses in the report and plan. Although improved over last year in terms of presentation issues, SBA's fiscal year 2000 performance report and fiscal year 2002 performance plan do not follow GPRA guidance in several areas. SBA did not provide criteria or a performance indicator to explain the accomplishment of its qualitative measures. We believe, as we stated in our fiscal year 1999 report, that SBA is still relying heavily on outputs without sufficiently linking them to achievement of the outcome. SBA's performance report also lacks information about time frames or schedules and strategies for achieving unmet goals. In our view, SBA's fiscal year 2000 performance report and 2002 performance plan do not present information in a logical manner linking strategies to outcomes, indicators, and measures. To make SBA's plan and report more useful for decisionmakers and more consistent with GPRA, OMB Circular A-11, and related guidance, we recommend that the Administrator of SBA ensure that the fiscal year 2001 performance report and fiscal year 2003 performance plan (1) clearly link strategies to outcomes, indicators, and measures; (2) present criteria or a performance indicator to explain the accomplishment of the goal when using qualitative measures; and (3) provide information about strategies, time frames, and schedules for achieving unmet targets. Our evaluation was generally based on the requirements of GPRA, the Reports Consolidation Act of 2000, guidance to agencies from OMB for developing performance plans and reports (OMB Circular A-11, Part 2), previous reports and evaluations by us and others, our knowledge of SBA's operations and programs, our identification of best practices concerning performance planning and reporting, and our observations on SBA's other GPRA-related efforts. We also discussed our review with agency officials in the Office of the Administrator and with SBA's IG. The agency outcomes that were used as the basis for our review were identified by the Ranking Minority Member of the Senate Governmental Affairs Committee as important mission areas for the agency and generally reflect the outcomes for all of SBA's programs or activities. We identified the major management challenges confronting SBA, including the governmentwide, high-risk areas of strategic human capital management and information security, in our January 2001 performance and accountability series and high-risk update and SBA's IG identified them in December 2000. We did not independently verify the information contained in the performance report and plan, although we did draw from other GAO work in assessing the validity, reliability, and timeliness of SBA's performance data. We conducted our review from April through June 2001 in accordance with generally accepted government auditing standards. SBA provided written comments on a draft of this report. In its response, SBA said that it intended to conduct a major review of its current plan once it has an Administrator confirmed and senior political leadership in place. In revising the plan, SBA said that it would take into account our comments and would fully comply with GPRA, as well as promote President Bush's agenda. SBA disagreed with our conclusion that its fiscal year 2000 performance report and 2002 performance plan do not present information in a logical manner linking strategies to outcomes, indicators, and measures; however, SBA did not comment specifically on the report's recommendations. SBA said it believes the 2002 budget and performance plan offers a clear logical construct that helps the reader to understand how SBA activities can contribute to the success of a firm, as defined by job creation, revenue generation, and viability in the marketplace. SBA also said that it used logical diagrams extensively to convey how activities produce outputs, which in turn contribute to outcomes. We continue to believe that it is difficult for a reader to follow SBA's report and plan. While SBA employed diagrams and tables that should have helped the reader, inconsistencies in SBA's use of terms such as strategies and outcomes make following SBA's logic a laborious process. SBA also provided technical clarifications, which were incorporated as appropriate. SBA's comments are in appendix II. 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 report. At that time, we will send copies to appropriate congressional committees, the Acting SBA Administrator, and the Director, Office of Management and Budget. Copies will also be made available to others on request. If you or your staff have any questions, please call me at (202) 512-8678. Key contributors to this report were Susan Campbell, Cheri Truett, and Tina Morgan. Table 3 identifies the major management challenges confronting the Small Business Administration (SBA), including the governmentwide high-risk areas of strategic human capital management and information security. The first column lists the management challenges that we and/or SBA's Inspector General (IG) have identified. The second column discusses what progress, as discussed in its fiscal year 2000 performance report, SBA has made in resolving its challenges. The third column discusses the extent to which SBA's fiscal year 2002 performance plan includes performance goals and measures to address the challenges that we and the IG identified. The SBA IG told us that in the fiscal year 2000 Performance and Accountability Report, SBA did not update its description of the actions it has taken in response to the challenges to reflect actions taken since the IG's December 2000 management challenges report. We found that SBA's performance report discussed the agency's plans and progress in responding to most of its challenges, but it did not discuss the agency's progress in resolving the challenge of streamlining and automating disaster loan processing to improve timeliness. The plan discusses SBA's efforts to improve timeliness, but not as a result of automated loan processing. Of SBA's 13 major management challenges, its performance plan had (1) goals, but no measures that were related to 11 of the challenges, and (2) no goals or measures related to two of the challenges. However, SBA discussed strategies for 12 of the 13 challenges.

This report reviews the Small Business Administration's (SBA) fiscal year 2000 performance report and fiscal year 2002 performance plan required by the Government Performance and Results Act of 1993 to assess SBA's progress in achieving selected key outcomes that are important to its mission. SBA's reported progress in achieving its outcomes is mixed. However, GAO had difficulty assessing SBA's progress due to weaknesses in its performance measures and data. GAO was unable to assess SBA's lack of an explanation about how the strategies relate to the outcomes or a discussion regarding strategies for the outcome. GAO identified some improvements from SBA's prior year report and plan, but several weaknesses persist in SBA's fiscal year 2000 performance report and performance plan. The performance report includes a section that summarizes SBA's programs, a matrix that identifies ongoing and closed audit reviews, and several recommendations associated with each. However, SBA omitted time frames or schedules for achieving unmet goals, lacked strategies for meeting unmet goals, and failed to adequately link strategies to indicators and measures.

The secretary of the Department of the Interior created OAS in 1973 to resolve several aviation program problems: numerous accidents, improper budgeting and financial management, and poor utilization of aircraft. A 1973 task force, comprising representatives from across the Interior bureaus, attributed these problems to the decentralized aviation program--with each bureau responsible for all aviation functions. The secretary of the Department of the Interior charged OAS with responsibility for (1) coordinating and directing all fleet and contract aircraft; (2) establishing and maintaining standards for safety, procurement, and utilization; (3) budgeting for and financially controlling fleet and contract aircraft; and (4) providing technical aviation services to the bureaus. As the program evolved, OAS assumed responsibility for policy oversight and aviation services, while the bureaus became responsible for implementing safety requirements, deciding on whether to use fleet or contract aircraft, and the scheduling and use of their aircraft. OAS works with the Aviation Management Board of Directors to involve the bureaus in formulating policy and managing aviation activities. In addition, since 1996, the bureaus' aviation managers have also participated with OAS in setting fleet rates and planning for aircraft replacement and projected aviation program requirements. Eight Interior bureaus use OAS's services in varying degrees to carry out their respective missions as shown in figure 1. The Bureau of Land Management--which accounted for over one-third of the OAS program in flight hours for fiscal year 2000-- uses aircraft to carry out its fire-fighting and resource management missions. The Fish and Wildlife Service and the National Park Service depend heavily on OAS to manage fleet aircraft to achieve their respective missions. OAS is headquartered in Boise, Idaho, with significant operations located in Anchorage, Alaska. It has additional offices in Boise; Atlanta, Georgia; and Phoenix, Arizona. OAS operated with approximately 94 FTE in fiscal year 2000, 63 located in the lower 48 states and 31 located in the Anchorage office. In fiscal year 2000, OAS managed 95 government-owned aircraft, 42 based in the lower 48 states and 53 based in Alaska. OAS contracts for aircraft maintenance of fleet aircraft in the lower 48 states. In Alaska, OAS contracts for maintenance of fleet aircraft with private vendors, but maintains an in-house core maintenance staff. To fulfill its responsibilities, OAS set up functional divisions, including financial and information management, acquisition, and technical services. However, OAS accounts for and reports costs across four lines of business: fleet, contract, rental, and other. Of the $117 million spent on aviation services in fiscal year 2000, OAS received an appropriation of only $800,000 (or approximately seven FTE) to provide oversight of OAS department-wide aviation policies and procedures. Most of OAS's costs are financed through a working capital fund, established in the Office of the Secretary to finance a continuing cycle of operations, and must be repaid to the fund by the bureaus and others using the services based on rates determined by OAS. Since 1975 Interior's aviation accident rate has been cut in half, from 18.8 accidents per 100,000 flight hours in fiscal year 1975 to 8.7 accidents per 100,000 flight hours in fiscal year 2001. A number of OAS efforts have contributed to this reduction. Prior to the establishment of OAS's aviation safety efforts, safety standards varied from bureau to bureau and between regions within bureaus; in some cases, standards did not exist at all. According to the 1973 task force, virtually no control over aviation operations existed within the department, which resulted in a high accident rate and higher operational costs. OAS officials attribute the department's reduced accident rate, in part, to the implementation of a standard aviation operating policy. OAS sets pilot qualifications and proficiency standards as well as standards for aircraft maintenance and equipment inspections. These standards exceed the Federal Aviation Administration's (FAA) requirements. In addition, OAS periodically evaluates the bureaus' implementation of the aviation program, with a special emphasis on safe operations. The OAS Aviation Safety Management Office, reporting to the OAS director, is responsible for policy development, implementation, and review of the department's (1) aviation safety management and aircraft accident/incident prevention programs; (2) accident and incident investigation; (3) management of the department's reporting system for aircraft accidents, incidents, and hazards; and (4) management of the OAS aviation and occupational safety and health programs. Since April 1995, OAS is required to report accidents involving fatalities, serious injuries, or substantial damage to the National Transportation Safety Board and to assist the board with accident investigations when appropriate. The OAS Division of Technical Services oversees many day-to-day safety concerns, such as pilot training, aircraft engineering and maintenance, and technical policy development. The bureau directors are ultimately responsible for adherence to standards and the implementation of an effective accident prevention program. Since safety oversight was centralized under OAS, Interior has seen a dramatic decline in the rate of accidents, as shown in figure 2. OAS accepts applicable FAA regulations as baseline criteria for its aviation operations and then applies additional standards in order to reduce accidents that occur during hazardous flying conditions and specialized operations required by the bureaus' unique missions. These standards are published in the department's manual and in OAS's operational procedures memoranda. Additional policy directives issued by the bureaus may be more restrictive but may never be less restrictive than OAS's standards. These manuals specify more stringent pilot qualifications than those required by federal aviation regulations. For example, FAA requires pilots who fly passengers on commuter aircraft to have a commercial pilot certificate, which requires a minimum of 250 flight hours. However, OAS requires its contract pilots to have 1,500 flight hours to be eligible to fly missions for Interior. OAS also requires most of its fleet pilots to have a minimum of 500 hours of time commanding an aircraft to operate government-controlled aircraft, although there is no similar requirement in the federal aviation regulations. OAS has also developed additional aircraft maintenance standards for all Interior-owned aircraft and all contract aircraft that operate for Interior. For example, OAS requires a flight test following an aircraft overhaul, a major repair, or a replacement of engine or propeller. In addition to requirements for flight tests and 100-hour inspections, OAS developed standards for the inspection and maintenance of special use and mission- related equipment that is not covered by FAA regulations. Although OAS strives to meet or exceed all FAA regulatory standards on manufacturer requirements, OAS has granted exceptions to manufacturers' weight requirements for certain aircraft--eight Cessna 206 Amphibians and one De Havilland DHC-2T Beaver aircraft. OAS granted these exceptions to the Fish and Wildlife Service to allow the aircraft to exceed the manufacturers' weight limitations when the service conducts surveys of migratory birds. The exceptions were required to compensate for special equipment needed to conduct these surveys and to carry extra fuel during long flights over remote areas. OAS granted the exceptions with several stipulations designed to enhance the safety of these operations. Furthermore, to verify that the aircraft are operating under safe conditions, OAS had an engineering analysis conducted on the eight Cessna aircraft and has an engineering analysis in progress on the De Havilland Beaver. OAS also awarded a development contract on June 5, 2001, to provide a replacement aircraft that will meet all migratory bird mission requirements, thereby eliminating the need for all overweight exceptions to policy. From fiscal year 1997 through fiscal year 2000, OAS did not recover about $4 million from Interior's bureaus. We found two primary reasons why OAS set rates too low to fully recover its costs: (1) actual flight hours were lower than the projected hours based on historical usage and (2) all costs were not included in the estimates. As a result, OAS had to subsidize the costs of the aircraft used by Interior bureaus in part with funds from its reserve accounts, collected in prior years, such as the reserve fund for replacing aircraft. OAS's failure to recover all its costs from the bureaus was not attributable to any faults in OAS's accounting system but to deficiencies in the fleet rate model and rate process. We found the accounting system capable of producing financial information that is reasonably complete, reliable, and useful to OAS management for the purposes of setting rates. OAS recovers its costs from users by charging for its services. Costs for fleet aircraft are recovered based on fleet rates, and costs for contract aircraft are recovered based on agreements for the cost of the contract plus OAS's costs for servicing these agreements. OAS provides four lines of services--fleet, contract, rental, and miscellaneous (other)--to Interior's bureaus and other agencies, such as those within the Departments of Defense and of Agriculture. For fiscal years 1997 through fiscal year 2000, OAS failed to recover about $4 million from the Interior sector of its business while realizing a slight overcharge of approximately $400,000 from agencies outside Interior. Table 1 shows, by business line, where these unrecovered costs occurred. As table 1 shows, the majority of unrecovered costs were in the fleet business line. The fleet business recovered less of its costs because OAS and the bureaus' aviation managers had not correctly determined and set the appropriate rates. To determine the rates it needs to charge its users to recover the costs of its services, OAS captures the historical costs associated with each aircraft. OAS then projects the future costs based on its analysis of the historical costs, adjusted for inflation, and determines a means by which to allocate projected costs to the appropriate user. Based on this allocation, OAS calculates the hourly and monthly rates of the fleet rates using a fleet rate model. OAS then meets with the bureaus' aviation managers to get their input on the rates and makes subsequent adjustments to its projections of future costs if necessary. Finally, the aviation managers and OAS agree to the fleet rates, and OAS and each bureau sign an interagency agreement that sets the rate. In order to allow the bureaus lead time to budget for future costs, rates are set 2 years in advance and adjusted, if necessary. OAS and the aviation managers do not have a process to monitor rates periodically to determine if the rates fully recover costs. Using this process for setting the fleet aircraft rates, OAS has not recovered all costs because it relies on 5-year historical averages of flight hours in its calculation of rates and has no provision for projecting flight hours in its rate-setting process. If OAS had solicited the bureaus for projected flight hours, which may change from year to year because of changes in mission requirements, it would have had a more accurate projection of usage and therefore could have set the rates more precisely. The use of 5-year historical averages has resulted in an overestimation of the number of flight hours when compared to declining actual usage in recent years. According to an OAS official, the bureaus accept this higher projection of flight hours based on 5-year historical usage, because it results in lower rates. For example, if an aircraft has (1) an estimated cost of $100,000 based on historical costs and (2) an estimated usage of 200 flight hours based on the historical averages, the resulting rate would be $500 per flight hour. However, if the actual usage were reduced to 100 flight hours, the actual cost recovery for that aircraft would only be $50,000 or one-half of the projected recovery. As a result, the rate set would not fully recover the costs. While it is to be expected that flight hours vary to some degree from the projected usage, the use of more accurate projections and resulting rates would result in more accurate recovery of the costs. Additionally, OAS did not include in its calculations all the costs that needed to be considered in setting rates. From 1991 through 2000, in the Alaskan operations, OAS omitted from its rate calculation approximately $1.9 million in costs for aircraft maintenance. Fleet rates were therefore significantly lower than needed to recover the costs. OAS did not have a process in place to recognize the error and the resulting underrecovery of costs in a timely fashion. OAS has since taken actions to recoup the costs of the Alaska fleet maintenance operations and now includes these costs in its rate calculations. OAS has also not included in its projection all the costs of employees' postretirement health benefits and of the Civil Service Retirement System employee pension plan for current OAS employees engaged in work directly related to aviation services and therefore is not recovering these costs from its users. OAS has taken steps to control increases in program costs, but could potentially save several million dollars more annually if it implemented a more cost-effective approach to using aircraft. In an effort to control costs, OAS has reduced staff and implemented strategies to operate more efficiently. As a further effort, OAS conducted cost comparisons and determined that it was more cost effective to maintain aircraft under government ownership than to contract for aircraft. Despite these efforts, OAS has not managed the use and scheduling of aircraft, a major factor of the aviation program's cost. We analyzed the savings attributable to improvements in fleet and contract utilization and found that a moderate increase in average annual flight hours per aircraft could translate into savings of several million dollars annually. However, until OAS sets results-oriented performance goals and measures as part of a strategic aviation planning process and monitors its performance on an ongoing basis, it cannot track its progress in achieving additional program savings. OAS has taken several actions to control the cost of operations to maintain fleet rate cost increases consistent with the producer price index for transportation since 1995. In particular: OAS decreased staffing levels from 124 staff in fiscal year 1992 to 94 staff in fiscal year 2000, a 24-percent decrease. Because most OAS costs are personnel-related, this reduction significantly decreased OAS's costs. The OAS Acquisition Management Division implemented new contracting procedures to streamline the contracting process and established interdepartmental agreements with the Department of Agriculture's Forest Service to facilitate aircraft sharing arrangements. OAS is developing Web-based training for bureau aviation personnel, reducing training cost by more than $100,000 during the first 6 months of program implementation. To examine the cost effectiveness of government ownership, OAS compared the costs of fleet aircraft with the costs of contracted aircraft. OAS found that, given the existing fleet aircraft, equipment, locations, and missions, retaining the fleet under government ownership to be $243 per flight hour less, on average, than contract aircraft. In making these comparisons, OAS contracted for two comprehensive studies--one in 1996 and one in 2001--that were to follow the standard requirements laid out in Office of Management and Budget Circular A-76, "Performance of Commercial Activities," for ensuring that the cost comparisons between government and contracted operations were conducted appropriately. The 1996 study concluded that all but 2 of the 84 aircraft examined were, on average, significantly more cost effective under government ownership. The 2001 study found that all but 1 of the 89 aircraft reviewed to be cost effective. OAS also contracted for a cost comparison of aviation maintenance costs and solicited bids from private vendors to maintain the fleet in Alaska during 1995. As part of the A-76 process, OAS also prepared a bid proposing a streamlined government operation that would lower its maintenance costs by reducing the number of maintenance personnel. While several vendors expressed interest, none ultimately bid on the contract to assume maintenance operations for the Alaskan service. Some bidders took exception with the minimum wage provisions issued by the Department of Labor that were included in the solicitation. OAS requested a clarification regarding wage determination rates, but did not receive a reply; therefore, the wage provisions remained in the solicitation as issued. OAS won the bid to continue in-house maintenance and implemented the streamlined organization, reducing the number of maintenance personnel from 13 to 9. Although OAS was organized in 1973 to help improve the utilization of government-controlled aircraft, the use of fleet aircraft declined from about 350 hours per aircraft in fiscal year 1973 to 246 hours per aircraft in fiscal year 2000. The task force and several recent reports recommended more centralization of scheduling; however, OAS has not been able to fully implement these recommendations because the bureaus determine the aviation resources needed to accomplish their missions. In 1995, the inspector general of the Department of the Interior estimated that Interior spent $2.3 million throughout 1992 and 1993 in unnecessary costs because the bureaus did not schedule flights when fleet aircraft were available and did not coordinate these aircraft either within each bureau or among the bureaus. The report suggested that OAS could be a focal point for scheduling and use of the government-owned fleet, or designate a bureau as the schedule coordinator within specified regional areas. In 1996, the General Services Administration also reviewed the Interior aviation program and identified the potential for significant savings related to utilization. At the time, the Interior average of 252 hours was significantly less than the federal average of 350 hours per year, according to the report. The report estimated that increasing the average hours per aircraft to the federal average of 350 hours per year would result in an annual savings of $715,000 in fixed costs and more than $4 million from the disposal of multiple fleet aircraft. The General Services Administration did not estimate any savings for variable costs. We also analyzed the potential for program savings resulting from improved aircraft utilization. Our analysis is meant to illustrate the potential for savings--not to identify what utilization improvements should be made by OAS and the bureaus. We considered two strategies to increase the fleet's average number of flight hours per year--either reduce the size of the fleet or increase the total hours flown. Reducing the number of fleet aircraft could reduce fixed program costs, while increasing the total number of hours flown by fleet aircraft could reduce the variable program costs. If fewer fleet aircraft could fly the required missions, then the utilization of the fleet could be increased and the fixed cost associated with some fleet aircraft could be eliminated. As shown in table 2, a 30-percent reduction in the size of the fleet increases average flight hours per aircraft per year from 221 to 316 hours per year based on actual fiscal year 2000 fleet flight hours. We also looked at the potential to realize variable cost savings. These savings could be achieved by using fleet aircraft instead of contract aircraft when fleet costs are less than contract costs. For example, according to the OAS 2001 cost comparison study, certain contract aircraft are 100 to 235 percent more expensive to operate. For these aircraft, the OAS's estimated average net variable cost savings between the fleet and contract aircraft was $778 per flight hour. As shown in table 3, if it were possible to convert 4,425 flight hours to fleet operations, then the average utilization per fleet aircraft would increase by 20 percent, and the potential variable cost saving would be about $3.4 million annually. However, in order to determine the actual savings potential, OAS and the bureaus would need to conduct a detailed review of opportunities on an aircraft- by-aircraft basis. OAS and the bureaus have not been able to improve aircraft utilization. Citing its history and relationship with the bureaus, OAS did not implement all the utilization recommendations made in the prior studies because it believes it lacks the authority and responsibility to mandate bureau program and mission requirements--and hence, utilization--under departmental regulations. While bureau aviation managers point to some examples in which improved utilization has resulted in savings, they have not attempted to make a systemwide improvement in utilization. Bureau aviation managers noted that improvements in utilization are difficult to implement because of other factors: weather, high-priority or time-critical missions, workload peaks, mission-required equipment, and the aircraft's physical location. OAS does not set results-oriented performance goals and measures as part of a strategic aviation planning process and does not monitor its performance on an ongoing basis. As a result, it cannot effectively track its performance or measure its results on a consistent basis. OAS has tracked its performance on a sporadic basis in response to requests for information, legislative requirements, or, most recently, as part of the rate-setting process, but it has not linked performance measurement to results-oriented goals. For example, OAS tracked the cost and performance of the Alaskan operations as part of the reorganization, but discontinued monitoring the operations' performance after 2 years. Rate setting is a critical component of OAS's program operations because OAS must recover its costs and maintain adequate funding for operations, future aircraft replacement, and accident reserves. Shortfalls in program costs, such as those resulting from inaccurately setting rates, would have been less likely to occur year after year if the bureaus had evaluated whether their reliance on historical averages correctly predicted future costs and usage. Consideration of both historical and projected data would help OAS bring the best available information to bear in estimating usage and setting rates. Periodic comparisons of the rates set with the actual costs incurred would have helped ensure that all costs were recovered. OAS acting alone cannot improve the utilization of aircraft. Traditionally, the bureaus have not coordinated their efforts to use their aviation resources in a more cost-effective manner. As a result, fleet aircraft are not being fully utilized; better utilization could lead to significant savings. Absent a strategic aviation plan for the department, it is difficult to analyze future requirements by mission and flight hours. OAS and the bureaus could begin the process for fuller utilization if they established a strategic aviation plan that, among other things, sets results-oriented performance goals and measures for the department and then, following that plan, analyzed future requirements for the department. Such an analysis could help them identify new opportunities to reduce cost, maintain the quality of services, and maximize the value of the aviation program for the department. To ensure that all program costs are fully recovered and to improve the rate-setting process, we recommend that the secretary of the Department of the Interior direct OAS to obtain forecasts of future usage from the bureaus and use these forecasts, as well as other relevant information, to set rates; and direct OAS and the bureaus, upon completion of the rate-setting process and calculation of associated payments, to determine whether the rates recovered all costs and, if not, whether adjustments in the process used to calculate the rates are necessary. We also recommend that the secretary of the Department of the Interior instruct the directors of the Office of Aircraft Services and of each bureau to improve scheduling and use of aircraft and establish performance measures to monitor and assess progress. We provided the Department of the Interior with a draft of this report for review and comment. Interior agreed with the information presented in the draft, and stated that our findings and recommendations are reasonable. It stated that the department's aviation program is complex and multi-faceted due to the widely diverse missions of the bureaus. Further, it stated that our report recognizes that successful aviation management within the department depends on a partnership between OAS and the bureaus to seek more efficient and cost-effective ways to manage the program. The comments of the Department of the Interior and our responses to those comments are included in appendix I. We performed our review at OAS's headquarters in Boise, Idaho, and at OAS, Fish and Wildlife Service, and the National Park Service offices located in Anchorage, Alaska. We discussed the OAS aviation program with aviation managers and others from Interior's Bureau of Land Management, Fish and Wildlife Service, and National Park Service. For additional perspective, we interviewed private-sector maintenance vendors in Alaska and representatives of the state of Alaska aviation program. We reviewed OAS's and bureaus' aviation program documents and prior audit reports, including laws, regulations, program plans, financial data, fleet rate meeting minutes, and other documents. Although we did not conduct audit procedures designed to completely evaluate or give an opinion on the OAS accounting system and corresponding internal controls, we did review work conducted by the Office of the Inspector General and also performed limited testing of data reliability. We examined OAS's cost comparisons as part of the A-76 process; we did not, however, evaluate the bureaus' future mission needs or flight hour forecasts on which the study was based. To illustrate the potential improvements in aircraft utilization, we relied on OAS's most recent comparison of contract and fleet costs and applied the estimated costs to actual OAS fiscal year 2000 aircraft and flight hours. We conducted our work from July 2001 through April 2002 in accordance with generally accepted government auditing standards. As we agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. We will then send copies to other interested parties and make copies available to others who request them. If you or your staff has any questions about this report, please call me or Peg Reese at (202) 512-3841. Key contributors to this report are listed in appendix II. The following are GAO comments on the Department of the Interior's letter dated March 27, 2002. 1. Interior agreed with our recommendation that historical and projected data should be used to set rates but stated that our report implies that fleet aircraft flight hour projections might be intentionally overestimated in an effort to reduce planned hourly rates. We disagree. Our report describes the process for making projections and attributes comments about projections to OAS, but draws no conclusions about the intent on the part of OAS or the bureaus. During our review, we noted that when total flight hours decline year after year, projections based on historical averages will inherently result in over-estimating future flight hour requirements. 2. Interior agrees with our findings and recommendation that periodic monitoring of fleet cost and subsequent adjustment of rates would result in more complete recovery of costs. Interior points out that, once rates are established for budgeting purposes, increasing rates after budget allocation would reduce flying hours, which in turn could adversely impact cost recovery. We agree. Our report, however, recommends that actual costs be compared with estimated costs and that adjustments be made as needed. We acknowledge Interior's concurrence to work with the bureaus and periodically compare the rates set with actual cost incurred, examine usage, and establish a methodology that will assist in more fully recovering fleet costs. 3. We support Interior's proposed actions to recover personnel costs, and its actions to improve use and scheduling of aircraft. 4. Interior agrees that there may be opportunities to improve the efficiency of its use of fleet aircraft. Interior stated that it will be reviewing its scheduling policies to identify such opportunities. We support this initiative. 5. Interior emphasizes that the department's aviation program is complex and multi-faceted due to the diverse missions of the bureaus and the high priority of safety and mission accomplishment. We agree with this assessment. Aviation program responsibility is shared by OAS and the bureaus. We support OAS and bureau partnerships to seek more efficient and cost-effective ways to manage the aviation program. In addition to those named above, Mark Connelly, Robert E. Kigerl, Lisa Knight, Dawn Shorey, and Carol Herrnstadt Shulman made key contributions to this report.

The Department of the Interior has cut its aviation accident rate in half since 1975--from 18.8 accidents to 8.7 per 100,000 flight hours. The department's lower accident rate can be attributed to the implementation of a standard aviation operating policy and to aviation safety standards that exceed the Federal Aviation Administration's requirements. The Office of Aircraft Services (OAS) has not fully recovered aviation program costs. From fiscal years 1999 to 2000, OAS has charged bureaus about $4 million less than actual costs, representing an undercharge of about two percent. OAS set rates that were based on flight hour projections of actual usage that turned out to be low, and OAS did not include all the cost elements that needed to be considered. Periodic monitoring of the rates and actual costs would ensure that all costs are recovered. OAS has yet to develop a more cost-effective approach for using aircraft. To cut costs, OAS has reduced its staffing levels by 24 percent since 1992.

The retention allowance authority was established by section 208 of the Federal Employees Pay Comparability Act of 1990 (FEPCA). The act required OPM to issue governmentwide regulations on retention allowances, which it did on March 28, 1991. The act and OPM's implementing regulations require agencies to document that (1) each allowance paid is based on a determination that unusually high or unique qualifications of the employee or a special need of the agency for the employee's services makes it essential to retain the employee and (2) in the absence of such an allowance, the employee would be likely to leave federal employment. The agency must also document the extent to which the employee's departure would affect the agency's ability to carry out an activity or perform a function deemed essential to the agency's mission. The regulations also require agencies to prepare retention allowance plans. The plans must include (1) criteria that must be met or considered in authorizing allowances, including criteria for determining the size of an allowance; (2) a designation of officials with authority to review and approve payment of retention allowances; (3) procedures for paying allowances; and (4) documentation and recordkeeping requirements sufficient to allow reconstruction of the actions taken to award the allowance. Agencies are permitted to pay employees allowances of up to an additional 25 percent of their basic pay. An agency may continue to pay a retention allowance as long as the conditions giving rise to the original determination to pay the allowance still exist, but it must conduct a formal review at least annually to determine whether the retention allowance is still warranted and document this review by means of an authorized official's written certification. To identify which agencies gave the largest number of retention allowances and the highest amounts awarded, as well as to determine the total value of retention allowances and the number of SES employees awarded allowances, we reviewed OPM retention allowance reports for fiscal years 1991 through 1994, which were derived from OPM's Central Personnel Data File (CPDF). We selected the five agencies that the data showed had the most allowances from fiscal years 1991 through 1994--DOD, Ex-Im Bank, SEC, DOE, and USDA. To assess whether agencies were preparing retention allowance plans in accordance with OPM regulations, we obtained and reviewed agencies' retention allowance plans and compared the provisions and other information in these documents with requirements in OPM retention allowance regulations. In addition, we interviewed agency officials about their plans. To perform a limited review of agencies' retention allowance awards, we interviewed agency officials about their award procedures and reviewed individual retention allowance justification documents for 43 selected awards at the five agencies. We did not evaluate the appropriateness of individual allowance amounts or the proportion of agencies' employees who received allowances. The 43 awards, although randomly selected from groups of retention allowances that were stratified based on grade levels, are not projectable because we were unable to review sufficient numbers of awards at each agency due to time constraints. To determine the extent of OPM's oversight efforts, we interviewed OPM program and oversight officials and reviewed documentation they provided, including reports statistically analyzing retention allowances by agency. We also informed OPM's program and oversight officials of our preliminary compliance concerns at Ex-Im Bank. Subsequently, OPM officials decided to conduct an in-depth review of Ex-Im Bank's use of retention allowances and recruitment bonus programs. We provided a draft of this report for comment to the heads of DOD, DOE, Ex-Im Bank, OPM, SEC, and USDA. Their comments are summarized on pages 12 through 14. Written comments from DOD, Ex-Im Bank, and SEC are reproduced in appendixes I through III, respectively. Our review was conducted in the agencies' Washington, D.C., headquarters offices from November 1994 to September 1995 in accordance with generally accepted government auditing standards. As of September 30, 1994, 354 employees (excluding HHS employees), or about 0.01 percent of the approximately 2.9 million federal civilian employees, were receiving retention allowances. Of these allowances, 334 (94 percent) had been awarded by the five agencies we reviewed. The number and amount of retention allowances awarded at the five agencies in fiscal years 1991 through 1994 are presented in table 1. As shown in the table, the annualized value of retention allowances for these agencies increased from approximately $21,000 in fiscal year 1991 to about $2.8 million in fiscal year 1994. The average allowance at the five agencies during fiscal years 1991 through 1994 was $7,789 per employee. In fiscal year 1994, the highest allowance of $28,925 was awarded by DOD, and the average amounts awarded per agency varied from $4,989 at Ex-Im Bank to $14,928 at DOE. In addition, five retention allowances were awarded to SES employees in four of the five agencies during fiscal years 1991 through 1994. Table 2 presents the average and highest amounts for retention allowances awarded by each of the five agencies in fiscal years 1991 through 1994. Among the five agencies, Ex-Im Bank awarded allowances to the largest proportion of its employees. Ex-Im Bank awarded allowances to 21.7 percent of its 462 employees during fiscal year 1994, while none of the other agencies awarded allowances to more than 0.3 percent of their employees. Table 3 presents the percentage of employees receiving allowances at each of the five agencies during fiscal year 1994. Ex-Im Bank did not appear to comply with the statutory requirement that it determine that the employee was likely to leave if the employee did not receive an allowance, which could result in unnecessarily spending funds for allowances. None of the seven Ex-Im Bank allowances we reviewed contained information that indicated the employee was considering leaving the agency. Bank officials stated that approximately 90 percent of the 100 allowances awarded were initiated based on management's recognition of the employees' special talents and their attractiveness to other employers, rather than on more definitive information, such as whether the employees were considering other job offers. Ex-Im Bank officials said that high level performance is a major criterion for selecting award recipients; that is, allowance recipients are generally selected from those employees who have outstanding performance ratings because this group includes those most necessary to the Bank's successful accomplishment of its mission. Officials said that they time the awards of new retention allowances and the recertification of existing allowances to coincide with the results of their performance appraisal process. Ex-Im Bank officials noted, however, that there is no direct linkage between a performance rating and a retention allowance. In justifying the use of performance ratings in awarding retention allowances, Ex-Im Bank officials said that high performing employees have been found to be particularly attractive to the private sector and, therefore, more likely to have opportunities to leave the agency. In 1992, prior to initiating its retention allowance program, Ex-Im Bank requested special pay rate authorities from OPM to pay certain of its employees more money. Ex-Im Bank officials said that OPM denied their request and encouraged them to consider other remedies to their staffing problems, including retention allowances. OPM officials told us that they had discussed various pay and nonpay flexibilities, including retention allowances, with Ex-Im Bank officials. OPM officials also provided us with copies of the governmentwide guidance that they had provided to Ex-Im Bank. They noted that, while they encourage agencies to use available pay flexibilities, agencies need to follow established regulations--for example, determining whether the employee was likely to leave without the retention allowance and documenting the extent to which the employee's departure would affect the agency's ability to carry out its mission. OPM officials said that the fact that an employee had a high performance rating is not sufficient to meet these requirements. We discussed with OPM officials our concern that, in the seven cases we reviewed, Ex-Im Bank did not appear to determine that the employee was likely to leave if the employee did not receive an allowance. After these discussions and in furtherance of its oversight responsibility, OPM initiated an in-depth review of Ex-Im Bank's use of pay flexibilities, including retention allowances and recruitment bonuses. Because of OPM's oversight role and its decision to review a larger number of Ex-Im Bank cases to pursue the compliance issue on a systemic basis, we decided to forgo further work on the issue. While the five agencies' retention allowance plans included most provisions required by OPM regulations, including designating officials with authority to review and approve allowances and providing criteria for selecting allowance recipients, DOD, Ex-Im Bank, and SEC did not include their rationales for determining the amount of the retention allowances in any of their plans. Without the documented rationale, it is impossible for an approving official to readily assess the appropriateness of the proposed award amount and to ensure that the agency is not awarding higher amounts than are necessary to retain the employee. A DOD wage administration specialist told us that a specific DOD-wide rationale was not included in its plan because DOD wanted to give the individual approving officials flexibility in awarding allowances, including the authority to determine the amounts of retention allowances. The official said, however, that a planned revision of the plan will indicate that appointing officials should apply criteria for determining retention allowance amounts consistent with OPM's regulations. SEC said that, as a small agency, it is able to handle the retention allowance process on a case-by-case basis and thus had not seen a need to formalize criteria for determining the size of an allowance. Both the Vice President for Management Services and a personnel specialist at Ex-Im Bank said that the omission of a rationale in their retention allowance plan was an oversight. Both individuals said that the agency wants the plan to comply with all of OPM's regulations and that the plan would be revised accordingly. OPM regulations do not require written recertification when an employee receives an increase in basic pay. However, the agencies we reviewed generally believed that retention allowances should be recertified when their employees received significant increases in basic pay. For minimal increases, such as government-wide pay raises, DOD, DOE, Ex-Im Bank, and USDA do not specifically require recertification, thereby permitting the allowances to continue at the same percentage rates, recognizing that the allowances increase in amounts proportionate to the increases in employees' basic pay. Ex-Im Bank said that it also allows for automatic recertification for promotions at lower grade levels. Conversely, SEC believed all allowances should be recertified whenever basic pay increases, regardless of the size of the increase. A USDA official told us that, while most approving officials recertify allowances when employees are promoted, some officials have interpreted OPM's regulations as allowing the allowances to continue at the same percentage rate when any basic pay increase occurs, including those due to promotions. Similarly, DOD officials said that they believed most approving officials recertify promoted employees' allowances, but that they could not be sure that some officials do not automatically increase allowances in proportion to promotions or other significant pay increases. DOE and Ex-Im Bank officials said that they believed that promotion to a new position with significantly higher pay results in changes to the conditions that justified the allowance and that the regulations therefore require that a new decision be made regarding the retention allowance. An SEC personnel official told us that he believed a recertification is required for any increase to an employee's allowance. He added that it would be unlikely for SEC to increase the value of an allowance when the basic pay rates increased, because the initial award established an amount that the employee in effect agreed was sufficient to retain his/her services. Thus, it would be more likely that the allowance would be decreased or terminated when the employee's basic pay was increased. OPM Compensation Administration Division officials said that OPM regulations do not require that the allowance percentage be changed when an employee receives an increase in his/her basic pay. OPM officials pointed out that the law (5 U.S.C. 5754(b)) requires that a retention allowance be stated as a percentage of the rate of basic pay and that this supports the notion that it may be appropriate to adjust retention allowances automatically based on changes in the rate of basic pay. One of the OPM officials told us that OPM intended to allow agencies flexibility in their approaches to these increases, including not necessarily requiring recertification, but that OPM believed that agencies would likely review employees' allowances when employees received significant increases in basic pay. OPM noted that, as part of their responsibility for administering the program, agencies are expected to reduce or terminate a retention allowance whenever they become aware that the original set of conditions justifying the allowance have changed to the extent that the approved allowance is no longer warranted. Further, OPM believes that agency evaluations of changes in a variety of related factors--for example, the employee's rate of basic pay, an agency's continuing need for the services of the employee, the employee's performance, and staffing and labor market factors--like the original determinations for granting retention allowances, are matters of judgment that cannot easily be reduced to a precise formula. Moreover, changes in a single factor, such as an increase in the rate of basic pay, do not necessarily mean that a full review and a new written certification are necessary. OPM believes that approving officials need to weigh all relevant factors and that they are in the best position to determine whether and when a formal review or changes are necessary. In any event, OPM's regulations require agencies to review each retention allowance annually and to certify in writing whether the payment is still warranted. In carrying out its oversight responsibility, OPM has relied on agencies to report retention allowance activity to OPM's CPDF. Most federal agencies report specific personnel-related information on the awarding of retention allowances, including the recipient's name, pay plan, performance rating, basic pay rate, position, and the value of the allowance. OPM has used this information to produce quarterly reports showing active retention allowance data governmentwide. To monitor the program, OPM has done statistical analyses of the agency-provided information, which included determining whether the allowance exceeded the 25-percent limitation and whether the allowance--when added to the total compensation received by the employee during the calendar year--exceeded the rate payable for level I of the Executive Schedule, the current statutory maximum pay rate. OPM officials said that they had not identified any noncompliance using these analyses. Until March 1994, OPM also conducted periodic longitudinal studies of FEPCA's incentive pay programs, including retention allowances, to examine both OPM's and agencies' implementation of the act. The studies, which began in 1991, resulted in three reports that addressed such issues as statistical comparisons, by sex and race, of retention allowances awarded. OPM officials said that they terminated these studies in fiscal year 1995 because they were not finding any significant problems and because of budget concerns. However, OPM said that it conducted on-site compliance reviews of FEPCA actions at randomly selected installations during this same period. As previously noted, we discussed with OPM our concerns about Ex-Im Bank's retention allowance award process, and OPM subsequently decided to conduct an in-depth review of Ex-Im Bank's use of retention allowances. Retention allowances were awarded to a limited number of employees governmentwide. With the exception of the Ex-Im Bank, the proportion of agencies' employees who received allowances was low. Ex-Im Bank did not appear to comply with a statutory requirement in awarding retention allowances, and Ex-Im Bank's, DOD's, and SEC's retention allowance plans did not satisfy an OPM planning requirement. Also, OPM's regulations did not address whether agencies should review and/or recertify allowances when employees receive significant pay increases during the year. Ex-Im Bank appeared to award allowances without determining that employees would be likely to leave in the absence of allowances, a practice which could result in unnecessarily spending allowance funds. OPM, as the agency responsible for governmentwide oversight of retention allowances, is conducting a review of compensation practices at Ex-Im Bank that should enable it to determine whether Ex-Im Bank needs to more adequately address this issue. Accordingly, we decided to forgo further work on the issue. The retention allowance plans for DOD, Ex-Im Bank, and SEC did not include criteria for determining the amounts of allowances. Without a documented agencywide rationale, lower level managers did not have guidance for establishing the amounts of individual allowances. In addition, since the individual award justifications developed by these managers were not required to include the rationale for the award amount, and thus frequently did not, agency officials and others reviewing the awards lacked sufficient information with which to assess the appropriateness of the amounts awarded. Thus, the agencies could not ensure that the amounts awarded were not in excess of amounts necessary to retain the employee. OPM's regulations do not require that allowances be reviewed or recertified in writing whenever there are significant increases to employees' basic pay during the year. As a result, agencies may not be reviewing or recertifying allowances in conjunction with increases to employees' basic pay in circumstances where such increases might affect the conditions justifying the allowances. In such circumstances, a review might make a significant difference. We recommend that the Chairman of Ex-Im Bank, the Secretary of Defense, and the Chairman of SEC include the required criteria for determining the value of retention allowances in their retention allowance plans. We recommend that the Director of OPM take action to ensure that retention allowance regulations are revised to explicitly address whether, and if so when, an agency should review or recertify the amount of an allowance as a result of basic pay rate increases or other relevant changes in the conditions justifying the allowance. DOD, DOE, Ex-Im Bank, OPM, SEC, and USDA provided comments on a draft of this report; these comments are summarized below. DOD, Ex-Im Bank, and SEC provided written comments, which are included in their entirety in appendixes I through III, respectively. We received oral comments from the Deputy Assistant Secretary for Human Resources, DOE, on September 25, 1995; the Chief of the Compensation Administration Division, OPM, on September 26, 1995; and the Director of Personnel, USDA, on September 26, 1995. DOD, DOE, SEC, and USDA concurred with the findings and conclusions in our report. In addition, DOD and SEC agreed to implement our recommendation to them and suggested some technical changes, which we have incorporated in the report. OPM offered a proposed revision to our recommendation that OPM revise its regulations to clearly define whether, and if so when, reviews or recertifications should be performed. OPM also provided technical comments, which we incorporated where appropriate. Ex-Im Bank granted that it may have "cut some procedural corners" but distinguished this from substance by asserting that its actions were consistent with legislative intent and regulatory guidelines as applied to its particular human resources requirements. Ex-Im Bank also expressed concern that we believed their rationales for determining allowance amounts were suspect or in some way unprincipled because the rationales were insufficiently documented. Ex-Im Bank did concur with our recommendation that it incorporate criteria for determining the amount of an allowance in its plan. While we agree that a failure to document retention allowance decisions--including the reasoning behind those decisions--is a procedural deficiency, we believe the Bank's apparent failure to systematically determine that, in the absence of an allowance, an employee would be likely to leave would, if confirmed, be a deficiency of substance. This is the reason we decided to inform OPM of our concerns regarding this issue. Further, both the act and OPM regulations clearly require that each allowance paid should include a determination that, in the absence of such an allowance, the employee would be likely to leave. We note that the Ex-Im Bank's First Vice President and Vice Chairman, in commenting on a draft of this report, confirmed that he did not typically base his award decisions on whether there might be an actual or imminent competing offer of employment. However, we neither state nor intend to imply in the report that Ex-Im Bank's rationales for allowance amounts were suspect or unprincipled. To avoid the misinterpretation that we viewed Ex-Im Bank's apparent noncompliance as a procedural rather than a substantive deficiency, we eliminated the wording in our draft report that could imply that all five agencies generally complied with federal requirements. We now make it clear that our review showed that Ex-Im Bank did not appear to comply with the "likely to leave" requirement, but we decided to forgo further work when OPM decided to start an in-depth review of Ex-Im Bank's award decisions. Our draft wording that the agencies generally complied with the requirements was not intended to excuse the Ex-Im Bank's apparent noncompliance with that specific requirement. OPM would prefer that we merely recommend that it consider revising the regulations. We continue to believe, however, that, given the agencies' varying interpretations of OPM's regulations, OPM needs to explicitly address the issue of whether and when retention allowance reviews and recertifications, other than the current annual requirement, should be conducted. We did modify the draft recommendation, as OPM suggested, to include other reasons for reviewing allowances in addition to the basic one of a pay rate increase. As arranged with your office, we plan no further distribution of this document until 14 days after the date of issuance unless you publicly announce its contents earlier. At that time, we will send copies of this report to the Chairmen and Ranking Minority Members of the Senate Committee on Governmental Affairs, the House Committee on Government Reform and Oversight, and the House Subcommittee on Civil Service; the Secretaries of Agriculture, Defense, and Energy; the Chairmen of Ex-Im Bank and SEC; and the Director of OPM; and will make copies available to other interested parties. Major contributors to this report are listed in appendix IV. If you have any questions about this report, please call me at (202) 512-7680. The following is GAO's comment on Ex-Im Bank's letter dated September 27, 1995. While we made most of the language changes proposed by Ex-Im Bank, we did not revise our report sections addressing allowance determinations. Our reasons for not revising the sections on determinations are addressed on page 13. Alan Belkin, Assistant General Counsel Robert Heitzman, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. 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. 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Pursuant to a congressional request, GAO reviewed federal agencies' use of retention allowances as salary supplements to retain essential employees, focusing on: (1) the total and average value of the allowances from 1991 to 1994; (2) the extent to which Senior Executive Service employees received retention allowances; (3) whether there were any compliance issues involved in retention allowance awards; (4) the agencies' adherence to Office of Personnel Management (OPM) retention regulations; and (5) the extent to which OPM oversees the use of retention allowances. GAO found that: (1) 354 civilian employees received retention allowances as of September 30, 1994; (2) although the Department of Health and Human Services did not report its allowance data, 20 of its employees received allowances during fiscal year (FY) 1994; (3) retention allowances totalled $2.8 million annually and averaged $7,789 annually per employee; (4) the Export-Import Bank (Eximbank) awarded allowances to 21.7 percent of its employees in FY 1994, while the other agencies awarded allowances to 0.3 percent or fewer of its employees; (5) Eximbank did not determine whether prospective recipients would have left their positions if they did not receive retention allowances; (6) the criteria the Department of Defense, Eximbank, and Securities and Exchange Commission (SEC) used to determine the amount of employee allowances could not be determined; (7) OPM regulations do not require agencies to review or recertify retention allowances affected by pay increases; and (8) OPM has developed regulations and conducted longitudinal studies of Federal Employees Pay Comparability Act (FEPCA) actions at selected agencies.

The Council on Foreign Relations study sets the stage for rethinking the federal role in assisting communities prepare for homeland security. Although acknowledging that the nation's preparedness has improved, the Council's report highlights some of the significant gaps in preparedness including shortfalls in personnel, equipment, communications, and other critical capabilities in local services. The Council's report attempts to fill a void by estimating unmet needs for emergency responders. The Council's 5-year estimate of approximately $98 billion across all levels of government was developed in concert with The Concord Coalition and the Center for Strategic and Budgetary Assessments. It was based on data made available by professional associations and others in the areas of fire service, urban search and rescue, hospital preparedness, public health, emergency 911 systems, interoperable communications, emergency operations centers, animal/agricultural emergency response, emergency medical services systems, emergency management planning and coordination, and emergency response regional exercises. However, the report clearly states that it does not include estimates for certain costs such as overtime for training and other estimated needs in several critical mission areas, such as the needs of police forces, because national police organizations were unable to provide the information. The total estimate is characterized in the report as being very preliminary and imprecise given the absence of comprehensive national preparedness standards. As the report itself acknowledges, the analysis is intended to foster national debate by focusing on the baseline of preparedness and steps needed to promote higher levels of readiness. The report performs a service in beginning an important dialogue on defining standards to assess readiness and recommends the development of a better framework and procedures to develop more precise estimates of national requirements and needs. The report concludes that the basis for funding decisions would be improved by agreement on a more detailed and systematic methodology to determine national requirements grounded in national standards defining emergency preparedness. We at GAO have not evaluated the methodology used in the Council's report. However, we have issued a report evaluating needs assessments performed by other agencies in the area of public infrastructure. That report highlights best practices that may prove useful if used by the Department of Homeland Security or other public or private entities in analyzing homeland security preparedness needs in the future. The practices used by these agencies to estimate funding needs varied widely, but we were able to benchmark their assessments against best practices used by leading public and private organizations. They also reflect requirements that the Congress and the Office of Management and Budget have placed on federal agencies that are aimed at improving capital decisionmaking practices. Among these best practices for infrastructure, there are several that might be considered useful and relevant when conducting homeland security capability assessments. For example, some agencies' assessments focus on resources needed to meet the underlying missions and performance goals. This type of results-oriented assessment is based on the actions needed to attain specific outcomes, rather than being simply a compilation of all unmet needs regardless of their contribution to underlying outcomes and goals. Assessments might also consider alternative approaches to meeting needs for cost effectiveness such as reengineering existing processes and improving collaboration with other governments and the private sector. Best-practice agencies use cost-benefit analysis to include only those needs for which benefits exceed costs; in cases where benefits are difficult to quantify, assessments could include an analysis that compares alternatives and recommends the most cost-effective (least-cost) option for achieving the goal. Some agencies also rank projects based on established criteria such as cost-effectiveness, relative risk, and potential contribution to program goals. Finally, we found that best-practice agencies have a process to independently review the quality of data used to derive estimates. GAO's work over the years has repeatedly shown that mission fragmentation and program overlap are widespread in the federal government and that crosscutting program efforts are not well coordinated. As far back as 1975, GAO reported that many of the fundamental problems in managing federal grants were the direct result of the proliferation of federal assistance programs and the fragmentation of responsibility among different federal departments and agencies. While we noted that the large number and variety of programs tended to ensure that a program is available to meet a defined need, we found that substantial problems occur when state and local governments attempt to identify, obtain, and use the fragmented grants-in-aid system to meet their needs. Such a proliferation of programs leads to administrative complexities that can confuse state and local grant recipients. Like GAO, Congress is aware of the challenges facing grantees in the world of federal grants management. In 1999, it passed the Federal Financial Assistance Management Improvement Act (P.L. 106-107), with the goal of improving the effectiveness and performance of federal financial assistance programs, simplify federal financial assistance application and reporting requirements, and improve the delivery of services to the public. The 108th Congress faces the challenge to redesign the nation's homeland security grant programs in light of the events of September 11, 2001 and the establishment of the Department of Homeland Security (DHS). In so doing, Congress must balance the needs of our state and local partners in their call for both additional resources and more flexibility with the nation's goals of attaining the highest levels of preparedness. At the same time, we need to design and build in appropriate accountability and targeting features to ensure that the funds provided have the best chance of enhancing preparedness. Funding increases for combating terrorism have been dramatic and reflect the high priority that the administration and Congress place on this mission. As the Council's report observes, continuing gaps in preparedness may prompt additional funds to be provided. The critical national goals underlying these funding increases bring a responsibility to ensure that this large investment of taxpayer dollars is wisely applied. We recently reported on some of the management challenges that could stem from increased funding and noted that these challenges--including grants management--could impede the implementation of national strategies if not effectively addressed. GAO has testified before on the development of counter-terrorism programs for state and local governments that were similar and potentially duplicative. Table 1 shows many of the different grant programs that can be used by first responders to address the nation's homeland security. To illustrate the level of fragmentation across homeland security programs, we have shown in table 1 the significant features for selected major assistance programs targeted to first responders. As the table shows, substantial differences exist in the types of recipients and the allocation methods for grants addressing similar purposes. For example, some grants go directly to local first responders such as firefighters while at least one goes to state emergency management agencies and another directly to state fire marshals. The allocation methods differ as well--some are formula grants while the others involve discretionary decisions by federal agency officials on a project basis. Grant requirements differ as well--DHS' Assistance to Firefighters Grant has a maintenance of effort requirement (MOE) while the State Fire Training Systems Grant has no similar requirement. Table 2 shows that considerable potential overlap exists in the activities that these programs support--for example, funding for training is provided by most grants in the table and several provide for all four types of needs. The fragmented delivery of federal assistance can complicate coordination and integration of services and planning at state and local levels. Homeland security is a complex mission requiring the coordinated participation of many federal, state, and local government entities as well as the private sector. As the national strategy issued by the administration last summer recognizes, preparing the nation to address the new threats from terrorism calls for partnerships of many disparate actors at many levels in our system. Within local areas, for example, the failure of local emergency communications systems to operate on an interoperable basis across neighboring jurisdictions reflects coordination problems within local regions. Local governments are starting to assess how to restructure relationships along contiguous local entities to take advantage of economies of scale, promote resource sharing, and improve coordination on a regional basis. Our previous work suggests that the complex web of federal grants used to allocate federal aid to different players at the state and local level may continue to reinforce state and local fragmentation. Some have observed that federal grant restrictions constrain the flexibility state and local officials need to tailor multiple grants to address state and local needs and priorities. For example, some local officials have testified that rigid federal funding rules constrain their flexibility and cannot be used to fund activities that meet their needs. We have reported that overlap and fragmentation among homeland assistance programs fosters inefficiencies and concerns in first responder communities. State and local officials have repeatedly voiced frustration and confusion about the burdensome and inconsistent application processes among programs. We concluded that improved coordination at both federal and state and local levels would be promoted by consolidating some of these first responder assistance programs. Using grants as a policy tool, the federal government can engage and involve other levels of government and the private sector in enhancing homeland security while still having a say in recipients' performance and accountability. The structure and design of these grants will play a vital role in determining success and ensuring that scarce federal dollars are used to achieve critical national goals. Addressing the underlying fragmentation of grant programs remains a challenge for our federal system in the homeland security area. Several alternatives have been pursued in the past to overcome problems fostered by fragmentation in the federal aid structure. I will discuss three briefly here - block grants, performance partnerships, and streamlining planning and administrative requirements. Block grants are one way Congress has chosen to consolidate related programs. Block grants currently are used to deliver assistance in such areas as welfare reform, community development, social services, law enforcement, public health, and education. While such initiatives often involved the consolidation of categorical grants, block grants also typically devolve substantial authority for setting priorities to state or local governments. Under block grants, state and local officials bear the primary responsibility for monitoring and overseeing the planning, management, and implementation of activities financed with federal grant funds. Accordingly, block grant proposals generally call for Congress to make a fundamental decision about where power and authority to make decisions should rest in our federal system for a particular program area. While block grants devolve authority for decisions, they can and have been designed to facilitate some accountability for national goals and objectives. Since federal funds are at stake, Congress typically wants to know how federal funds are spent and what state and local governments have accomplished. Indeed, the history of block grants suggests that the absence of national accountability and reporting for results can either undermine continued congressional support or prompt more prescriptive controls to ensure that national objectives are being achieved. Given the compelling national concerns and goals for homeland security, Congress may conclude that the traditional devolution of responsibility found in a pure block grant may not be the most appropriate approach. Congress might instead choose a hybrid approach--what we might call a "consolidated categorical" grant which would consolidate a number of narrower categorical programs while retaining strong standards and accountability for discrete federal performance goals. State and local governments can be provided greater flexibility in using federal funds in exchange for more rigorous accountability for results. One example of this model involves what became known as "performance partnerships," exemplified by the initiative of the Environmental Protection Agency (EPA). Under this initiative, states may voluntarily enter Performance Partnership Agreements with EPA regional offices covering the major federal environmental grant programs. States can propose to use grants more flexibly by shifting federal funds across programs but they are held accountable for discrete or negotiated measures of performance addressing EPA's national performance goals. This approach has allowed states to use federal funds more flexibly and support innovative projects while increasing the focus on results and effectiveness. However, in 1999 we reported that the initiative had been hampered by an absence of baseline data against which environmental improvements could be measured and the inherent difficulty in quantifying certain results and linking them to program activities. The challenge for developing performance partnerships for homeland security grants will be daunting because the administration has yet to develop clearly defined federal and national performance goals and measures. We have reported that the initiatives outlined in the National Strategy for Homeland Security often do not provide performance goals and measures to assess and improve preparedness at the federal or national levels. The strategy generally describes overarching objectives and priorities but not measurable outcomes. The absence of such measures and outcomes at the national level will undermine any effort to establish performance based grant agreements with states. The Council on Foreign Relations report recommends establishing clearly defined national standards and guidelines in consultation with first responders and other state and local officials. Another alternative to overcome grant fragmentation is the simplification and streamlining of administrative and planning requirements. In June 2003, the Senate Governmental Affairs Committee passed a bill (S. 1245, The Homeland Security Grant Enhancement Act of 2003) intended to better coordinate and simplify homeland security grants. The bill would establish an interagency committee to coordinate and streamline homeland security grant programs by advising the Secretary of DHS on the multiple programs administered by federal agencies. The interagency committee would identify all redundant and duplicative requirements to the appropriate committees of Congress and the agencies represented in the interagency committee. The bill also establishes a clearinghouse function within the Office for State and Local Government Coordination for grant information that would gather and disseminate information regarding successful state and local homeland security programs and practices. The bill seeks to streamline the application process for federal assistance and to rationalize and better coordinate the state and local planning requirements. The bill provides for a comprehensive state plan to address the broad range of emergency preparedness functions currently funded from separate programs with their own separate planning requirements. A statewide plan can be used as a tool to promote coordination among federal first responder programs that continue to exist as separate funding streams. One option could be to require recipients of federal grants for homeland security within each state to obtain review and comment by the central state homeland security agency to attest to consistency with the statewide plan. Whatever approach is chosen, it is important that grants be designed to (1) target the funds to states and localities with the greatest need, (2) discourage the replacement of state and local funds with federal funds, commonly referred to as "supplantation," with a maintenance-of-effort requirement that recipients maintain their level of previous funding, and (3) strike a balance between accountability and flexibility. As Congress goes forward to consider how to design a grant system to promote a stronger federal, state, local and regional partnership to improve homeland security, it faces some of the traditional dilemmas in federal grant design. One is targeting. How do you concentrate funds in the places with the highest risks? A proclivity to spread money around, unfortunately, may provide less additional net protection while actually placing additional burdens on state and local governments. Given the significant needs and limited federal resources, it will be important to target to areas of greatest need. The formula for the distribution of any new grant could be based on several considerations, including relative threats and vulnerabilities faced by states and communities as well as the state or local government's capacity to respond to a disaster. The Council on Foreign Relations report recommends that Congress establish a system for allocating scarce resources based on addressing identified threats and vulnerabilities. The report goes on to say that the federal government should consider factors such as population and population density, vulnerability assessments, and the presence of critical infrastructure within each state as the basis for fund distribution. By comparing three of the grants listed in table 2, one can see differences in the way funds have been allocated thus far. For example, under the State Homeland Security Grant Program allocations are determined by using a base amount of .75 percent of the total allocation to each state (including the District of Columbia and Puerto Rico) and .25 percent of the total to the territories. The balance of the funds goes to recipients on a population- share basis. In contrast, the Urban Area Security Initiative funds are distributed according to a formula from the Department of Homeland Security as being a combination of weighted factors including current threat estimates, critical assets within the urban area, population and population density--the results of which are ranked and used to calculate the proportional allocation of resources. For Byrne Grants, each participant state receives a base amount of $500,000 or .25 percent of the amount available for the program, whichever is greater, with the remaining funds allocated to each state based on the state's relative share of the total U.S. population. A second dilemma in federal grant design involves preventing fiscal substitution or supplantation. In earlier work, we found that substitution is to be expected in any grant and, on average, every additional federal grant dollar results in about 60 cents of supplantion. We found that supplantation is particularly likely for block grants supporting areas with prior state and local involvement. However, our work on the Temporary Assistance to Needy Families block grant found that a strong maintenance of effort provision can limit states' ability to supplant since recipients can be penalized for not meeting a maintenance of effort requirement. It seems obvious to say that grant recipients should maintain the effort they were making prior to receiving the grant and use the grant to add to, rather than replace, their own contribution. However, since September 11, 2001, many local jurisdictions have taken it upon themselves to take the initiative to dramatically increase their own-source funding in an effort to enhance security. Should the federal grant system now penalize them by locking in their increased spending levels and at the same time reward state and local governments that have taken a "wait and see" attitude concerning enhancing security? This is one of the design dilemmas that Congress will need to address to ensure that scarce federal resources in fact are used to promote increased capability. A third challenge is sustainability. Local governments think of sustainability as keeping the federal spigot permanently turned on. They may argue that the urgent needs they face will drive out the important needs of enhanced homeland security without continued federal aid. However, from a broader, national perspective there is an expectation that the responsibility for sustaining homeland security responsibility would at least be shared by all levels of government since state, local, and regional governments receive benefits from these grants in addition to the national benefit of improving homeland security. Several options can be considered to further shared fiscal responsibility. A state and local match could be considered to reflect both the benefits received by state and local taxpayers from preparedness as well as to encourage the kind of discipline and responsibility that can be elicited when a government's own funds are at stake. An additional option--the "seed money" approach--could be to lower the federal match over time to encourage ownership, support, and long term sustainability at the state and local level for funded activities. However, at their best grants can stimulate state and local governments to enhance their preparedness to address the unique threats posed by terrorism. Ideally, grants should stimulate higher levels of preparedness and avoid simply subsidizing local functions that are traditionally state or local responsibilities. The literature on intergovernmental management suggests that federal money can succeed in institutionalizing a commitment to aided goals and purposes over time within states and communities, as professional administrators and clients of these programs take root and gain influence within local political circles. Ultimately, the sustainability of government funding can be promoted by accountability provisions that provide clear and transparent information on results achieved from the intergovernmental partnership. At the federal level, experience with block grants shows that grant programs are sustainable if they are accompanied by sufficient performance and accountability information on national outcomes to enable them to compete for funding in the congressional appropriations process. Accountability can be performance and results oriented to provide focus on national goals across state and local governments while providing for greater flexibility for those governments in deciding how best to meet those goals. Last summer, the Administration released a national strategy for homeland security that placed emphasis on security as a shared national responsibility involving close cooperation among all levels of government. We noted at the time that the national strategy's initiatives often did not provide a baseline set of performance goals and measures for homeland security. Then and now--over a year later--the nation does not have a comprehensive set of performance goals and measures against which to assess and upon which to improve prevention efforts, vulnerability reduction, and responsiveness to damage and recovery needs at all levels of government. We still hold that given the need for a highly integrated approach to the homeland security challenge, national performance goals and measures for strategy initiatives that involve both federal and nonfederal actors may best be developed in a collaborative way involving all levels of government and the private sector. At this point, there are few national or federal performance standards that can be defined, given the differences among states and lack of understanding of what levels of preparedness are appropriate given a jurisdiction's risk factors. The Council on Foreign Relations recommended that national standards be established by federal agencies in such areas as training, communications, and response equipment, in consultation with intergovernmental partners. Communications is an example of an area for which standards have not yet been developed, but various emergency managers and other first responders have highlighted that standards are needed. State and local government officials often report that there are deficiencies in their communications capabilities, including the lack of interoperable systems. The national strategy recognizes that it is crucial for response personnel to have and use equipment, systems, and procedures that allow them to communicate. Therefore, the strategy calls for a national communication plan to establish protocols (who needs to talk to whom), processes, and national standards for technology acquisition. Just as the federal government needs to rationalize its grant system for first responders, state and local governments are also challenged to streamline and better coordinate their efforts. As pointed out in the recent report from the Century Foundation, ultimately the nation's homeland defense will be critically dependent on the ability of state and local governments to act to overcome barriers to coordination and integration. The scale of homeland security threat spills over conventional boundaries of political jurisdictions and agencies. Effective response calls on local governments to reach across boundaries to obtain support and cooperation throughout an entire region or state. Promoting partnerships among key players within each state and even across states is vital to addressing the challenge. States and local governments need to work together to reduce and eliminate barriers to achieving this coordination and regional integration. The federal government is, of course, a key player in promoting effective preparedness and can offer state and local governments assistance beyond grant funds in such areas as risk management and intelligence sharing. The Office for State and Local Government Coordination has been established within DHS to facilitate close coordination with state and local first responders, emergency services and governments. In turn, state and local governments have much to offer in terms of knowledge of local vulnerabilities and resources, such as local law enforcement personnel, available to respond to threats in their communities. Local officials emphasized the importance of regional coordination. Regional resources, such as equipment and expertise, are essential because of proximity, which allows for quick deployment, and experience in working within the region. Large-scale or labor-intensive incidents quickly deplete a given locality's supply of trained responders. Some cities have spread training and equipment to neighboring municipal areas so that their mutual aid partners can help. We found in our work last year that to facilitate emergency planning and coordination among cities in metropolitan areas officials have joined together to create task forces, terrorism working groups, advisory committees and Mayors' caucuses. Cities and counties have used mutual aid agreements to share emergency resources in their metropolitan areas. These agreements may include fire, police, emergency medical services, and hospitals and may be formal or informal. These partnerships afford economies of scale across a region. In events that require a quick response, such as a chemical attack, regional agreements take on greater importance because many local officials do not think that federal and state resources can arrive in sufficient time to help. Forging regional arrangements for coordination is not an easy process at the local level. The federal government may be able to provide incentives through the grant system to encourage regional planning and coordination for homeland security. Transportation planning offers one potential model for federal influence that could be considered. Under federal law, Metropolitan Planning Organizations are established to develop regionally based transportation plans from which, generally, projects that are to be federally funded must be selected. Improving the partnership among federal and nonfederal officials is vital to achieving important national goals. The task facing the nation is daunting and federal grants will be a central vehicle to improve and sustain preparedness in communities throughout the nation. While funding increases for combating terrorism have been dramatic, the Council's report reflects concerns that many have about the adequacy of current grant programs to address the homeland security needs. Ultimately, the "bottom line" question is: What impact will the grant system have in protecting the nation and its communities against terrorism? At this time, it is difficult to know since we do not have clearly defined national standards or criteria defining existing or desired levels of preparedness across the country. Our grant structure is not well suited to provide assurance that scarce federal funds are in fact enhancing the nation's preparedness in the places most at risk. There is a fundamental need to rethink the structure and design of assistance programs, to streamline and simplify programs, improve targeting, and enhance accountability for results. Federal, state, and local governments alike have a stake in improving the grant system to reduce burden and tensions and promote the level of security that can only be achieved through effective partnerships. The sustainability and continued support for homeland security initiatives will rest in no small part on our ability to demonstrate to the public that scarce public funds are in fact improving security in the most effective and efficient manner. This concludes my prepared statement. I would be pleased to answer any questions you or the members of the subcommittee may have at this time. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The challenges posed in strengthening homeland security exceed the capacity and authority of any one level of government. Protecting the nation calls for a truly integrated approach bringing together the resources of all levels of government. The Council on Foreign Relations study--Emergency Responders: Drastically Underfunded, Dangerously Unprepared--states that in the aftermath of the September 11 attacks, the United States must prepare based on the assumption that terrorists will strike again. Although it acknowledges the nation's preparedness has improved, the Council's report highlights gaps in preparedness including shortfalls in personnel, equipment, communications, and other critical capabilities. Given the many needs and high stakes, it is critical that the design of federal grants be geared to fund the highest priority projects with the greatest potential impact for improving homeland security. This testimony discusses possible ways in which the grant system for first responders might be reformed. The federal grant system for first responders is highly fragmented, which can complicate coordination and integration of services and planning at state and local levels. In light of the events of September 11, 2001 and the establishment of the Department of Homeland Security, the 108th Congress faces the challenge of redesigning the homeland security grant system. In so doing, Congress must balance the needs of our state and local partners in their call for both additional resources and more flexibility with the nation's goals of attaining the highest levels of preparedness. Given scarce federal resources, appropriate accountability and targeting features need to be designed into grants to ensure that the funds provided have the best chance of enhancing preparedness. Addressing the underlying fragmentation of grant programs remains a challenge for our federal system in the homeland security area. Several alternatives might be employed to overcome problems fostered by fragmentation in the federal aid structure, including consolidating grant programs through block grants, establishing performance partnerships, and streamlining planning and administrative requirements. Grant programs might be consolidated using a block grant approach, in which state and local officials bear the primary responsibility for monitoring and overseeing the planning, management, and implementation of activities financed with federal grant funds. While block grants devolve authority for decisions, they can be designed to facilitate accountability for national goals and objectives. Congress could also choose to take a more hybrid approach that would consolidate a number of narrowly focused categorical programs while retaining strong standards and accountability for discrete federal performance goals. One example of this model involves establishing performance partnerships, exemplified by the initiative of the Environmental Protection Agency in which states may voluntarily enter into performance agreements with the agency's regional offices covering the major federal environmental grant programs. Another option would be to simplify and streamline planning and administrative requirements for the grant programs. Whatever approach is chosen, it is important that grants be designed to target funds to states and localities with the greatest need, discourage the replacement of state and local funds with federal funds, and strike the appropriate balance between accountability and flexibility.

Since DHS began operations in March 2003, it has developed and implemented key policies, programs, and activities for implementing its homeland security missions and functions that have created and strengthened a foundation for achieving its potential as it continues to mature. However, the department's efforts have been hindered by challenges faced in leading and coordinating the homeland security enterprise; implementing and integrating its management functions for results; and strategically managing risk and assessing, and adjusting as necessary, its homeland security efforts. DHS has made progress in these three areas, but needs to take additional action, moving forward, to help it achieve its full potential. DHS has made important progress in implementing and strengthening its mission functions over the past 8 years, including implementing key homeland security operations and achieving important goals and milestones in many areas. The department's accomplishments include developing strategic and operational plans across its range of missions; hiring, deploying and training workforces; establishing new, or expanding existing, offices and programs; and developing and issuing policies, procedures, and regulations to govern its homeland security operations. For example: DHS issued the QHSR, which provides a strategic framework for homeland security, and the National Response Framework, which outlines guiding principles for disaster response. DHS successfully hired, trained, and deployed workforces, such as a federal screening workforce which assumed security screening responsibilities at airports nationwide, and the department has about 20,000 agents to patrol U.S. land borders. DHS created new programs and offices, or expanded existing ones, to implement key homeland security responsibilities, such as establishing the United States Computer Emergency Readiness Team to, among other things, coordinate the nation's efforts to prepare for, prevent, and respond to cyber threats to systems and communications networks. DHS also expanded programs for identifying and removing aliens subject to removal from the United States and for preventing unauthorized aliens from entering the country. DHS issued policies and procedures addressing, among other things, the screening of passengers at airport checkpoints, inspecting travelers seeking entry into the United States, and assessing immigration benefit applications and processes for detecting possible fraud. Establishing these elements and others are important accomplishments and have been critical for the department to position and equip itself for fulfilling its homeland security missions and functions. However, more work remains for DHS to address gaps and weaknesses in its current operational and implementation efforts, and to strengthen the efficiency and effectiveness of those efforts to achieve its full potential. For example, we have reported that many DHS programs and investments have experienced cost overruns, schedule delays, and performance problems, including, for instance, DHS's recently cancelled technology program for securing U.S. borders, known as the Secure Border Initiative Network, and some technologies for screening passengers at airport checkpoints. Further, with respect to the cargo advanced automated radiography system to detect certain nuclear materials in vehicles and containers at ports DHS pursued the acquisition and deployment of the system without fully understanding that it would not fit within existing inspection lanes at ports of entry. DHS subsequently canceled the program. DHS also has not yet fully implemented its roles and responsibilities for developing and implementing key homeland security programs and initiatives. For example, DHS has not yet developed a set of target capabilities for disaster preparedness or established metrics for assessing those capabilities to provide a framework for evaluating preparedness, as required by the Post-Katrina Emergency Management Reform Act. Our work has shown that DHS should take additional action to improve the efficiency and effectiveness of a number of its programs and activities by, for example, improving program management and oversight, and better assessing homeland security requirements, needs, costs, and benefits, such as those for key acquisition and technology programs. Table 1 provides examples of key progress and work remaining in DHS's functional mission areas, with an emphasis on work we completed since 2008. Impacting the department's ability to efficiently and effectively satisfy its missions are: (1) the need to integrate and strengthen its management functions; (2) the need for increased utilization of performance assessments; (3) the need for an enhanced use of risk information to inform planning, programming, and investment decision-making; (4) limitations in effective sharing and use of terrorism-related information; (5) partnerships that are not sustained or fully leveraged; and (6) limitations in developing and deploying technologies to meet mission needs. DHS made progress in addressing these areas, but more work is needed, going forward, to further mitigate these challenges and their impact on DHS's mission implementation. For instance, DHS strengthened its performance measures in recent years and linked its measures to the QHSR's missions and goals. However, DHS and its components have not yet developed measures for assessing the effectiveness of key homeland security programs, such as programs for securing the border and preparing the nation for emergency incidents. For example, with regard to checkpoints DHS operates on U.S. roads to screen vehicles for unauthorized aliens and contraband, DHS established three performance measures to report the results of checkpoint operations. However, the measures did not indicate if checkpoints were operating efficiently and effectively and data reporting and collection challenges hindered the use of results to inform Congress and the public on checkpoint performance. Moreover, DHS has not yet established performance measures to assess the effectiveness of its programs for investigating alien smuggling operations and foreign nationals who overstay their authorized periods of admission to the United States, making it difficult for these agencies to determine progress made in these areas and evaluate possible improvements. Further, DHS and its component agencies developed strategies and tools for conducting risk assessments. For example, DHS has conducted risk assessments of various surface transportation modes, such as freight rail, passenger rail, and pipelines. However, the department needs to strengthen its use of risk information to inform its planning and investment decision-making. For example, DHS could better use risk information to plan and prioritize security measures and investments within and across its mission areas, as the department cannot secure the nation against every conceivable threat. In addition, DHS took action to develop and deploy new technologies to help meet its homeland security missions. However, in a number of instances DHS pursued acquisitions without ensuring that the technologies met defined requirements, conducting and documenting appropriate testing and evaluation, and performing cost-benefit analyses, resulting in important technology programs not meeting performance expectations. For example, in 2006, we recommended that DHS's decision to deploy next-generation radiation-detection equipment, or advanced spectroscopic portals, used to detect smuggled nuclear or radiological materials, be based on an analysis of both the benefits and costs and a determination of whether any additional detection capability provided by the portals was worth their additional cost. DHS subsequently issued a cost-benefit analysis, but we reported that this analysis did not provide a sound analytical basis for DHS's decision to deploy the portals. In June 2009, we also reported that an updated cost-benefit analysis might show that DHS's plan to replace existing equipment with advanced spectroscopic portals was not justified, particularly given the marginal improvement in detection of certain nuclear materials required of advanced spectroscopic portals and the potential to improve the current- generation portal monitors' sensitivity to nuclear materials, most likely at a lower cost. In July 2011, DHS announced that it would end the advanced spectroscopic portal project as originally conceived given the challenges the program faced. As we have previously reported, while it is important that DHS continue to work to strengthen each of its functional areas, it is equally important that these areas be addressed from a comprehensive, departmentwide perspective to help mitigate longstanding issues that have impacted the department's progress. Our work at DHS has identified several key themes--leading and coordinating the homeland security enterprise, implementing and integrating management functions for results, and strategically managing risks and assessing homeland security efforts--that have impacted the department's progress since it began operations. These themes provide insights that can inform DHS's efforts, moving forward, as it works to implement its missions within a dynamic and evolving homeland security environment. DHS made progress and has had successes in all of these areas, but our work found that these themes have been at the foundation of DHS's implementation challenges, and need to be addressed from a departmentwide perspective to position DHS for the future and enable it to satisfy the expectations set for it by the Congress, the administration, and the country. Leading and coordinating the homeland security enterprise. While DHS is one of a number of entities with a role in securing the homeland, it has significant leadership and coordination responsibilities for managing efforts across the homeland security enterprise. To satisfy these responsibilities, it is critically important that DHS develop, maintain and leverage effective partnerships with its stakeholders, while at the same time addressing DHS-specific responsibilities in satisfying its missions. Before DHS began operations, we reported that the quality and continuity of the new department's leadership would be critical to building and sustaining the long-term effectiveness of DHS and achieving homeland security goals and objectives. We further reported that to secure the nation, DHS must form effective and sustained partnerships between components and also with a range of other entities, including federal agencies, state and local governments, the private and nonprofit sectors, and international partners. DHS has made important strides in providing leadership and coordinating efforts. For example, it has improved coordination and clarified roles with state and local governments for emergency management. DHS also strengthened its partnerships and collaboration with foreign governments to coordinate and standardize security practices for aviation security. However, DHS needs to take additional action to forge effective partnerships and strengthen the sharing and utilization of information, which has affected its ability to effectively satisfy its missions. For example, we reported that the expectations of private sector stakeholders have not been met by DHS and its federal partners in areas related to sharing information about cyber-based threats to critical infrastructure. Without improvements in meeting private and public sector expectations for sharing cyber threat information, private-public partnerships will remain less than optimal, and there is a risk that owners of critical infrastructure will not have the information and mechanisms needed to thwart sophisticated cyber attacks that could have catastrophic effects on our nation's cyber-reliant critical infrastructure. Moreover, we reported that DHS needs to continue to streamline its mechanisms for sharing information with public transit agencies to reduce the volume of similar information these agencies receive from DHS, making it easier for them to discern relevant information and take appropriate actions to enhance security. In 2005, we designated information sharing for homeland security as high risk because the federal government faced serious challenges in analyzing information and sharing it among partners in a timely, accurate, and useful way. Gaps in sharing, such as agencies' failure to link information about the individual who attempted to conduct the December 25, 2009, airline bombing, prevented the individual from being included on the federal government's consolidated terrorist watchlist, a tool used by DHS to screen for persons who pose a security risk. The federal government and DHS have made progress, but more work remains for DHS to streamline its information sharing mechanisms and better meet partners' needs. Moving forward, it will be important that DHS continue to enhance its focus and efforts to strengthen and leverage the broader homeland security enterprise, and build off the important progress that it has made thus far. In addressing ever-changing and complex threats, and with the vast array of partners with which DHS must coordinate, continued leadership and stewardship will be critical in achieving this end. Implementing and integrating management functions for results. Following its establishment, the department focused its efforts primarily on implementing its various missions to meet pressing homeland security needs and threats, and less on creating and integrating a fully and effectively functioning department from 22 disparate agencies. This initial focus on mission implementation was understandable given the critical homeland security needs facing the nation after the department's establishment, and the enormous challenge posed by creating, integrating, and transforming a department as large and complex as DHS. As the department matured, it has put into place management policies and processes and made a range of other enhancements to its management functions--acquisition, information technology, financial, and human capital management. However, DHS has not always effectively executed or integrated these functions. In 2003, we designated the transformation and integration of DHS as high risk because DHS had to transform 22 agencies into one department, and failure to effectively address DHS's management and mission risks could have serious consequences for U.S. national and economic security. Eight years later, DHS remains on our high-risk list. DHS has demonstrated strong leadership commitment to addressing its management challenges and has begun to implement a strategy to do so. Further, DHS developed various management policies, directives, and governance structures, such as acquisition and information technology management policies and controls, to provide enhanced guidance on investment decision making. DHS also reduced its financial management material weaknesses in internal control over financial reporting and developed strategies to strengthen human capital management, such as its Workforce Strategy for Fiscal Years 2011-2016. However, DHS needs to continue to demonstrate sustainable progress in addressing its challenges, as these issues have contributed to schedule delays, cost increases, and performance problems in major programs aimed at delivering important mission capabilities. For example, in September 2010, we reported that the Science and Technology Directorate's master plans for conducting operational testing of container security technologies did not reflect all of the operational scenarios that U.S. Customs and Border Protection was considering for implementation. In addition, when it developed the US-VISIT program, DHS did not sufficiently define what capabilities and benefits would be delivered, by when, and at what cost, and the department has not yet determined how to deploy a biometric exit capability under the program. Moreover, DHS does not yet have enough skilled personnel to carry out activities in various areas, such as acquisition management; and has not yet implemented an integrated financial management system, impacting its ability to have ready access to reliable, useful, and timely information for informed decision making. Moving forward, addressing these management challenges will be critical for DHS's success, as will be the integration of these functions across the department to achieve efficiencies and effectiveness. Strategically managing risks and assessing homeland security efforts. Forming a new department while working to implement statutorily mandated and department-initiated programs and responding to evolving threats, was, and is, a significant challenge facing DHS. Key threats, such as attempted attacks against the aviation sector, have impacted and altered DHS's approaches and investments, such as changes DHS made to its processes and technology investments for screening passengers and baggage at airports. It is understandable that these threats had to be addressed immediately as they arose. However, limited strategic and program planning by DHS and limited assessment to inform approaches and investment decisions have contributed to programs not meeting strategic needs or not doing so in an efficient manner. For example, as we reported in July 2011, the Coast Guard's planned acquisitions through its Deepwater Program, which began before DHS's creation and includes efforts to build or modernize ships and aircraft and supporting capabilities that are critical to meeting the Coast Guard's core missions in the future, is unachievable due to cost growth, schedule delays and affordability issues. In addition, because FEMA has not yet developed a set of target disaster preparedness capabilities and a systematic means of assessing those capabilities, as required by the Post-Katrina Emergency Management Reform Act and Presidential Policy Directive 8, it cannot effectively evaluate and identify key capability gaps and target limited resources to fill those gaps. Further, DHS has made important progress in analyzing risk across sectors, but it has more work to do in using this information to inform planning and resource allocation decisions. Risk management has been widely supported by Congress and DHS as a management approach for homeland security, enhancing the department's ability to make informed decisions and prioritize resource investments. Since DHS does not have unlimited resources and cannot protect the nation from every conceivable threat, it must make risk-informed decisions regarding its homeland security approaches and strategies. Moreover, we have reported on the need for enhanced performance assessment, that is, evaluating existing programs and operations to determine whether they are operating as intended or are in need of change, across DHS's missions. Information on the performance of programs is critical for helping the department, Congress, and other stakeholders more systematically assess strengths and weaknesses and inform decision making. In recent years, DHS has placed an increased emphasis on strengthening its mechanisms for assessing the performance and effectiveness of its homeland security programs. For example, DHS established new performance measures, and modified existing ones, to better assess many of its programs and efforts. However, our work has found that DHS continues to miss opportunities to optimize performance across its missions because of a lack of reliable performance information or assessment of existing information; evaluation among feasible alternatives; and, as appropriate, adjustment of programs or operations that are not meeting mission needs. For example, DHS's program for research, development, and deployment of passenger checkpoint screening technologies lacked a risk-based plan and performance measures to assess the extent to which checkpoint screening technologies were achieving the program's security goals, and thereby reducing or mitigating the risk of terrorist attacks. As a result, DHS had limited assurance that its strategy targeted the most critical risks and that it was investing in the most cost-effective new technologies or other protective measures. As the department further matures and seeks to optimize its operations, DHS will need to look beyond immediate requirements; assess programs' sustainability across the long term, particularly in light of constrained budgets; and evaluate tradeoffs within and among programs across the homeland security enterprise. Doing so should better equip DHS to adapt and respond to new threats in a sustainable manner as it works to address existing ones. Given DHS's role and leadership responsibilities in securing the homeland, it is critical that the department's programs and activities are operating as efficiently and effectively as possible, are sustainable, and continue to mature, evolve and adapt to address pressing security needs. DHS has made significant progress throughout its missions since its creation, but more work is needed to further transform the department into a more integrated and effective organization. DHS has also made important progress in strengthening partnerships with stakeholders, improving its management processes and sharing of information, and enhancing its risk management and performance measurement efforts. These accomplishments are especially noteworthy given that the department has had to work to transform itself into a fully functioning cabinet department while implementing its missions--a difficult undertaking for any organization and one that can take years to achieve even under less daunting circumstances. Impacting the department's efforts have been a variety of factors and events, such as attempted terrorist attacks and natural disasters, as well as new responsibilities and authorities provided by Congress and the administration. These events collectively have forced DHS to continually reassess its priorities and reallocate resources as needed, and have impacted its continued integration and transformation. Given the nature of DHS's mission, the need to remain nimble and adaptable to respond to evolving threats, as well as to work to anticipate new ones, will not change and may become even more complex and challenging as domestic and world events unfold, particularly in light of reduced budgets and constrained resources. To better position itself to address these challenges, our work has shown that DHS should place an increased emphasis and take additional action in supporting and leveraging the homeland security enterprise, managing its operations to achieve needed results, and strategically planning for the future while assessing and adjusting, as needed, what exists today. Addressing these issues will be critically important for the department to strengthen its homeland security programs and operations. Eight years after its establishment and 10 years after the September 11, 2001, terrorist attacks, DHS has indeed made significant strides in protecting the nation, but has yet to reach its full potential. Chairman Lieberman, Ranking Member Collins, and Members of the Committee, this concludes my prepared statement. I would be pleased to respond to any questions you may have at this time. For further information regarding this testimony, please contact Cathleen A. Berrick at (202) 512-3404 or [email protected]. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this testimony are Rebecca Gambler, Assistant Director; Melissa Bogar; Susan Czachor; Sarah Kaczmarek; Tracey King; Taylor Matheson; Jessica Orr; and Meghan Squires. 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 terrorist attacks of September 11, 2001, led to profound changes in government agendas, policies and structures to confront homeland security threats facing the nation. Most notably, the Department of Homeland Security (DHS) began operations in 2003 with key missions that included preventing terrorist attacks from occurring in the United States, reducing the country's vulnerability to terrorism, and minimizing the damages from any attacks that may occur. DHS is now the third-largest federal department, with more than 200,000 employees and an annual budget of more than $50 billion. Since 2003, GAO has issued over 1,000 products on DHS's operations in such areas as border and transportation security and emergency management, among others. As requested, this testimony addresses DHS's progress and challenges in implementing its homeland security missions since it began operations, and issues affecting implementation efforts. This testimony is based on a report GAO is issuing today, which assesses DHS's progress in implementing its homeland security functions and work remaining. Since it began operations in 2003, DHS has implemented key homeland security operations and achieved important goals and milestones in many areas to create and strengthen a foundation to reach its potential. As it continues to mature, however, more work remains for DHS to address gaps and weaknesses in its current operational and implementation efforts, and to strengthen the efficiency and effectiveness of those efforts to achieve its full potential. DHS's accomplishments include developing strategic and operational plans; deploying workforces; and establishing new, or expanding existing, offices and programs. For example, DHS (1) issued plans to guide its efforts, such as the Quadrennial Homeland Security Review, which provides a framework for homeland security, and the National Response Framework, which outlines disaster response guiding principles; (2) successfully hired, trained, and deployed workforces, such as a federal screening workforce to assume security screening responsibilities at airports nationwide; and (3) created new programs and offices to implement its homeland security responsibilities, such as establishing the U.S. Computer Emergency Readiness Team to help coordinate efforts to address cybersecurity threats. Such accomplishments are noteworthy given that DHS has had to work to transform itself into a fully functioning department while implementing its missions--a difficult undertaking that can take years to achieve. While DHS has made progress, its transformation remains high risk due to its management challenges. Examples of progress made and work remaining include: Border security. DHS implemented the U.S. Visitor and Immigrant Status Indicator Technology program to verify the identities of foreign visitors entering and exiting the country by processing biometric and biographic information. However, DHS has not yet determined how to implement a biometric exit capability and has taken action to address a small portion of the estimated overstay population in the United States (individuals who legally entered the country but then overstayed their authorized periods of admission). Aviation security. DHS developed and implemented Secure Flight, a program for screening airline passengers against terrorist watchlist records. DHS also developed new programs and technologies to screen passengers, checked baggage, and air cargo. However, DHS does not yet have a plan for deploying checked baggage screening technologies to meet recently enhanced explosive detection requirements, a mechanism to verify the accuracy of data to help ensure that air cargo screening is being conducted at reported levels, or approved technology to screen cargo once it is loaded onto a pallet or container. Emergency preparedness and response. DHS issued the National Preparedness Guidelines that describe a national framework for capabilities-based preparedness, and a Target Capabilities List to provide a national-level generic model of capabilities defining all-hazards preparedness. DHS is also finalizing a National Disaster Recovery Framework. However, DHS needs to strengthen its efforts to assess capabilities for all-hazards preparedness, and develop a long-term recovery structure to better align timing and involvement with state and local governments' capacity. Chemical, biological, radiological and nuclear (CBRN) threats. DHS assessed risks posed by CBRN threats and deployed capabilities to detect CBRN threats. However, DHS should work to improve its coordination of CBRN risk assessments, and identify monitoring mechanisms for determining progress made in implementing the global nuclear detection strategy. GAO's work identified three themes at the foundation of DHS's challenges: Leading and coordinating the homeland security enterprise; Implementing and integrating management functions for results; and Strategically managing risks and assessing homeland security efforts. This testimony contains no new recommendations.

The college textbook market is complex, with a number of parties involved in the development and distribution of course materials. First, publishers develop and produce textbooks and accompanying materials for faculty and students. Publishers then market their materials to faculty, school administrators, and sometimes academic departments that make decisions about what course materials to assign to students. Publishers employ sales representatives who often speak with instructors in person to discuss product options. They also provide instructors with free sample materials for their consideration. Publishers produce a variety of products and services for faculty to choose from in selecting course materials. In addition to traditional textbooks, faculty can work with publishers to create customized course materials by adding or deleting information from a single textbook or multiple sources. Faculty may also select supplemental materials, such as workbooks, lab activities, and study guides. Supplemental materials and textbooks may be sold together in one package, referred to as a bundle, and may also be available for sale separately. In addition to print versions, course materials are often available as digital products that can be accessed on computers or e-readers. Publishers have also developed online interactive systems that integrate multimedia instructional material with supplemental materials like homework or personalized quizzes and tutorials. Faculty or other designated parties select course materials and submit orders for them according to the process and time frames established by their school. Upon receiving information about selected materials and enrollment numbers from the school, campus bookstores determine how many to order and stock. These school-affiliated bookstores may include independent booksellers and large retail chains. They generally sell both new and used books, and some offer digital products and textbook rental programs. Many campus bookstores also have websites through which students can purchase or rent textbooks online. In addition to campus bookstores, students may be able to obtain course materials from a variety of sources. For example, students may purchase or rent course materials from online retailers, publishers, or through peer-to-peer exchanges, among other outlets. They may also borrow materials from libraries or peers. An emerging source of course materials is the open source model, in which textbooks and other materials are published under a license that allows faculty to personally adapt materials and students to access them for free or for a nominal cost. Table 1 below summarizes common options available for obtaining course materials. After completing a course, students may be able to offset their costs by selling back their course materials to the campus bookstore, online retailers, or wholesale companies. Bookstores generally buy as many used textbooks from their students as possible, but there are limits to what students can sell back. For example, electronic products are generally not eligible for resale because they are accessible through one- time access codes or downloading. Opportunities to sell back customized course materials may also be limited given their uniqueness to a particular course on a particular campus. In 2005, based on data from the Bureau of Labor Statistics, we reported that new college textbook prices had risen at twice the rate of annual inflation over the course of nearly two decades, increasing at an average of 6 percent per year and following close behind increases in tuition and fees. More recent data show that textbook prices continued to rise from 2002 to 2012 at an average of 6 percent per year, while tuition and fees increased at an average of 7 percent and overall prices increased at an average of 2 percent per year. As reflected in figure 1 below, new textbook prices increased by a total of 82 percent over this time period, while tuition and fees increased by 89 percent and overall consumer prices grew by 28 percent. While the Bureau of Labor Statistics publishes data annually on college textbook pricing, there are no comparable, nationally representative data sources that estimate student spending. Given the range of options for format and delivery of course materials, students are not limited to purchasing new, print books. Students may lower their costs by purchasing used or digital textbooks, renting materials, or taking advantage of other affordable options. However, the price of new, print books often drives the prices of other items. Specifically, as we reported in 2005, used textbook prices are directly linked to new textbook prices in that retailers typically offer used books for about 75 percent of the new, print price.offered at a discount based on the new, print price. Thus, while students may be able to find lower-priced options, increasing prices for new, print books will likely lead to similar price increases for other related course materials. In part to ensure that students have access to information about selected course materials, Congress included several provisions related to textbook information in the Higher Education Opportunity Act (HEOA), as described below. When publishers provide faculty or others responsible for selecting course materials at schools with information about textbooks or supplemental material, they are required to provide the price at which they would make the textbook or supplemental material available to the school's bookstore (often referred to as the net price) and, if available, to the public (often referred to as the retail price or the list price). They are also required to provide a description of substantial content revisions between the current and prior edition, the copyright dates of the three prior editions, if any, and any alternate formats available, along with their net prices and retail price, if available. 20 U.S.C. SS 1015b(c). While publishers may suggest retail prices, retailers determine the final price at which to sell the materials. Schools are generally required to disclose information on textbooks to students and campus bookstores. Specifically, to the maximum extent practicable, in their online course schedules, schools are to provide the International Standard Book Number (ISBN) and retail price for required and recommended material for each course listed in the schedule used for preregistration and registration purposes, with some exceptions. If the ISBN is not available, schools are to provide the author, title, publisher, and copyright date in the schedule. If disclosing the required information is not practicable, the school is to list it as "to be determined" (TBD) on the course schedule. In addition to making these disclosures on the course schedule, schools are to provide their affiliated bookstores with the same information, along with enrollment data for each course as soon as practicable upon the request of the bookstore. Beyond these requirements, HEOA encourages schools to provide information to students about institutional textbook rental programs, buyback programs, and any other cost-saving strategies. Figure 2 illustrates the types of information communicated throughout the process of selecting and ordering course materials. In addition to the disclosure requirements, HEOA requires publishers to make college textbooks and materials sold together in a bundle available for sale individually, a practice referred to as unbundling (see fig. 3). While each component must be available individually, publishers may continue to sell course materials in bundles. This requirement does not apply in the case of integrated textbooks. These are books with related materials that are either governed by a third-party contract that prohibits their separation, such as those produced by another company, or are so interrelated that the components would be unusable on their own. For example, a computer software textbook may include multimedia content that is essential to understanding the book. HEOA prohibits Education from issuing regulations related to the textbook information section of the law. While Education therefore has a limited role in this area, it provided some early nonregulatory guidance to help publishers and schools understand the textbook provisions. In addition, Education encourages students to consider textbook costs in preparing for college and collects student complaints, including those related to textbooks. The eight publishers included in this study have disclosed textbook information including retail prices, available alternative formats, and descriptions of substantial content revisions between editions. Seven publishers also provided net prices and six provided information on prior copyright dates to faculty. Two smaller publishers told us they did not have a practice of disclosing prior copyright dates, and one said net pricing was not part of its business practices. Publishers included in this study have communicated this information to faculty online and in other marketing materials, as well as in the course materials themselves. In most cases, publishers' textbook information was available to students and the public, in addition to faculty. For example, all eight publishers chose to disclose retail prices and format options in publicly accessible areas of their websites. Representatives from one of these publishers stated the company's intent in making the information publicly available was to increase transparency. Another publisher chose to disclose net pricing information to faculty on a restricted-access website--a decision representatives said was meant to avoid public confusion about the difference between net and retail prices. Instead of using a website, representatives from another publisher said they primarily use marketing materials distributed directly to faculty to disclose net pricing and format information. In addition, publishers provided some required information in the course materials themselves. For example, five of eight publishers disclosed prior copyright dates on the inside pages of textbooks. See figure 4 for the types of information publishers disclosed and the methods they utilized for doing so. Representatives of the majority of publishers included in our study said disclosing required textbook information involved process changes that took initial investments of time and financial resources. Some publishers told us they made changes to their technology and production systems, as well as their marketing practices. For example, representatives from two publishers said they had to change their internal databases to include all the textbook information specified in HEOA. Four publishers also told us they conducted extensive training with staff about HEOA implementation. Despite the changes publishers made to disclose required textbook information, four publishers did not view the costs directly associated with implementing HEOA as substantial. All publishers included in this study have made bundled materials available for sale individually, which is a requirement of HEOA. In some cases, publishers said they began phasing out bundles before HEOA's passage in 2008, which we also noted in our 2005 report. For example, one publisher told us it made the decision to make its bundled products available for sale individually prior to HEOA's enactment because it wanted to be more transparent about its product offerings. Another publisher said that most of its bundled materials were available for sale individually by 2004, and in response to HEOA, it only had to change its external website to allow faculty to view the individual components. In contrast, another publisher noted that in response to HEOA, it had to begin setting prices for all bundled components and change its process for storing them. In order to make faculty aware that bundled materials are available individually, publishers use the same methods they use for disclosing information about other course materials. For example, five publishers display options for supplemental materials or bundles on their public websites. These pages include lists of each component, sometimes with individual prices or ISBNs. Offering individual components for sale gives students more options when selecting their course materials, but several bookstores, faculty, students, and national associations told us that some market conditions may limit the potential for savings or student choice. For example: As we reported in 2005, buying individual components may not be cheaper for students, as bundled products may be offered at a discount compared to the price of buying each component separately. Some publishers said that the discounts available on bundles are a selling point with faculty. Several faculty, students, and bookstore representatives we spoke with for this study told us that the price of individual components, particularly electronic course materials, is often higher than it would have been in a bundle. This pricing structure may limit students' ability to reduce their costs by purchasing less expensive used books and choosing which supplements to purchase. Students may have limited options for obtaining unbundled components. When faculty select bundles, campus bookstores may choose not to stock all the individual components, according to representatives from two campus bookstores and a national campus retailer. In addition, publishers may not make some separate components available for sale through campus bookstores, according to representatives from an industry trade group and a national campus retailer. In such cases, students wishing to obtain individual components would need to seek other outlets, such as publisher websites or online retailers. As previously discussed, the HEOA requirement to make materials available for sale individually does not apply in the case of integrated textbooks, which either are governed by a third-party contract that prohibits separation or would be rendered useless if separated. For example, one publisher reported that it is not authorized to separately sell a listening component that accompanies a music book under the terms of the contract it has with the company that produced the music. While representatives of one industry trade group expressed concern that the exemption for integrated textbooks offered a way around the requirement to ensure all products in a bundle are available for sale individually, the five large publishers we spoke with said they offer very few of these materials. For example, one publisher estimated that integrated textbooks make up 2 percent of its inventory, while representatives of another said they offer one integrated textbook. Representatives of faculty groups, bookstores and publishers we interviewed said the availability of information and unbundled materials has had little effect on college textbook selection decisions. Faculty told us they typically prioritize selecting the most appropriate materials for their courses over pricing and format considerations. One faculty group we spoke with explained that the quality and relevance of the materials are the key factors in finding the best match for the course. Another group said they need to determine whether the material is at a level suitable for the students likely to enroll and comprehensive enough for the content they plan to cover. Only after they have identified the most appropriate course materials will faculty consider pricing and format options, according to stakeholders. For example, a representative of a national campus retailer said faculty ask about cost-saving options like digital formats and textbook rentals after they have identified the best materials to help their students master the necessary concepts. Changes in technology and available options in the college textbook market--factors unrelated to HEOA--have also shaped faculty decisions about course materials. For example, representatives from a publisher and a national campus retailer noted there is growing interest in digital assessment tools that allow faculty to track student progress in an effort to improve student outcomes. In 2005, we reported that publishers were developing these types of digital products to help enhance faculty productivity and teaching. Currently, publishers are expanding these offerings with interactive products like online interactive systems, which may include some combination of instructional material, adaptive homework questions, exams, worksheets, or tutoring programs in one system. Representatives of two campus bookstores and a faculty group told us that online interactive systems are becoming more popular at their schools. Although HEOA requires publishers to make textbooks and supplemental materials available for sale individually, faculty can still select bundled products for their courses. Some publishers and bookstores told us there was initial confusion about whether the law constrained faculty choice in selecting bundles, and they employed various communication efforts to help clarify the issue. Our review of a nationally representative sample of school websites shows that bundles continue to be assigned for some courses. More specifically, in cases where schools provided textbook information online, we found that an estimated 58 percent included required materials that appeared to be bundles for at least one of the three courses we reviewed. Although faculty decisions about textbook selections have not changed much in response to publisher practices, representatives of faculty groups told us they are more aware of affordability than they used to be. For example, faculty we spoke with at a public school expressed a strong interest in finding appropriate textbook options that also save students money because they often serve low-income students who work part- time. They added that a new textbook could cost over $200, which is more than the course fee of $136. These faculty also said that as a result of HEOA, more faculty are providing information about textbook selections in their syllabi as early as possible, and are putting books on reserve in the library. In addition, several faculty from different schools reported using the same textbook for multiple semesters, which allows students to buy a used version at a reduced price. At one public school, faculty told us their school's guidelines encourage them to consider both the price of course materials and the use of the same edition of a textbook for as long as possible. With regard to other cost-saving solutions, a few faculty told us they have developed their own course materials. For example, one professor said a lab manual for his course could cost $50-$60 when developed by a publisher; instead, he created his own, which costs students about $10 in printing fees. A music professor said that with the advent of free online videos, he can teach his class almost entirely by assigning links to websites. Based on our review of a nationally representative sample of school websites, most schools provided students and college bookstores with the textbook information specified in the HEOA provisions. We estimate that 81 percent of schools, serving an estimated 97 percent of college students nationwide, made textbook information--such as the ISBN or retail price--available online in time for the fall 2012 term. In addition, an estimated 93 percent of these schools made the information publicly available without the use of a password, allowing both current and prospective students to view it. Schools are structured and operate in various ways, and HEOA allows some flexibility in whether and how they disclose textbook information. An estimated 19 percent of schools did not provide textbook information online. When we contacted all such schools in our sample to inquire why they did not provide that information, representatives from 62 percent said they included the cost of textbooks in tuition and fees or assessed students a separate fee for textbooks. Other reasons cited included not posting a course schedule online and supplying required materials through the school's library (see fig. 5). The extent to which schools provided textbook information online varied by school sector and level (see fig. 6). The vast majority of public and private nonprofit schools provided information compared to about half of private for-profit schools, while 4-year schools provided information more often than 2-year schools. In turn, we found the practice of including the cost of textbooks in tuition and fees or assessing students a separate fee for textbooks occurred at private for-profit schools more often than at public or private nonprofit schools, and at 2-year schools more often than at 4-year schools. Representatives we spoke with at one such private for- profit, 2-year school that offers medical, business, and technical programs told us the school has a centralized curriculum and standardized textbooks for each program across its 10 campuses, allowing it to purchase textbooks and materials in bulk at lower prices and pass the savings on to its students. This is a common practice among schools with specialized or technical programs of study, according to a higher education association we interviewed. An estimated 80 percent of schools that provided textbook information online to students and bookstores included the primary elements specified in HEOA for all textbooks listed for the three courses we reviewed. In doing so, almost all of these schools provided the ISBN or alternative information outlined by HEOA (title, author, copyright date, and publisher) and some retail pricing information (i.e., new, used, rental, or other price) for all courses that required textbooks. A small share of schools indicated textbook information was "to be determined" for one or more of their courses. Of the remaining 20 percent of schools that provided textbook information online, most included the primary elements specified in HEOA for all textbooks listed for one or two courses we reviewed, and almost all included some information that could assist students in shopping for their textbooks, such as the titles or authors. Schools also provided additional information--such as information on textbook rental programs, used books, and digital products--to students, as encouraged by the HEOA provisions. Of the estimated 81 percent of schools that provided textbook information online for the fall 2012 term: an estimated 67 percent had an institutional textbook rental an estimated 73 percent provided some used textbook pricing information for at least one course; and an estimated 40 percent provided other pricing information--almost always for digital products--for at least one course. Representatives of all campus bookstores and national campus retailers we spoke with said they have ramped up their rental programs in the last few years, and cited discounts for renting textbooks, ranging from 14 to 60 percent over the new retail price. They also reported their stores carry used and digital books to provide students with additional options. One campus bookstore reported that its students saved more than $150 per semester, on average, after it introduced textbook rental and digital book programs. Representatives of schools, bookstores, and higher education associations we spoke with said the costs to schools and bookstores of implementing the HEOA provisions were manageable. Administrators and campus bookstore representatives of six schools, as well as a national campus retailer, said they invested some time or money to implement the HEOA provisions--for example, by linking up school and bookstore databases and convening internal meetings--but that their costs were not substantial. Representatives of another national campus retailer we spoke with said their costs were more considerable because they developed software to help their schools comply. We also heard from representatives of two higher education associations, which represent over a thousand schools nationwide, that implementation of the HEOA textbook information provisions had gone smoothly and that they did not hear about any complaints from their member schools. Schools varied in their approach to implementing the HEOA provisions. Some schools that provided textbook information online relied on their campus bookstores to provide it, according to school administrators and national campus retailers. For example, administrators we spoke with at four schools said they provided textbook information to students by adding links from their schools' online course schedules to their bookstores' websites, which in some cases involved linking school and bookstore databases so that students could go directly from the course schedule to the bookstore's list of textbook information for each course. Administrators at two of these schools said this approach was simpler and more cost-effective than other options they considered. Another school went a step further and provided textbook information directly on the school's course schedule. Specifically, administrators said they used a web-based tool from the company that managed their bookstore to display textbook information directly on the school's online course schedule, at no additional cost to the school. A student at this school told us it was helpful to have course and textbook information available in one place. However, administrators at another school that considered this approach, but ultimately included a link to the bookstore website instead, said it would have required substantial resources and maintenance to implement. Besides providing textbook information to students, schools also submitted the number of students enrolled in each course to their campus bookstores, as outlined by HEOA. Administrators at four schools we spoke with said they provide this information electronically by transferring it from their course registration database to the campus bookstore's database. Some bookstores moved up their deadlines for faculty to submit their textbook choices as a result of implementing the HEOA provisions. Specifically, representatives from an industry trade group representing school bookstores said some of their members moved their fall deadlines up by as many as 2 months to provide textbook information to students at the time of preregistration. Representatives of two campus bookstores and both national campus retailers we spoke with reported that getting faculty to submit their textbook choices by the deadlines had already been a challenge prior to HEOA. However, faculty we spoke with at one school, as well as representatives from two campus bookstores and an industry trade group, acknowledged there may be legitimate reasons why textbook choices are not submitted by the deadline, such as a given course having no instructor assigned. Students, faculty, school administrators, and most other stakeholders we spoke with said students have benefited from having timely and reliable textbook information. As faculty submit more complete and timely textbook information, schools are better able to provide that information to students, according to faculty at one school and representatives from a campus bookstore and an industry trade group. Representatives of student organizations at three schools said they now have sufficient information and time to shop for their course materials before each academic term. Students told us they use ISBNs found on their campus bookstore's website to actively research textbook prices at both the campus bookstore and other retailers, and that they make better spending decisions as a result. Students at one school said researching their options to find the highest quality materials for the lowest cost is easy and worth the little time it takes. For example, one student estimated she saves about $150 per semester by being able to compare prices among multiple retailers. Students at one of the three schools said their campus bookstore includes competitors' prices on its website, allowing students to see which retailer offers the lowest price for a given textbook. While students said price is the biggest factor affecting their decisions about obtaining textbooks, they also consider how they want to use the books and how long they want to keep them. For example, students at three schools mentioned that some students prefer to highlight or take notes in print versions of books rather than mark up digital books. Students also said they are able to obtain ISBNs and other information in enough time to acquire their required textbooks by the first day of class. Students further benefit from increased information on the options for obtaining textbooks, such as institutional rental programs, according to representatives from one bookstore and an industry trade group we interviewed. In addition to talking to students and other stakeholders, we reviewed 153 entries from Education's Program Compliance Complaints Tracking System from July 2010 through April 2012 that mentioned the word "book." While we found several entries related to the timing of financial aid for purchasing books, our review yielded no complaints related to the HEOA textbook provisions. As the cost of attending college continues to rise, students and their families need clear and early information about the cost of textbooks. In implementing HEOA's textbook provisions, publishers and schools have provided them with increased access to such information. Greater transparency of information alone, however, does not make textbooks less expensive, as the affordability of course materials results from the complex market forces that drive prices. Moreover, the textbook market is different from other commodity markets; although students are the end consumers, faculty are responsible for selecting which textbooks students will need, thereby limiting students' ability to allay costs. Nevertheless, the proliferation of new products, formats, and delivery channels has left students with many options for obtaining course materials. For example, students can now choose whether to realize savings upfront by selecting digital or rental options, or on the back end by reselling books in the used book market. In light of the increased complexity of students' options, the information schools have provided in implementing HEOA has proven useful to students in making informed decisions. As a result, even though students cannot directly control the cost of their textbooks, they can better manage these costs by comparison shopping and making deliberate decisions about what to purchase, and from where. We provided a draft of the report to the Department of Education for review and comment. Education provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Education, relevant congressional committees, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (617) 788-0534 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. To examine publishers' efforts and faculty decision-making, we interviewed representatives from eight publishers that develop materials for the college textbook market and reviewed supporting documentation from each of them, including documents from their websites and ones obtained at the interviews. To obtain a range of perspectives, we selected five publishers that represented over 85 percent of new U.S. higher education textbook sales, according to information they provided us, as well as three smaller publishers. The views of publishers we spoke with cannot be generalized to all publishers. While we reviewed documentation of publisher efforts to provide information to faculty and make bundled materials available for sale individually, we did not evaluate whether these practices, as supported by documentation or described to us in interviews, were in compliance with the law. We also interviewed others with relevant expertise, including faculty groups at three schools, two national campus retailers that operate hundreds of bookstores nationwide, a textbook rental company, a company that provides price comparison software for campus bookstores, and professional organizations that represent publishers, bookstores, faculty, students, and schools. To determine the extent to which postsecondary schools have provided students and college bookstores access to textbook information, we reviewed websites of a nationally representative, stratified random sample of 150 schools to determine the extent to which they disclosed textbook information in their fall 2012 course schedules. The sample was drawn from Education's 2010-2011 Integrated Postsecondary Education Data System (IPEDS), which contains data on over 7,200 institutions eligible for federal student aid programs authorized under Title IV of the Higher Education Act of 1965, as amended. We assessed the reliability of the IPEDS data by reviewing Education's quality control procedures and testing the data electronically. We determined the data were sufficiently reliable for our purposes. Our sampling frame consisted of all public, private nonprofit, and private for-profit 2-year and 4-year degree-granting postsecondary schools that participated in Title IV federal student aid programs, had undergraduate programs, were not U.S. military academies, and had at least 100 students, yielding a universe of 4,293 schools. We created six strata to stratify the sampling frame by sector (public, private nonprofit, and private for-profit) and level (2-year and 4- year). This sample of schools allowed us to make national estimates about the availability of textbook information, as well as estimates by sector and level. The percentage estimates reported from this review have margins of error at the 95 percent confidence level of 9 percentage points or less, unless otherwise noted. In order to review comparable information across the sampled schools, we developed a standardized web-based data collection instrument and pre-tested it in July 2012. Using the finalized data collection instrument, we examined available textbook information for an introductory business, psychology, and biology course at each school in our sample. We judgmentally selected these subjects because they are among the top 10 undergraduate majors for degree-completing students, according to IPEDS data. In addition, these courses likely affect a larger number of students than upper division courses. We reviewed school websites from July through September 2012, as students would be obtaining textbooks for their fall 2012 term courses. In cases where we were unable to find or access textbook information online for a particular school, we contacted the school to determine how to access it and followed up with representatives as appropriate to determine the reasons why information was not available online. We recorded and verified the information we obtained in the web- based data collection instrument to facilitate the analysis across schools. We collected complete information for all 150 schools in our sample, resulting in a response rate of 100 percent. Based on the results of our review of school websites, we conducted follow-up interviews regarding the implementation of the HEOA textbook provisions and the associated costs and benefits with various representatives from eight schools in our sample, including seven groups of administrators, four campus bookstores, three faculty groups, and three student government groups. (See table 2 for a list of schools.) To select this subset of eight schools, we took into account characteristics such as sector, level, and geographic location. To provide background information on changes in the prices of textbooks over time, we reviewed public data from 2002-2012 from the Consumer Price Index (CPI) published by the Department of Labor's Bureau of Labor Statistics (BLS). The CPI data reflect changes over time in the prices paid by urban consumers for different goods and services. Specifically, we reviewed CPI data for three expenditure categories: college textbooks, college tuition and fees, and overall prices. The college textbooks data are limited to the price of new print and digital books. In addition, the timeframes for collecting price information in the field vary, so different textbooks may be priced at different times. We assessed the reliability of these data by reviewing documentation of the CPI data and interviewing BLS officials about the methodology used to calculate the data. We determined that these data were sufficiently reliable for the purposes of our study. We provided BLS with an opportunity to review our use of the CPI data. In addition, we reviewed complaints submitted to Education to determine whether any were related to the information provided by schools about required textbooks. Specifically, Education provided GAO with an excerpt from its Program Compliance Complaints Tracking System containing any complaints in which the word "book" appeared. There were 153 such complaints from July 2010, when the HEOA textbook provisions went into effect, through April 2012. We took steps to verify the reliability of the data. We interviewed Education officials about the methodology used to calculate the data and determined they were sufficiently reliable for our purposes. We also reviewed relevant studies and federal laws. In addition to the contact named above, Debra Prescott (Assistant Director), Lara Laufer, Jeffrey G. Miller, Amy Moran Lowe, Michelle Sager, Najeema Washington, and Rebecca Woiwode made significant contributions to this report. Also contributing to this report were David Barish, James Bennett, Deborah Bland, David Chrisinger, Daniel Concepcion, Jennifer Cook, Rachel Frisk, Alex Galuten, Bill Keller, Ying Long, Jean McSween, Karen O'Conor, and Betty Ward-Zukerman.

The rising costs of postsecondary education present challenges to maintaining college affordability. Textbooks are an important factor students need to consider when calculating the overall cost of attending college. In an effort to ensure that faculty and students have sufficient information about textbooks, Congress included requirements in HEOA concerning publisher and school disclosures, as well as publisher provision of individual course materials. HEOA directed GAO to examine the implementation of the new textbook provisions. This report addresses (1) the efforts publishers have made to provide textbook information to faculty and make bundled materials available for sale individually, and how these practices have informed faculty selection of course materials; and (2) the extent to which postsecondary schools have provided students and college bookstores access to textbook information, and what the resulting costs and benefits have been. To conduct this study, GAO interviewed eight publishers representing over 85 percent of new U.S. higher education textbook sales, administrators at seven schools, four campus bookstores, two national campus retailers, faculty and student groups at three schools, and others with relevant expertise. GAO also reviewed websites of a nationally representative sample of schools, complaint data from Education, and relevant federal laws. GAO makes no recommendations in this report. The Department of Education provided technical comments, which were incorporated as appropriate. Publishers included in GAO's study have disclosed textbook information required by the Higher Education Opportunity Act (HEOA), such as pricing and format options, and made components of bundled materials available individually, but stakeholders GAO interviewed said these practices have had little effect on faculty decisions. While most publishers in GAO's study provided all relevant textbook information, two smaller publishers did not provide copyright dates of prior editions, and one did not provide certain pricing information. Publishers communicated information to faculty online and in other marketing materials, and in most cases the information was available to students and the public. In addition, publishers said they began making bundled materials available for sale individually before HEOA was passed. Faculty GAO interviewed said they typically prioritize selecting the most appropriate materials for their courses over pricing and format considerations, although they said they are more aware of affordability issues than they used to be. Changes in the availability of options in the college textbook market that are not related to HEOA, such as the increase in digital products, have also shaped faculty decisions about course materials. Based on GAO's review of a nationally representative sample of schools, an estimated 81 percent provided fall 2012 textbook information online, and stakeholders GAO interviewed said implementation costs were manageable and students have benefited from increased transparency. HEOA allows schools some flexibility in whether and how they disclose information and an estimated 19 percent of schools did not provide textbook information online for various reasons, such as including textbook costs in tuition and fees or not posting a course schedule online. Representatives of most schools and bookstores, as well as others GAO interviewed, said implementation costs were not substantial. In addition, there was general consensus among students and others GAO interviewed that students have benefited from timely and dependable textbook information. Specifically, representatives of student organizations said they had sufficient information and time to comparison shop for their course materials before each academic term.

Employers have been the driving force behind the growing move to compare health care providers and plans on the basis of their performance. These employers have worked both individually and collaboratively with providers, health plans, and government to produce information that will allow them to assess the quality of the care they purchase. Health plans have been publishing reports comparing their performance to their peers or to a national standard. State governments have published comparative information, often focused on specific procedures performed in hospitals. Although the federal government was responsible for the first widespread public disclosure of hospital performance data in 1987, it discontinued this practice in 1993. As a payer of health care services on behalf of Medicare and Medicaid beneficiaries, the Health Care Financing Administration (HCFA) lags behind others in making performance data public. Report cards can include a variety of performance indicators, either structural, process, or outcome based. Structural indicators measure the resources and organizational arrangements in place to deliver care, such as the ratio of nurses to inpatient beds. Process indicators measure the physician and other provider activities carried out to deliver the care, such as the rates of childhood immunization. Outcome indicators measure the results of the physician and other provider activities, such as mortality, morbidity, and customer satisfaction. In 1989, a group of employers initiated one of the most significant efforts to identify uniform and standardized performance indicators. This effort resulted in the creation of a performance measurement system known as the Health Plan Employer Data and Information Set (HEDIS). Several business coalitions and health care organizations used the first HEDIS measures in 1991. The nonprofit National Committee for Quality Assurance (NCQA) has led the effort to revise the measures, issuing HEDIS 2.0 in 1993 and HEDIS 2.5 in 1995. Current HEDIS measures focus on process indicators. (See table 1 for a list of some key HEDIS measures.) Using HEDIS as a base, some employers have begun to distribute to their employees educational materials that include outcome measures. For example, the California Public Employees' Retirement System (CalPERS) recently distributed to its employees a performance report about the health plans it offers. Although it had furnished some comparative information to its employees in previous years, the information generally featured cost and benefits. CalPERS' May 1995 Health Plan Quality/Performance Report is its first effort at distributing comprehensive information that includes both specific quality performance indicators and member satisfaction survey results. The quality performance data are based on HEDIS indicators measuring health maintenance organizations' (HMO) success with providing childhood immunizations, cholesterol screening, prenatal care, cervical and breast cancer screening results, and diabetic eye exams. Employee survey results include employee satisfaction with physician care, hospital care, and the overall plan, and the results of a question asking whether members would recommend the plan to a fellow employee or friend. Some employers are using third-party health care accrediting organizations to measure health plan performance using structural indicators. These employers are requiring the health plans they contract with to be accredited by organizations such as NCQA and the Joint Commission on Accreditation of Healthcare Organizations. Furthermore, some accrediting agencies publicize their accreditation decisions, which allows employers and individual consumers to consider accreditation status in their health care purchasing decisions. For example, a consortium of employers has elected to exclude a Florida HMO from new business with its employer-sponsored health plans because of the HMO's failure to obtain accreditation. Health plans have published comparative information intended to assist individual consumers in their health care choices and health care providers in their quality improvements. For example, in 1993, Kaiser Permanente Northern California Region released a report on 102 performance measures divided into the following categories: childhood health, maternal care, cardiovascular disease, cancer, common surgical procedures, other adult health, and mental health/substance abuse. (See fig. 1.) Although Kaiser was one of the first health plans to publish this kind of information, an increasing number of health plans are now providing similar information. Health plans have been exploring new ways to make information readily available and understandable to individual consumers. For example, on September 15, 1995, HealthPartners, Inc., will initiate a consumer-oriented program using touch-screen computers. Initially, at least 50 computers will be installed permanently at 50 employer sites, and at least 100 computers will be rotated among other employers. This will allow employees to obtain details about any one of the plans' primary care sites, such as its physicians' credentials, on-site services offered, and specialists to which its physicians refer. Because health plan members are expected to enroll in a specific care delivery system--a set of primary care sites with affiliated specialists--HealthPartners will furnish data about each care system to help plan members make a decision about which one to join. Currently these data include preventive screening rates and patient satisfaction measures. HealthPartners anticipates expanding the availability of touch-screen computers to more public spaces, such as shopping malls, after physician concerns about data confidentiality and other matters are resolved. The states have also been active in providing information about provider performance to the public. Forty states have mandated the collection, analysis, and public distribution of health care data, such as hospital use, charges or cost of care, effectiveness of health care, and performance of hospitals. For example, Pennsylvania has released four report cards on the hospitals and physicians in the state performing coronary artery bypass graft surgery (CABG) since 1992. Providing both costs and mortality rates, the reports are publicized through the local media and are available free to consumers. (See fig. 2.) In 1987, HCFA initially publically released hospital mortality information, but did so only in response to a request under the Freedom of Information Act (5 U.S.C. 552). The published information, collected as part of HCFA's oversight efforts, included the observed and expected mortality rates for Medicare beneficiaries in each hospital that performed CABG surgery. HCFA published the information annually until 1993, when the HCFA Administrator discontinued the reports. He cited problems with the reliability of HCFA's methods to adjust the data to account for the influence of patient characteristics on the outcomes. HCFA has not published any other information about the performance of Medicare providers. HCFA's responsibility to Medicare beneficiaries in the selection and oversight of Medicare contract HMOs is similar to that of employers to their employees in selecting health plans. However, HCFA does not routinely provide beneficiaries the results of its monitoring reviews or other performance-related information such as HMO disenrollment rates. In August 1995, we recommended that HCFA publish (1) comparative performance data it collects on HMOs such as complaint rates, disenrollment rates, and rates and outcomes of appeals and (2) the results of its investigations or any findings of noncompliance by HMOs. Our recommendation that HCFA publish performance data was consistent with the views of experts we interviewed about the federal government's role in ensuring that Medicare beneficiaries receive quality care. These experts cited the need for gathering health plan information such as (1) performance measures, (2) patient satisfaction, and (3) assurances that basic organizational standards have been met. Furthermore, they believed that when the information is obtained, it should be shared with beneficiaries to assist them in their health care purchasing decisions. Although HCFA has not been publishing data on Medicare providers, it is collaborating with others to publish performance information about Medicaid providers. HCFA has been participating with NCQA and the American Public Welfare Association on behalf of the State Medicaid Agencies Directors Group to tailor HEDIS to the particular needs of state Medicaid agencies, health plans that serve Medicaid recipients, and the recipients themselves. In July 1995 the work group released the first draft of Medicaid HEDIS and is expected to release a final version of the document in Fall 1995 after considering comments received. Like HEDIS, many of the most recent initiatives to provide data involve a partnership between private and public players. For example, a more recent public/private initiative that includes some of the major employers involved in developing HEDIS is the Foundation for Accountability (FAcct), created in June 1995. At a meeting of the Jackson Hole Group, some of the nation's largest employers and HCFA, together representing more than 80 million people, or almost a third of the U.S. population, agreed to combine their expertise and purchasing power. This action grew out of employer frustration with current performance data that focus on plan and provider structure and process rather than outcomes of care. FAcct intends to recommend measures of health care quality that can be easily understood by the general public so that people can make informed decisions when choosing a health plan. FAcct also hopes to encourage the common adoption of these standards to establish uniformity and minimize health plan reporting burdens as well as develop a means of educating diverse audiences about the significance and applications of health plan accountability. Experts have noted that studies performed to determine how consumers make decisions when no comparative information on quality has been available may not be helpful in determining what information consumers would actually use. Adding to the conclusions of numerous researchers that individual consumers give more weight to information from acquaintances than to expert opinion, researchers at Brandeis University reported in 1994 that Massachusetts state employees they surveyed valued information about quality but did not value report card information. From this apparent contradiction, the researchers concluded that survey respondents view quality as something other than what is described in report cards. In 1995, NCQA reported that almost all consumers participating in focus groups NCQA sponsored stated that they would use better evaluative information if it were available to them. In addition, when NCQA provided participants with sample report cards, NCQA noted that in every group, participants were able to critically evaluate the information, raising the same questions about the validity of the data that experts debate. In 1994, we reported that while performance measures or report cards could be a useful tool to educate consumers about the health care that plans provide, the report cards being developed may not reflect the needs of some users. Employers have been the primary users of information comparing quality of care; little is known about the extent to which this information is meeting individual consumers' needs. The sections that follow discuss in more detail the results of our efforts to determine, from the consumers' perspectives, the extent to which they use quality of care information in making health care choices and the types of information consumers find useful in arriving at decisions. Many of the employers and individual consumers of health care we talked with are increasingly using information that compares the quality of care furnished by health care providers or health plans to make purchasing decisions and to encourage providers and plans to improve the quality of their care. However, some of those we interviewed told us they are not using the information because they are unaware that it exists, they have not been able to find it in some markets, they believe the available information does not meet their needs, or they lack the resources or time to find and use the information. Further, they stated that the information would be more useful if their concerns about the reliability and validity of the information were addressed. "we'd like to get some kind of value-based decision for purchasing health care. The pure pricing arrangements, the deals . . . have not really been a complete answer for us. Those arrangements don't address quality, and we're coming to believe that that's got to be the cornerstone of your health care plan." "I think that they [HMOs] should be in the business of comparing hospitals, picking out the high-quality, cost-effective providers; that's what I'm paying them to do. I just want to make sure they're doing it, and feel comfortable that they're doing it." These employers used the comparative data as a "red flag," signaling a possible decline in quality. For example, one large southeastern self-insured employer stated that he watched for trends in performance measures that might serve as a warning that a problem was developing. Some smaller employers reported that they had neither the resources nor the time to find or use report cards but wanted the information to be available to the insurance agents or purchasing alliance staff they relied on to make health insurance recommendations. Employers told us that they are also using the data as a tool to market a specific plan to their employees or to negotiate contract terms with the insurance carriers. Numerous employers told us that providing employees with data comparing quality of care was particularly helpful in convincing their workers that managed care plans do not compromise the quality of care provided. Employers stated that they use the data to influence providers and plans to improve quality. For example, one employer told us that during contract negotiations, data were used comparing hospitals on specific procedures, such as hysterectomies, to encourage hospitals to reduce unnecessary surgeries. The individual consumers we talked with in Pennsylvania, California, and Minnesota who had requested and received specific report cards generally used the information and found it to be very helpful in making health care purchasing decisions. These consumers received either (1) information about patient outcomes for physicians and hospitals performing specific procedures or (2) information on a specific plan. More specifically, individual consumers in Pennsylvania and California reported using the procedure-specific reports to select the best surgeon or hospital because they or someone in their family anticipated having the surgery described in the report, select the best surgeon or hospital for procedures other than those described in the report, review the ranking of the surgeon who had performed their surgery before they had obtained the report, ask more informed questions of their doctors, increase their general knowledge, provide advice to others, or satisfy their curiosity. Individual consumers using a plan-specific report card told us that they used the information to select a health plan or to increase their knowledge about the health plan chosen by their employer, such as the services provided or the financial health of the plan. Consumers using either a plan- or procedure-specific report card who had no choice of provider reported that the information gave them reassurance. Although most individual consumers we interviewed found the report card helpful, some did not. Some consumers reported that they did not use the information because it focused on one procedure or health plan, or because it was limited to a specific state or area. Other consumers told us that they were unaware the information existed until after they or a family member no longer needed it. For example, a Pennsylvania woman stated that she wished she had known about this information before her mother died after heart surgery, because it might have helped her select a provider. Both employers and individual consumers echoed many of the same concerns expressed by health care experts and previously reported by us that comparative information may not be measuring what it is intended to measure. Experts have varying beliefs about what information should be included in a report card because of acknowledged difficulties with the reliability and validity of data sources and systems designed to measure quality. Areas of concern for purchasers we interviewed focused on risk adjustment, age of data, subjectivity, and bias. More specifically, consumers, both corporate and individual, questioned whether procedure-specific data were properly adjusted to account for differences in patient characteristics that might contribute to adverse outcomes. They were skeptical about whether factors such as age, severity of condition, and functional status could be accounted for to ensure that outcomes were an accurate reflection of provider quality. We have reported previously that severity-adjusted performance measurement systems are in a relatively early stage of development and may not provide information for accurately comparing hospitals' performance. We concluded that additional information and methodological improvements are needed to provide more useful data on which to base purchasing decisions. "they are to reassure the public, but they can't be used to make health care decisions because they are too general and outdated from the time the data was gathered until the decision is made." Some consumers stated that selecting a health care provider is a subjective decision that is difficult to quantify. In the words of a Pennsylvania consumer, while the report card was a good publication, "it is limited by trying to objectify something that will always be subjective." For example, consumers differ in what they want from a provider. Some consumers mentioned that it is more important for some patients to feel at ease with their doctor than it is for others. Although many consumers stated that they wanted information on customer satisfaction, others felt it was of limited value because "just because you're happy with your doctor doesn't mean I would be happy with him or her." Another individual consumer questioned a patient's ability to assess a doctor's medical knowledge, technical skills, and ability. "Quality is in the eyes of the beholder . . . . It is not appropriate for the employer to place a value on one outcome over another. It is up to the patient to place that value. Is it more important that I be alive but it's okay if I'm hurt or I'd rather die than be ?" "you know I think that a big part of the problem, and we're guilty of it too, is imposing our own tastes or beliefs on other people . . . . In health care we do a lot of deciding of what's good for people on the basis of our own beliefs, and the issues that a $9 an hour person are not the same ones that I'm contending with . . . . The highly paid person may not have any problem in going out of network--may be able to afford to go to Mayo's [the Mayo clinic] and decide, 'hey, that's where I'm going with this problem. I'm not going to stick around .' Whereas somebody on the shop floor has got to stay in [city deleted]." Individual consumers questioned the objectivity of the health care data produced and distributed by the provider or plan. Many consumers stated they would be less likely to believe the information if it is gathered and reported by the provider or plan rather than an independent third party. For example, one individual stated that "an unscrupulous provider could make sure they hit home runs on all of these particular items [the quality measurements] . . . ." Individual consumers who requested and received report card information from health plans used terms such as "self-serving," "one-sided," and "nontrustworthy" to describe the report. These respondents saw the purpose of the reports as a provider's public relations effort to "blow its own horn" or use the report as a "marketing tool" rather than to provide information to the consumer. Consumers we interviewed want more information than they currently have. Both employers and individual consumers want information that emphasizes outcomes rather than process or structure measures of quality. They want standardized information that allows them to compare providers and plans. Few employers we interviewed are sharing unpublished data with employees, and they differ from one another on whether or not they believe their employees would use it to make decisions. Individual consumers generally stated that they wanted reports on quality to make decisions, but many emphasized that such reports would never be the sole source of information; they would only augment the advice of others. When emphasizing that they want information on the outcome of health care provided, consumers are asking for a measure that allows them to select providers who will improve their health status or that of their employees. For example, in describing the need for outcome data, one employer stated that rather than just knowing how many women received mammography screening for breast cancer, he wanted to know if the number of women who died or were incapacitated from breast cancer was being reduced. A major northeastern food manufacturer used outcomes to relate quality assurance in health care to its manufacturing quality assurance program to explain that "outcome data . . . is the only way to measure quality . . . . Once you have the outcome, you can go back and look at the processes themselves." A large West Coast employer stated that what the company really wants is information on health status. "What we'd like as a measure is we'd like to know that the plan has improved the health status of the population served . . . . That might be different for some subpopulations. So, moving much more to population-based approaches." "in general, you're looking for quality and you're looking for value, so maybe more of a functional analysis. There is some subjective information that needs to be obtained along with the length of stay and cost of stay and some of these other factors that we're just not getting yet . . . . You need to do a kind of functional analysis as well, to say 30 days after that angioplasty was that patient back at work, and were they working 40 hours per week, and were they doing their job . . . . How's your quality of life after you've had this?" "the number one thing people ask . . . when they're considering an HMO . . . is not like gee, 'Am I going to get that mammogram,' it's 'What if I get sick, am I going to die, are they going to take care of me?'" Both employers and individual consumers stated that although data reflecting the outcomes may be the best measure of provider quality, it is very difficult to know whether outcomes result from quality of care or factors such as the patient's condition or lifestyle choices. "the government should prescribe some standards and force providers to adhere to these standards in the publishing of information. The government should say, 'You're going to code this disease this way, and you do it consistently and uniformly . . . .'" Individual consumers stated that the way the information was presented was very important to them. For example, some wanted to have providers or plans compared side-by-side on one or two pages. Consumers using the procedure-specific reports uniformly praised the table format that provided this kind of direct comparison. (See fig. 2 for an example of a table providing a comparison of providers from a procedure-specific report.) Some individual consumers wanted the information to cover a wider geographic area, and others emphasized the need for community-specific data. For example, some Pennsylvania consumers stated that the report card for that state pertained only to providers in Pennsylvania. Consumers living in Philadelphia would like to have had this type of information for surrounding states because their providers, while close to their homes, were located in other states. The same concern came up in a midwestern city that bordered two states. "hav some report card concepts that the employees could understand the information, user friendly . . . consistent . . . . I want to have a tool for the employees to make that decision. If the employees are making that decision, they are going to change the marketplace. They are going to improve the quality of the system because the doctors and the hospitals are going to have to alter their practices because of the information that has been gathered and is presented and understood by employees. They are then making intelligent decisions as far as where to get their health care . . . . Empower the people to make the decision." "if we are going to have value-based purchasing which would drive a competitive marketplace in health care, we have to involve consumers who make the ultimate choice. Therefore the information has to be relevant for them." "I think it's not speaking to how they make decisions. I think we'd overwhelm them . . . . Also, I don't know if the data we'd be giving them would be the complete picture." "I've been in health care benefits for 15 years. I don't know how to make the choice. What happens to poor Harry the Huffer working on the shop floor when you give him . . . the morbidity in this hospital is here, and you know the readmission rate is this, and the reinfection rate is this, and the guy says, 'I don't know what I should do.' Because what they do to our counselors is say, 'I don't want to make choices.'" Nevertheless, employees we interviewed disagreed with those employers who said that employees would not use the information. Employees' concerns included issues of validity and reliability such as risk assessment and accuracy rather than their ability to understand the data. Most of the individual consumers who had requested the published reports found them to be easy to understand, using terms such as "clear," "concise," and "well organized." They found the charts and tables particularly useful. For those who had some problems understanding the reports, additional assistance was useful. For example, a Pennsylvania consumer who had been unable to fully understand the published report on her own had no trouble after it was explained by the state agency that had produced the report. Another Pennsylvania consumer stated that the first report card she received was difficult to understand but that by the third report she received, she found it very useful. Many individual consumers emphasized that published information would never be the sole source of data for their health care decisions but would be used in addition to other information such as personal consultation with their physician, friends, family members, or coworkers. Data comparing health care plans and providers helped the consumers we interviewed make their health care purchasing decisions. However, performance reports have not yet achieved their fullest potential. Consumers said they needed more reliable and valid data, more readily available and standardized information, and a greater emphasis on outcome measures. Meeting the information needs of individual consumers continues to lag behind meeting the employer needs. Attention must be paid to ensuring that individual consumers have access to health care data. While employers themselves have initiated efforts to cooperate with one another, few we interviewed are making complete health care data available to assist individual consumers in making purchasing decisions. Relevant stakeholders have not yet addressed the issues of disseminating performance data to individual consumers so that they can make responsive, informed decisions about their health care coverage. We are sending copies of this report to interested congressional committees and other interested parties. We will make copies available to others on request. This report was prepared under the direction of Carlotta C. Joyner, Associate Director. Other major contributors to this report include Sandra K. Isaacson, Assistant Director; Susan Lawes; Lise Levie; Lesia Mandzia; and Janice Raynor. Please call me on (202) 512-6806, or Dr. Joyner on (202) 512-7002, if you have any questions. To obtain information on how consumers use data comparing the quality of health care providers or health plans and what information they want when making health care purchasing decisions, we interviewed both employers and individual consumers. To obtain the view of employers, we interviewed officials at over 60 businesses. The size of these businesses ranged from under 5 employees to over 100,000 employees. These employers were selected on the basis of the following criteria: (1) size of workforce (small, medium, and large); (2) geographic variability; and (3) variation in whether or not they used published report cards. "Small" employers were defined as those with fewer than 50 employees, "medium" as having 50 to 499, and "large" as 500 or more employees. Because the businesses were not randomly selected, their experiences and opinions cannot be generalized to all employers. We also interviewed a major private sector management consulting firm that supplies comparative health care data to employers. To obtain the views of individual consumers who had received a report card, we conducted telephone interviews during January, February, and March 1995 with 153 consumers who had requested and received published report cards to determine how they used the information (see table I.1). The report cards they received were published by either California or Pennsylvania state agencies or by health maintenance organizations in California and Minnesota. These report cards were selected because they were the most recently available in which the issuing entity had a record of requesters and the state or HMO was willing to assist in the study. The consumers we talked with had received this information sometime during 1993 and 1994. The reports published by the state agencies contained only procedure-specific indicators, while the health plan reports focused on various plan and procedure quality indicators related to the individual health plans. Kaiser Permanente (HMO) Although we attempted to contact all 1,087 individuals who had requested the report cards issued by those states or health plans, many of these individuals did not choose to participate, could not recall receiving the information, or had requested the information for reasons other than making health care purchasing decisions, such as for school or work. Because we spoke with only a small number of individuals who had requested information for consumer-related purposes and they were not chosen at random, their experiences and opinions cannot be generalized to the entire consumer population that requested report card information. We also conducted interviews with seven groups of employees around the country who may not have had previous experience with such reports. We conducted these interviews with employees from four federal government agencies and three private corporations--manufacturing, sales, and service. These employees were selected because their employers offered them more than one health insurance plan to choose from when making their health care insurance purchasing decisions. The number of participants in each group ranged from 8 to 10 and included employees with varying marital, family, and age status as well as employees enrolled in both indemnity and managed care plans. Medicare: Increased HMO Oversight Could Improve Quality and Access to Care (GAO/HEHS-95-155, Aug. 3, 1995). Employer-Based Health Plans: Issues, Trends, and Challenges Posed by ERISA (GAO/HEHS-95-167, July 25, 1995). Medicare: Enhancing Health Care Quality Assurance (GAO/T-HEHS-95-224, July 27, 1995). Health Care: Employers Urge Hospitals to Battle Costs Using Performance Data Systems (GAO/HEHS-95-1, Oct. 3, 1994). Health Care Reform: "Report Cards" Are Useful but Significant Issues Need to Be Addressed (GAO/HEHS-94-219, Sept. 29, 1994). Access to Health Insurance: Public and Private Employers' Experience With Purchasing Cooperatives (GAO/HEHS-94-142, May 31, 1994). Managed Health Care: Effect on Employers' Cost Difficult to Measure (GAO/HRD-94-3, Oct. 19, 1993). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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 provided information on health care quality issues, focusing on: (1) how consumers use health care performance reports that contain comparative data on the quality of health care providers; and (2) what information consumers consider most important. GAO found that: (1) employers and individuals use information that measures and compares the quality of health care furnished by providers and health plans when making purchasing decisions; (2) consumers want performance reporting efforts to continue and are requesting that more data be made publicly available; (3) consumers want standardized and comparable health care information to assess health care providers' or health plans' performance; (4) many employers get health care performance data through business coalitions, consultants, and their own data collection efforts; and (5) although employers have begun cooperating with one another to enhance their purchasing decisions, few employers make health care data available to their employees.

Economic growth--which is central to almost all our major concerns as a society--requires investment, which, over the longer term, depends on saving. Since the 1970s, nonfederal saving has declined while federal budget deficits have consumed ever-higher levels of these increasingly scarce savings. The result has been to decrease the amount of national saving potentially available for investment. (See figure 1.) Since we last reported on this issue in 1992, overall national saving has remained low. These conditions--less nonfederal saving and a greater share of this saving absorbed by deficits--do not bode well for the nation's future productive capacity and future generations' standard of living. The surest way to increase the resources available for investment is to increase national saving, and the surest way to increase national saving is to reduce the federal deficit. Our 1992 analysis showed that an indefinite continuation of then-current federal budget policy was not sustainable. Without policy change, the continuation of large increases in health care costs, a jump in Social Security costs after 2010 as the baby boom generation retires, and escalating interest costs would fuel progressively larger deficits. Growing deficits and the resulting lower saving would lead to dwindling investment, slower growth, and finally a decline of real GDP. Living standards, in turn, would at first stagnate and then fall. Our view was that a "no action" path with respect to the deficit was not sustainable. Action on the deficit might be postponed, but it could not be escaped. Our simulation of several hypothetical deficit reduction paths further showed that the timing and magnitude of deficit reduction would affect both the amount of sacrifice required and the economic benefits realized. Acting sooner would reduce future interest costs and therefore total deficit reduction required from other sources. Achieving and sustaining balance or surplus would yield long-term benefits in the form of higher national saving, higher investment, and more rapid economic growth. By promoting economic growth, deficit elimination would give future generations more resources to finance the baby boom's retirement. Since our 1992 report, the Congress and the President have taken action on the deficit. According to Congressional Budget Office (CBO) estimates, the Omnibus Budget Reconciliation Act of 1993 (OBRA 93) will reduce the federal deficit cumulatively for fiscal years 1994 through 1998 by over $400 billion. Despite this short-term progress, however, OBRA 93 did not fundamentally alter the growth of the major entitlement programs driving the long-term deficit problem. The Bipartisan Commission on Entitlement and Tax Reform, created in late 1993, highlighted the nation's vulnerability to the growth of these programs and their potential fiscal effects. Currently, the Congress and the administration are again considering proposals which could reduce future deficits. As in our 1992 work, our updated simulation results show that continuing current spending and taxation policies unimpeded over the long term would have major consequences for economic growth. A fiscal policy of "no action" through 2025 implies federal spending of nearly 44 percent of GDP and a deficit of over 23 percent of GDP. (See figure 2.) By drastically reducing national saving, rising deficits would shrink private investment and eventually result in a declining capital stock. Given our labor force and productivity growth assumptions, GDP would inevitably begin to decline. These negative effects of rapidly increasing deficits on the economy would, we believe, force action at some point before the end of the simulation period. If policymakers did not take the initiative, external events--for example, the unwillingness of foreign investors to sustain a deteriorating American economy--would compel action. While the "no action" simulation is not a prediction of what would actually happen, it illustrates the pressures to change the nation's current fiscal course. The shift in the composition of federal spending by the end of the simulation period shows that, under a long-term "no action" path, health care, interest costs, and--after 2010--Social Security spending drive increasingly large and unsustainable deficits. (See figure 3.) As federal spending in the simulation heads toward 44 percent of GDP in 2025, the major federal health care programs--Medicare and Medicaid--would become the major programmatic driver of budget deficits. Their share of the economy would more than triple between 1994 and 2025. Health care cost inflation and the aging of the population work together to produce this rapid growth. At the same time, simulated interest spending increases dramatically. Escalating deficits resulting from the increased spending add substantially to the national debt. Rising debt, in turn, raises spending on interest, which compounds the deficit problem, driving a vicious circle. The effects of compound interest are clearly visible, as interest spending rises from about 3 percent of GDP in 1994 to over 13 percent in 2025. Social Security also grows, but its rise is much slower than health care. Its expansion occurs mainly after 2010 as the baby boom generation retires. The expansion of the three forces fueling budget deficits means that the federal government would find it increasingly difficult to fund other needs. The economic benefits of deficit reduction are illustrated by the three fiscal paths we simulate in our model. (See table 1.) As discussed above, a fiscal policy of "no action" is not economically sustainable over the long term. The "muddling through" and "balance" paths show that the further away fiscal policy moves from a path of "no action," the better the outlook for the economy in the long term. The differences in GDP per capita at 2025 reflect major differences in the underlying capacity of the economy in our illustrative simulations to generate growth. Our "no action" simulation, when maintained unimpeded through 2025, portrays the potential long-term economic impact of a declining national saving rate. Under a policy of "no action" on the deficit, investment would peak in the next decade and then decline steadily due to the lack of national saving. Shortly thereafter, capital depreciation would outweigh investment, and the capital stock would actually begin to decline. Given our assumptions about labor force and productivity growth, the declining capital stock would lead inevitably to a decline in GDP. By 2025, investment would be entirely eliminated, the capital stock would have declined to less than half of its 1994 level, and per capita GDP--only about 5 percent greater in real terms than at the start of the 30-year period--would be poised for a precipitous drop. Compared to a policy of "no action," more stringent fiscal policies would result in greater economic growth. Tighter fiscal policies can promote greater private investment in the long term, a larger capital stock, and therefore a larger future GDP. The "muddling through" simulation shows such GDP growth but because of persistent deficits, debt increases well above current levels. In the model, the larger debt requires increased foreign capital inflows. Our "balance" simulation, compared to "muddling through," achieves greater deficit reduction and a larger GDP with lower debt and, accordingly, less reliance on foreign capital. And as we stated in 1992, a strongly growing economy will be needed to support present commitments to the future elderly and a rising standard of living for the future working population. In actuality, the differences between alternative fiscal policies would likely be even greater than our simulation results suggest. Our model incorporates conservative assumptions about the relationship between savings, investment, and GDP growth that tend to understate the differences between the economic outcomes associated with alternative fiscal policies. For example, in our model, interest rates, productivity, and foreign investment all hold steady regardless of economic change. In the "no action" simulation, we assumed that they all remain constant in the face of a collapsing U.S. economy; this is unlikely to be true. Similarly, under our "balance" simulation, interest rates, productivity, and foreign investment do not respond favorably to increased national savings and investment. While the magnitude of any response is difficult to predict, some change could be expected. To the extent that our assumptions are conservative, differences between a "balance" path and the other two paths would be larger than simulated. We recognize that deficit reduction would have costs in the short term. The deficit reduction necessary to achieve beneficial long-term economic outcomes and reduced interest costs would entail difficult budgetary reductions and require a greater share of national income to be devoted to saving, thus foregoing some consumption in the short term. The greater the fiscal austerity, the more consumption would need to be sacrificed. However, more stringent deficit reduction measures mean correspondingly larger increases in consumption in the long term. The decision policymakers face, then, involves a trade-off between the immediate sacrifice of deficit reduction and the deferred but more severe economic costs associated with continued deficits. The share of the federal budget devoted to interest costs would be reduced through deficit reduction, freeing up scarce resources to satisfy other public needs. This will be particularly important for future budgets when the aging of the population will prompt greater spending pressures. The dynamics of compound interest which, given no action on the deficit, lead inexorably to spiralling deficits, yield dividends under a balance simulation. The more rapidly real debt is reduced and real interest costs brought down, the less long-term programmatic sacrifice required. Action taken to achieve balance by 2002 and to sustain it shrinks interest as a percent of total outlays from 12 percent in 1994 to less than 5 percent in 2025, assuming a constant interest rate. (See figure 4.) In contrast, higher interest costs would approach 18 percent of outlays by 2025 under the "muddling through" path because the deficit is maintained at 3 percent of GDP, resulting in higher debt. Moreover, due to growing pressures from health and Social Security commitments, the "muddling through" path requires progressively greater spending reductions just to keep the deficit from growing above 3 percent of GDP. Not all spending cuts have the same impact over the long run. Decisions about how to reduce the deficit will reflect--among other considerations--judgments about the role of the federal government and the effectiveness of individual programs. In our 1992 work, we drew particular attention to federal investment in physical capital, human capital, and research and development. Such public investment plays a key role in economic growth, directly and by creating an environment conducive to private sector investment. Accordingly, in addition to the overall level of deficit or surplus, the proportion of the budget devoted to investment spending will also affect long-term growth. The extent to which deficit reduction affects spending on fast-growing programs also matters. Although a dollar is a dollar in the first year it is cut--regardless of what programmatic changes it represents--cutbacks in the base of fast-growing programs generate greater savings in the future than those in slower-growing programs, assuming the specific cuts are not offset by increases in the growth rates of the programs. Figure 5 illustrates this point by comparing the long-run effects of a $50-billion cut in health spending with those of the same dollar amount cut from unspecified other programs. For both paths the cut occurs in 1996 and is assumed to be permanent but, after 1996, spending is assumed to continue at the same rates of growth as those shown in the "no action" simulation.We used the simple assumption that a reduction either in health or in other programs would not alter the expected growth rates simply to illustrate the point that a cut in high-growth areas of spending will exert greater fiscal effects in the future than the same size cut in low-growth areas. Because the 1996 cuts are equal dollar amounts, the two simulations appear very similar in the early part of the period. A gap develops between them as time passes, however, and by 2025 the difference between the two paths has widened to nearly 4 percent of GDP. The gap appears and then widens because health spending grows much faster than other areas of spending. A cut in this spending area reduces the proportion of the budget growing quickly, thereby reducing the total budget growth. The effects of compound interest, discussed earlier in this report, magnify the difference. Even if a balanced budget is achieved early in the next century, deficits could reemerge as the coming demographic changes continue to exert fiscal pressures. Depending upon the types of spending reductions adopted, future growth in health, Social Security, and interest costs--the deficit drivers--will continue to place demands on federal budgetary resources. As the Bipartisan Commission on Entitlement and Tax Reform recently observed, the decreasing ratio of the labor force to retirees will exacerbate the fiscal effects of the growing elderly population. In addition to the effects of the known demographic shift, uncertainties about the growth of health care costs also promise to complicate future budget policy. Recent budgetary history has shown that health care costs have proven very difficult to predict. Experts we contacted agreed on only one thing--long-range cost projections made today will be wrong. Whether they are too high or too low is unclear, although historically health projections have nearly always been too low. For these reasons, sustaining a balanced budget over the long term could be an ongoing challenge. Rather than discouraging efforts to reduce the deficit, an awareness of future fiscal pressures might instead be used to help inform current fiscal policy choices. For example, some program changes, if made today, would generate little in immediate savings but would exert large future outlay reductions. Program changes with such "wedge-shaped" savings paths might be important elements of a strategy to mitigate the longer-term spending pressures, as they were in several other nations that reduced fiscal deficits. Phasing in such changes over a longer time frame would give affected populations more time to adjust to these changes. Moreover, other nations found that phasing in program changes strengthened prospects for public support of needed fiscal policy changes. The analysis presented in this report of the long-term economic and fiscal implications of these alternative fiscal policy paths relies in substantial part on an economic growth model that GAO adapted from a model developed by economists at the Federal Reserve Bank of New York. The model reflects the interrelationships between the budget and the economy over the long term and does not capture their interaction during short-term business cycles. The main influence of budget policy on long-term economic performance is through the effect of the federal deficit on national saving. Conversely, the rate of economic growth helps determine the overall federal deficit or surplus through its effect on revenues and spending. Higher federal budget deficits reduce national saving while lower deficits increase national saving. The level of saving affects investment and, in turn, GDP growth. Budget assumptions in the model rely upon CBO estimates through 2004 to the extent practicable. These estimates are used in conjunction with our model's simulated levels of GDP. For Medicare, we assumed growth consistent with CBO's projections and HCFA's long-term intermediate projections from the Medicare Trustees' April 1995 report. For Medicaid through 2004, we similarly assumed growth consistent with CBO's projections. For 2005 and thereafter, in the absence of long-range Medicaid projections from HCFA, we used projections developed in 1994 by the Bipartisan Commission on Entitlement and Tax Reform. For Social Security, we use the April 1995 intermediate projections from the Social Security Trustees throughout the simulation period. Other mandatory spending is held constant as a percentage of GDP after 1999, the last year in which CBO projections are available in a format usable by our model. Discretionary spending is held constant as a percentage of GDP after 2005. Receipts are held constant as a percentage of GDP after 1999. Our interest rate assumptions are based on CBO through 1999 and then move to a fixed rate. (See appendix I for a more detailed description of the model and the assumptions we used.) We conducted our work from June 1994 through April 1995. We received comments from experts in fiscal and economic policy and have incorporated them as appropriate. We are sending copies of this report to the President of the Senate and the Speaker of the House of Representatives and to the Ranking Minority Members of your Committees. We are also sending copies to the Director of the Congressional Budget Office, the Secretary of the Treasury, and the Director of the Office of Management and Budget. Copies will be made available to others upon request. This report was prepared under the direction of Paul L. Posner, Director for Budget Issues, and James R. White, Acting Chief Economist. They may be reached at (202) 512-9573. Major contributors to this report are listed in appendix II. This updated analysis of the long-term economic and budgetary implications of alternative fiscal policy paths relies in substantial part on an economic growth model that GAO adapted from a model developed by economists at the Federal Reserve Bank of New York (FRBNY). The model represents growth as resulting from labor force increases, capital accumulation, and the various influences affecting total factor productivity. To allow a closer analysis of the long-term effects of fiscal policy, we added a set of relationships describing the federal budget and its links to the economy. The relationships follow the definitions of national income accounting, which differ slightly from those in the budget. The model is helpful for exploring the long-term implications of policies and for comparing alternative policies within a common economic framework. The results provide qualitative illustrations, not quantitative forecasts, of the budget or economic outcomes associated with alternative policy paths. The model reflects the interrelationships between the budget and the economy over the long term and does not capture their interaction during short-term business cycles. Figure I.1 illustrates the core relationships of the model. The main influence of budget policy on long-term economic performance is through the effect of the federal deficit on national saving. Higher federal budget deficits reduce national saving while lower deficits increase national saving. The level of savings affects investment and, hence, GDP growth. Gross domestic product (GDP) is determined by the labor force, capital stock, and total factor productivity. GDP in turn influences nonfederal saving, which consists of private saving and state and local government surpluses or deficits. Through its effects on federal revenues and spending, GDP also helps determine the federal budget deficit or surplus. Nonfederal and federal savings together comprise national saving, which influences private investment and the next period's capital stock. Capital combines with labor and total factor productivity to determine GDP in the next period, and the process continues. There also are important links between national saving and investment and the international sector, not shown in figure I.1 in order to keep the overview simple. In an open economy such as the United States, a decrease in saving due to, for example, an increase in the federal budget deficit, does not require an equal decrease in investment. Instead, part of the saving shortfall may be filled by foreign capital inflows. A portion of the net income that results from such investments flows abroad. If capital were perfectly mobile, foreign capital inflows could fully offset the effect on domestic investment of a decline in U.S. saving. The evidence continues to suggest, however, that a nation's investment is correlated with its own saving. Hence, we retained our 1992 assumption (based on the work of FRBNY) that net foreign capital inflows rise by one-third of any decrease in the national saving rate. Table I.1 lists the key assumptions incorporated in the model. The assumptions used tend to provide conservative estimates of the benefit of deficit reduction and the harm of deficit increases. The interest rate on the national debt is held constant, for example, even when deficits climb and the national saving rate plummets. Under such conditions, the more likely result would be a rise in the rate of interest and a more rapid increase in federal interest payments than our results display. Another conservative assumption is that the rate of total factor productivity growth is unaffected by the amount of investment. Productivity is assumed to advance 1 percent each year even if investment collapses. Such assumptions suggest that deficit changes could have greater effects than our results indicate. We have made several modifications to the model since the 1992 report, but its essential structure remains the same. The model incorporates the National Income and Product Accounts (NIPA) shift from 1982 to 1987 as the base year, and the switch from gross national product to GDP as the primary measure of overall economic activity. The more recent data prompted several parameter changes. For example, the inflation rate is now assumed to be 3.4 percent, down from 4.0 percent in our previous work, while the average interest rate is reduced to 7.2 percent from 7.8 percent. Our work also incorporates the CBO projection that deficits in the next few years will be somewhat lower than was foreseen in 1992. The distinction between the mandatory and discretionary components of the budget is important. Our approach has been modified to accommodate this distinction by reclassifying budget data based on the NIPA framework as mandatory or discretionary spending. From 1995 through 1999, CBO data were used for this reclassification. For the years from 2000 through 2005, we adopted CBO's assumption that discretionary spending would increase at the rate of inflation, and, thereafter, we assumed it would keep pace with GDP growth. Mandatory spending includes Health, Old Age Survivors' and Disability Insurance (OASDI, or Social Security), and a residual category covering other mandatory spending. For the first 9 years, health spending incorporates CBO's Medicare and Medicaid assumptions. Thereafter, Medicare follows the Trustees' 1995 Alternative II projections. We smoothed the path of Medicaid spending from 2005 through 2011 in order to link CBO's spending assumptions to those of the Bipartisan Commission on Entitlement and Tax Reform. OASDI reflects the April 1995 Social Security Trustees' Alternative II projections. Other mandatory spending is a residual category consisting of all nonhealth, non-Social Security mandatory spending. It equals CBO's NIPA projection for Transfers, Grants, and Subsidies less Health, OASDI, and other discretionary spending. Through 1999, CBO assumptions are the main determinant of other mandatory spending, after which its growth is linked to that of GDP. The interest rates for 1994-1999 are consistent with the average effective rate implied by CBO's interest payment projections. We assume that the average rate then moves to 7.2 percent by 2003, where it remains for the rest of the simulation period. Receipts follow CBO's dollar projections to 1999. Thereafter, they continue at 20.3 percent of GAO's simulated GDP, which is the percent the model projects for 1999. As these assumptions differ somewhat from those used in our earlier report, the results are not directly comparable. An appendix to the 1992 report provides additional detail on the model's structure. Interest rate (average on the national debt) Surplus/Deficit 1995-99 (% of GDP) Spending rises at the rate of inflation Spending rises at the rate of economic growth Grows at the rate CBO assumes Medicare follows HCFA; Medicaid follows assumptions of the Bipartisan Commission on Entitlement and Tax Reform (continued) Follows the Trustees' Alternative II projections CBO's assumed levels Spending rises at the rate of economic growth CBO's assumed levels Receipts equal 20.3 percent of GDP (1999 ratio) Addressing the Deficit: Budgetary Implications of Selected GAO Work for Fiscal Year 1996 (GAO/OCG-95-2, Mar. 15, 1995). Deficit Reduction: Experiences of Other Nations (GAO/AIMD-95-30, Dec. 13, 1994). Budget Policy: Issues in Capping Mandatory Spending (GAO/AIMD-94-155, July 18, 1994). Budget Issues: Incorporating an Investment Component in the Federal Budget (GAO/AIMD-94-40, Nov. 9, 1993). Federal Budget: Choosing Public Investment Programs (GAO/AIMD-93-25, July 23, 1993). Budget Policy: Long-Term Implications of the Deficit (GAO/T-OCG-93-6, Mar. 25, 1993). Budget Policy: Prompt Action Necessary to Avert Long-Term Damage to the Economy (GAO/OCG-92-2, June 5, 1992). The Budget Deficit: Outlook, Implications, and Choices (GAO/OCG-90-5, Sept. 12, 1990). 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 provided information on the long-term economic impacts of the budget deficit. GAO found that: (1) some progress has been made in reducing the deficit since 1992, but the long-term deficit outlook remains a national problem; (2) inaction in reducing the deficit would inevitably result in a declining economy; (3) although taking action to reduce the deficit would promote long-term economic growth and reduce interest costs, such action would require significant budget adjustments; (4) early reductions in fast growing areas, such as health programs, would contribute more to the elimination of long-term deficits than other types of spending reductions; (5) even after a balanced budget is achieved, deficits could continue to emerge as demographic changes exert fiscal pressures; and (6) Congress faces difficult tradeoffs between the short- and long-term economic benefits of deficit reduction.

DHS has increased its global outreach efforts. Historically, DHS and its components, working with State, have coordinated with foreign partners on an ongoing basis to promote aviation security enhancements through ICAO and other multilateral and bilateral outreach efforts. For example, DHS and TSA have coordinated through multilateral groups such as the European Commission and the Quadrilateral Group--comprising the United States, the EU, Canada, and Australia--to establish agreements to develop commensurate air cargo security systems. On a bilateral basis, the United States has participated in various working groups to facilitate coordination on aviation security issues with several nations, such as those that make up the EU, Canada, and Japan. The United States has also established bilateral cooperative agreements to share information on security technology with the United Kingdom, Germany, France, and Israel, among others. In addition, TSA has finalized agreements with ICAO to provide technical expertise and assistance to ICAO in the areas of capacity building and security audits, and serves as the United States' technical representative on ICAO's Aviation Security Panel and the panel's various Working Groups. In the wake of the December 2009 incident, DHS increased its outreach efforts. For example, to address security gaps highlighted by the December incident, DHS has coordinated with Nigeria to deploy Federal Air Marshals on flights operated by U.S. carriers bound for the United States from Nigeria. Further, in early 2010, the Secretary of Homeland Security participated in five regional summits--Africa, the Asia/Pacific region, Europe, the Middle East, and the Western Hemisphere--with the Secretary General of ICAO, foreign ministers and aviation officials, and international industry representatives to discuss current aviation security threats and develop an international consensus on the steps needed to address remaining gaps in the international aviation security system. Each of these summits resulted in a Joint Declaration on Aviation Security in which, generally, the parties committed to work through ICAO and on an individual basis to enhance aviation security. Subsequently, during the September 2010 ICAO Assembly, the 190 member states adopted a Declaration on Aviation Security, which encompassed the principles of the Joint Declarations produced by the five regional summits. Through the declaration, member states recognized the need to strengthen aviation security worldwide and agreed to take nine actions to enhance international cooperation to counter threats to civil aviation, which include, among other things strengthening and promoting the effective application of ICAO Standards and Recommended Practices, with particular focus on Annex 17, and developing strategies to address current and emerging threats; strengthening security screening procedures, enhancing human factors, and utilizing modern technologies to detect prohibited articles and support research and development of technology for the detection of explosives, weapons, and prohibited articles in order to prevent acts of unlawful interference; developing and implementing strengthened and harmonized measures and best practices for air cargo security, taking into account the need to protect the entire air cargo supply chain; and providing technical assistance to states in need, including funding, capacity building, and technology transfer to effectively address security threats to civil aviation, in cooperation with other states, international organizations and industry partners. TSA has increased coordination with foreign partners to enhance security standards and practices. In response to the August 2006 plot to detonate liquid explosives on board commercial air carriers bound for the United States, TSA initially banned all liquids, gels, and aerosols from being carried through the checkpoint and, in September 2006, began allowing passengers to carry on small, travel-size liquids and gels (3 fluid ounces or less) using a single quart-size, clear plastic, zip-top bag. In November 2006, in an effort to harmonize its liquid-screening standards with those of other countries, TSA revised its procedures to match those of other select nations. Specifically, TSA began allowing 3.4 fluid ounces of liquids, gels, and aerosols onboard aircraft, which is equivalent to 100 milliliters--the amount permitted by the EU and other countries such as Canada and Australia. This harmonization effort was perceived to be a success and ICAO later adopted the liquid, gels, and aerosol screening standards and procedures implemented by TSA and other nations as a recommended practice. TSA has also worked with foreign governments to draft international air cargo security standards. According to TSA officials, the agency has worked with foreign counterparts over the last 3 years to draft Amendment 12 to ICAO's Annex 17, and to generate support for its adoption by ICAO members. The amendment, which was adopted by the ICAO Council in November 2010, will set forth new standards related to air cargo such as requiring members to establish a system to secure the air cargo supply chain (the flow of goods from manufacturers to retailers). TSA has also supported the International Air Transport Association's (IATA) efforts to establish a secure supply chain approach to screening cargo for its member airlines and to have these standards recognized internationally. Moreover, following the October 2010 bomb attempt in cargo originating in Yemen, DHS and TSA, among other things, reached out to international partners, IATA, and the international shipping industry to emphasize the global nature of transportation security threats and the need to strengthen air cargo security through enhanced screening and preventative measures. TSA also deployed a team of security inspectors to Yemen to provide that country's government with assistance and guidance on their air cargo screening procedures. In addition, TSA has focused on harmonizing air cargo security standards and practices in support of its statutory mandate to establish a system to physically screen 100 percent of cargo on passenger aircraft--including the domestic and inbound flights of United States and foreign passenger operations--by August 2010. In June 2010 we reported that TSA has made progress in meeting this mandate as it applies to domestic cargo, but faces several challenges in meeting the screening mandate as it applies to inbound cargo, related, in part, to TSA's limited ability to regulate foreign entities. As a result, TSA officials stated that the agency would not be able to meet the mandate as it applies to inbound cargo by the August 2010 deadline. We recommended that TSA develop a plan, with milestones, for how and when the agency intends to meet the mandate as it applies to inbound cargo. TSA concurred with this recommendation and, in June 2010, stated that agency officials were drafting milestones as part of a plan that would generally require air carriers to conduct 100 percent screening by a specific date. At a November 2010 hearing before the Senate Committee on Commerce, Science, and Transportation, the TSA Administrator testified that TSA aims to meet the 100 percent screening mandate as it applies to inbound air cargo by 2013. In November 2010 TSA officials stated that the agency is coordinating with foreign countries to evaluate the comparability of their air cargo security requirements with those of the United States, including the mandated screening requirements for inbound air cargo on passenger aircraft. According to TSA officials, the agency has begun to develop a program that would recognize the air cargo security programs of foreign countries if TSA deems those programs provide a level of security commensurate with TSA's programs. In total, TSA plans to coordinate with about 20 countries, which, according to TSA officials, were selected in part because they export about 90 percent of the air cargo transported to the United States on passenger aircraft. According to officials, TSA has completed a 6-month review of France's air cargo security program and is evaluating the comparability of France's requirements with those of the United States. TSA officials also said that, as of November 2010, the agency has begun to evaluate the comparability of air cargo security programs for the United Kingdom, Israel, Japan, Singapore, New Zealand, and Australia, and plans to work with Canada and several EU countries in early 2011. TSA expects to work with the remaining countries through 2013. TSA is working with foreign governments to encourage the development and deployment of enhanced screening technologies. TSA has also coordinated with foreign governments to develop enhanced screening technologies that will detect explosive materials on passengers. According to TSA officials, the agency frequently exchanges information with its international partners on progress in testing and evaluating various screening technologies, such as bottled-liquid scanner systems and advanced imaging technology (AIT). In response to the December 2009 incident, the Secretary of Homeland Security has emphasized through outreach efforts the need for nations to develop and deploy enhanced security technologies. Following TSA's decision to accelerate the deployment of AIT in the United States, the Secretary has encouraged other nations to consider using AIT units to enhance the effectiveness of passenger screening globally. As a result, several nations, including Australia, Canada, Finland, France, the Netherlands, Nigeria, Germany, Poland, Japan, Ukraine, Russia, Republic of Korea, and the UK, have begun to test or deploy AIT units or have committed to deploying AITs at their airports. For example, the Australian Government has committed to introducing AIT at international terminals in 2011. Other nations, such as Argentina, Chile, Fiji, Hong Kong, India, Israel, Kenya, New Zealand, Singapore, and Spain are considering deploying AIT units at their airports. In addition, TSA hosted an international summit in November 2010 that brought together approximately 30 countries that are deploying or considering deploying AITs at their airports to discuss AIT policy, protocols, best practices, as well as safety and privacy concerns. However, as discussed in our March 2010 testimony, TSA's use of AIT has highlighted several challenges relating to privacy, costs, and effectiveness that remain to be addressed. For example, because the AIT presents a full-body image of a person during the screening process, concerns have been expressed that the image is an invasion of privacy. Furthermore, as noted in our March 2010 testimony, it remains unclear whether the AIT would have been able to detect the weapon used in the December 2009 incident based on the preliminary TSA information we have received. We will continue to explore these issues as part of our ongoing review of TSA's AIT deployment, and expect the final report to be issued in the summer of 2011. TSA conducts foreign airport assessments. TSA efforts to assess security at foreign airports--airports served by U.S. aircraft operators and those from which foreign air carriers operate service to the United States--also serve to strengthen international aviation security. Through TSA's foreign airport assessment program, TSA utilizes select ICAO standards to assess the security measures used at foreign airports to determine if they maintain and carry out effective security practices. TSA also uses the foreign airport assessment program to help identify the need for, and secure, aviation security training and technical assistance for foreign countries. In addition, during assessments, TSA provides on-site consultations and makes recommendations to airport officials or the host government to immediately address identified deficiencies. In our 2007 review of TSA's foreign airport assessment program, we reported that of the 128 foreign airports that TSA assessed during fiscal year 2005, TSA found that 46 (about 36 percent) complied with all ICAO standards, whereas 82 (about 64 percent) did not meet at least one ICAO standard. In our 2007 review we also reported that TSA had not yet conducted its own analysis of its foreign airport assessment results, and that additional controls would help strengthen TSA's oversight of the program. Moreover, we reported, among other things, that TSA did not have controls in place to track the status of scheduled foreign airport assessments, which could make it difficult for TSA to ensure that scheduled assessments are completed. We also reported that TSA did not consistently track and document host government progress in addressing security deficiencies identified during TSA airport assessments. As such, we made several recommendations to help TSA strengthen oversight of its foreign airport assessment program, including, among other things, that TSA develop controls to track the status of foreign airport assessments from initiation through completion; and develop a standard process for tracking and documenting host governments' progress in addressing security deficiencies identified during TSA assessments. TSA agreed with our recommendations and provided plans to address them. Near the end of our 2007 review, TSA had begun work on developing an automated database to track airport assessment results. In September 2010 TSA officials told us that they are now exploring ways to streamline and standardize that automated database, but will continue to use it until a more effective tracking mechanism can be developed and deployed. We plan to further evaluate TSA's implementation of our 2007 recommendations during our ongoing review of TSA's foreign airport assessment program, which we plan to issue in the fall of 2011. A number of key challenges, many of which are outside of DHS's control, could impede its ability to enhance international aviation security standards and practices. Agency officials, foreign country representatives, and international association stakeholders we interviewed said that these challenges include, among other things, nations' voluntary participation in harmonization efforts, differing views on aviation security threats, varying global resources, and legal and cultural barriers. According to DHS and TSA officials, these are long-standing global challenges that are inherent in diplomatic processes such as harmonization, and will require substantial and continuous dialogue with international partners. As a result, according to these officials, the enhancements that are made will likely occur incrementally, over time. Harmonization depends on voluntary participation. The framework for developing and adhering to international aviation standards is based on voluntary efforts from individual states. While TSA may require that foreign air carriers with operations to, from, or within the United States comply with any applicable U.S. emergency amendments to air carrier security programs, foreign countries, as sovereign nations, generally cannot be compelled to implement specific aviation security standards or mutually accept other countries' security measures. International representatives have noted that national sovereignty concerns limit the influence the United States and its foreign partners can have in persuading any country to participate in international harmonization efforts. As we reported in 2007 and 2010, participation in ICAO is voluntary. Each nation must initiate its own involvement in harmonization, and the United States may have limited influence over its international partners. Countries view aviation security threats differently. As we reported in 2007 and 2010, some foreign governments do not share the United States government's position that terrorism is an immediate threat to the security of their aviation systems, and therefore may not view international aviation security as a priority. For example, TSA identified the primary threats to inbound air cargo as the introduction of an explosive device in cargo loaded on a passenger aircraft, and the hijacking of an all-cargo aircraft for its use as a weapon to inflict mass destruction. However, not all foreign governments agree that these are the primary threats to air cargo or believe that there should be a distinction between the threats to passenger air carriers and those to all-cargo carriers. According to a prominent industry association as well as foreign government representatives with whom we spoke, some countries view aviation security enhancement efforts differently because they have not been a target of previous aviation-based terrorist incidents, or for other reasons, such as overseeing a different airport infrastructure with fewer airports and less air traffic. Resource availability affects security enhancement efforts. In contrast to more developed countries, many less developed countries do not have the infrastructure or financial or human resources necessary to enhance their aviation security programs. For example, according to DHS and TSA officials, such countries may find the cost of purchasing and implementing new aviation security enhancements, such as technology, to be prohibitive. Additionally, some countries implementing new policies, practices, and technologies may lack the human resources--for example, trained staff--to implement enhanced security measures and oversee new aviation security practices. Some foreign airports may also lack the infrastructure to support new screening technologies, which can take up a large amount of space. These limitations are more common in less developed countries, which may lack the fiscal and human resources necessary to implement and sustain enhanced aviation security measures. With regard to air cargo, TSA officials also cautioned that if TSA were to impose strict cargo screening standards on all inbound cargo, it is likely many nations would be unable to meet the standards in the near term. Imposing such screening standards in the near future could result in increased costs for international passenger travel and for imported goods, and possible reductions in passenger traffic and foreign imports. According to TSA officials, strict standards could also undermine TSA's ongoing cooperative efforts to develop commensurate security systems with international partners. To help address the resource deficit and build management capacity in other nations, the United States provides aviation security assistance-- such as training and technical assistance--to other countries. TSA, for example, works in various ways with State and international organizations to provide aviation security assistance to foreign partners. In one such effort, TSA uses information from the agency's foreign airport assessments to identify a nation's aviation security training needs and provide support. In addition, TSA's Aviation Security Sustainable International Standards Team (ASSIST), comprised of security experts, conducts an assessment of a country's aviation security program at both the national and airport level and, based on the results, suggests action items in collaboration with the host nation. State also provides aviation security assistance to other countries, in coordination with TSA and foreign partners through its Anti- Terrorism Assistance (ATA) program. Through this program, State uses a needs assessment--a snapshot of a country's antiterrorism capability--to evaluate prospective program participants and provide needed training, equipment, and technology in support of aviation security, among other areas. State and TSA officials have acknowledged the need to develop joint coordination procedures and criteria to facilitate identification of global priorities and program recipients. We will further explore TSA and State efforts to develop mechanisms to facilitate interagency coordination on capacity building through our ongoing work. Legal and cultural factors can also affect harmonization. Legal and cultural differences among nations may hamper DHS's efforts to harmonize aviation security standards. For example, some nations, including the United States, limit, or even prohibit the sharing of sensitive or classified information on aviation security procedures with other countries. Canada's Charter of Rights and Freedoms, which limits the data it can collect and share with other nations, demonstrates one such impediment to harmonization. According to TSA officials, the United States has established agreements to share sensitive and classified information with some countries; however, without such agreements, TSA is limited in its ability to share information with its foreign partners. Additionally, the European Commission reports that several European countries, by law, limit the exposure of persons to radiation other than for medical purposes, a potential barrier to acquiring some passenger screening technologies, such as AIT. Cultural differences also serve as a challenge in achieving harmonization because aviation security standards and practices that are acceptable in one country may not be in another. For example, international aviation officials explained that the nature of aviation security oversight varies by country--some countries rely more on trust and established working relationships to facilitate security standard compliance than direct government enforcement. Another example of a cultural difference is the extent to which countries accept the images AIT units produce. AIT units produce a full-body image of a person during the screening process; to varying degrees, governments and citizens of some countries, including the United States, have expressed concern that these images raise privacy issues. TSA is working to address this issue by evaluating possible display options that would include a "stick figure" or "cartoon-like" form to provide enhanced privacy protection to the individual being screened while still allowing the unit operator or automated detection algorithms to detect possible threats. Other nations, such as the Netherlands, are also testing the effectiveness of this technology. Although DHS has made progress in its efforts to harmonize international aviation security standards and practices in key areas such as passenger and air cargo screening, officials we interviewed said that there remain areas in which security measures vary across nations and would benefit from harmonization efforts. For example, as we reported in 2007, the United States requires all passengers on international flights who transfer to connecting flights at United States airports to be rescreened prior to boarding their connecting flight. In comparison, according to EU and ICAO officials, the EU has implemented "one-stop security," allowing passengers arriving from EU and select European airports to transfer to connecting flights without being rescreened. Officials and representatives told us that although there has been ongoing international discussion on how to more closely align security measures in these and other areas, additional dialogue is needed for countries to better understand each others' perspectives. According to the DHS officials and foreign representatives with whom we spoke, these and other issues that could benefit from harmonization efforts will continue to be explored through ongoing coordination with ICAO and through other multilateral and bilateral outreach efforts. Our 2007 review of TSA's foreign airport assessment program identified challenges TSA experienced in assessing security at foreign airports against ICAO standards and recommended practices, including a lack of available inspector resources and host government concerns, both of which may affect the agency's ability to schedule and conduct assessments for some foreign airports. We reported that TSA deferred 30 percent of its scheduled foreign airport visits in 2005 due to the lack of available inspectors, among other reasons. TSA officials said that in such situations they sometimes used domestic inspectors to conduct scheduled foreign airport visits, but also stated that the use of domestic inspectors was undesirable because these inspectors lacked experience conducting assessments in the international environment. In September 2010 TSA officials told us that they continue to use domestic inspectors to assist in conducting foreign airport assessments and air carrier inspections-- approximately 50 domestic inspectors have been trained to augment the efforts of international inspectors. We also previously reported that representatives of some foreign governments consider TSA's foreign airport assessment program an infringement of their authority to regulate airports and air carriers within their borders. Consequently, foreign countries have withheld access to certain types of information or denied TSA access to areas within an airport, limiting the scope of TSA's assessments. We plan to further assess this issue, as well as other potential challenges, as part of our ongoing review of TSA's foreign airport assessment program, which we plan to issue in the fall of 2011. Mr. Chairman, this completes my prepared statement. I look forward to responding to any questions you or other members of the committee may have at this time. For additional information about this statement, please contact Stephen M. 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. In addition to the contact named above, staff who made key contributions to this statement were Steve D. Morris, Assistant Director; Carissa D. Bryant; Christopher E. Ferencik; Amy M. Frazier; Barbara A. Guffy; Wendy C. Johnson; Stanley J. Kostyla; Thomas F. Lombardi; Linda S. Miller; Matthew M. Pahl; Lisa A. Reijula; Rebecca Kuhlmann Taylor; and Margaret A. Ullengren. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The attempted December 25, 2009, terrorist attack and the October 2010 bomb attempt involving air cargo originating in Yemen highlight the ongoing threat to aviation and the need to coordinate security standards and practices to enhance security with foreign partners, a process known as harmonization. This testimony discusses the Department of Homeland Security's (DHS) progress and challenges in harmonizing international aviation security standards and practices and facilitating compliance with international standards. This testimony is based on reports GAO issued from April 2007 through June 2010, and ongoing work examining foreign airport assessments. For this work, GAO obtained information from DHS and the Transportation Security Administration (TSA) and interviewed TSA program officials, foreign aviation officials, representatives from international organizations such as the International Civil Aviation Organization (ICAO), and industry associations, about ongoing harmonization and TSA airport assessment efforts and challenges. In the wake of the December 2009 terrorist incident, DHS and TSA have strived to enhance ongoing efforts to harmonize international security standards and practices through increased global outreach, coordination of standards and practices, use of enhanced technology, and assessments of foreign airports. For example, in 2010 the Secretary of Homeland Security participated in five regional summits aimed at developing an international consensus to enhance aviation security. In addition, DHS and TSA have coordinated with foreign governments to harmonize air cargo security practices to address the statutory mandate to screen 100 percent of air cargo transported on U.S.-bound passenger aircraft by August 2010, which TSA aims to meet by 2013. Further, in the wake of the December 2009 incident, the Secretary of Homeland Security has encouraged other nations to consider using advanced imaging technology (AIT), which produces an image of a passenger's body that screeners use to look for anomalies such as explosives. As a result, several nations have begun to test and deploy AIT or have committed to deploying AIT units at their airports. Moreover, following the October 2010 cargo bomb attempt, TSA also implemented additional security requirements to enhance air cargo security. To facilitate compliance with international security standards, TSA assesses the security efforts of foreign airports as defined by ICAO international aviation security standards. In 2007, GAO reported, among other things, that TSA did not always consistently track and document host government progress in addressing security deficiencies identified during foreign airport assessments and recommended that TSA track and document progress in this area. DHS and TSA have made progress in their efforts to enhance international aviation security through these harmonization efforts and related foreign airport assessments; however, a number of key challenges, many of which are beyond DHS's control, exist. For example, harmonization depends on the willingness of sovereign nations to voluntarily coordinate their aviation security standards and practices. In addition, foreign governments may view aviation security threats differently, and therefore may not consider international aviation security a high priority. Resource availability, which is a particular concern for developing countries, as well as legal and cultural factors may also affect nations' security enhancement and harmonization efforts. In addition to challenges facing DHS's harmonization efforts, in 2007 GAO reported that TSA experienced challenges in assessing foreign airport security against international standards and practices, such as a lack of available international inspectors and concerns host governments had about being assessed by TSA, both of which may affect the agency's ability to schedule and conduct assessments for some foreign airports. GAO is exploring these issues as part of an ongoing review of TSA's foreign airport assessment program, which GAO plans to issue in the fall of 2011. In response to prior GAO recommendations that TSA, among other things, track the status of foreign airport assessments, DHS concurred and is working to address the recommendations. TSA provided technical comments on a draft of the information contained in this statement, which GAO incorporated as appropriate.

We found that Indian Affairs does not have complete and accurate information on safety and health conditions at all BIE schools because of key weaknesses in its inspection program. In particular, Indian Affairs does not inspect all BIE schools annually as required by Indian Affairs' policy, limiting information on school safety and health. We found that 69 out of 180 BIE school locations were not inspected in fiscal year 2015, an increase from 55 locations in fiscal year 2012 (see fig. 2). Further, we determined that 54 school locations received no inspections during the past 4 fiscal years. At the regional level, Indian Affairs did not conduct any annual school safety and health inspections in 4 of BIA's 10 regions with school facility responsibilities--the Northwest, Southern Plains, Southwest, and Western regions--in fiscal year 2015, accounting for 52 of the 180 school locations (see fig. 3). Further, the same four regions did not conduct any school inspections during the previous 3 fiscal years. In the Western region, we found three schools that had not been inspected since fiscal year 2008 and three more that had not been inspected since fiscal year 2009. Indian Affairs' safety office considers the lack of inspections a key risk to its safety and health program. BIA regional safety officers that we spoke with cited three key factors affecting their ability to conduct required annual safety and health inspections: (1) extended vacancies among BIA regional safety staff, (2) uneven workload distribution among BIA regions, and (3) limited travel budgets. Officials told us that one BIA region's only safety position was vacant for about 10 years due to funding constraints. As an example of uneven workload distribution, one BIA region had two schools with one safety inspector position, while another region had 32 schools with one safety inspector position. Currently, Indian Affairs has not taken actions to ensure all schools are annually inspected. Without conducting annual inspections at all school locations, Indian Affairs does not have complete information on the frequency and severity of safety and health deficiencies at all BIE school locations and cannot ensure these facilities are safe for students and staff and currently meet safety and health requirements. We also found that Indian Affairs does not have complete and accurate information for the two-thirds of schools that it did inspect in fiscal year 2015 because it has not provided BIA inspectors with updated and comprehensive inspection guidance and tools. In particular, we found that Indian Affairs' inspection guidance lacks comprehensive procedures on how inspections should be conducted, which Indian Affairs' safety office acknowledged. For example, BIA's Safety and Health Handbook--last updated in 2004--provides an overview of the safety and health inspection program but does not specify the steps inspectors should take to conduct an inspection. Further, according to some regional safety staff, Indian Affairs does not compile and provide inspectors with a reference guide for all relevant current safety and health standards. At the same time, BIA inspectors use inconsistent inspection practices, which may limit the completeness and accuracy of Indian Affairs' information on school safety and health. For example, at one school we visited, school officials told us that the regional safety inspector conducted an inspection from his car and did not inspect the interior of the school's facilities, which include 34 buildings. The inspector's report comprised a single page and identified no deficiencies inside buildings. Concerned about the lack of completeness of the inspection, school officials said they arranged with the Indian Health Service (IHS) within the Department of Health and Human Services to inspect their facilities. IHS identified multiple serious safety and health problems, including electrical shock hazards, emergency lighting and fire alarms that did not work, and fire doors that were difficult to open or close. Currently, Indian Affairs does not systematically evaluate the thoroughness of school safety and health inspections and monitor the extent to which inspection procedures vary within and across regions. According to federal internal control standards, internal control monitoring should be ongoing and assess program performance, among other aspects of an agency's operations. Without monitoring whether safety inspectors across BIA regions are consistently following inspection procedures and guidance, inspections in different regions may continue to vary in completeness and miss important safety and health deficiencies at schools that could pose dangers to students and staff. To support the collection of complete and accurate safety and health information on the condition of BIE school facilities nationally, we recommended that Interior (1) ensure all BIE schools are annually inspected for safety and health, as required by its policy, and that inspection information is complete and accurate and (2) revise its inspection guidance and tools, require that regional safety inspectors use them, and monitor safety inspectors' use of procedures and tools across regions to ensure they are consistently adopted. Interior agreed with these recommendations. We also found that Indian Affairs is not providing schools with needed support in addressing deficiencies or consistently monitoring whether they have established safety committees, which are required by Indian Affairs. In particular, according to Indian Affairs information, one-third or less of the 113 schools inspected in fiscal year 2014 had abatement plans in place, as of June 2015. Interior requires that schools put in place such plans for any deficiencies inspectors identify. Because such plans are required to include time frames, steps, and priorities for abatement, they are an initial step in demonstrating how schools will address deficiencies identified in both annual safety and health and boiler inspection reports. Among the 16 schools we visited, several schools had not abated high- risk deficiencies within the time frames required by Indian Affairs. Indian Affairs requires schools to abate high-risk deficiencies within 1 to 15 days, but we found that inspections of some schools identified serious unabated deficiencies that repeated from one year to the next year. For example, we reviewed inspection documents for two schools and found numerous examples of serious "repeat" deficiencies--those that were identified in the prior year's inspection and should have been corrected soon afterward but were not. One school's report identified 12 repeat deficiencies that were assigned Interior's highest risk assessment category, which represents an immediate threat to students' and staff safety and health and require correction within a day. Examples include fire doors that did not close properly; fire alarm systems that were turned off; and obstructions that hindered access/egress to building corridors, exits, and elevators. Another school's inspection report showed over 160 serious hazards that should have been corrected within 15 days, including missing fire extinguishers, and exit signs and emergency lights that did not work. Besides these repeat deficiencies, we also found that some schools we visited took significantly longer than Indian Affairs' required time frames to abate high-risk deficiencies. For example, at one school, 7 of the school's 11 boilers failed inspection in 2015 due to various high-risk deficiencies, including elevated levels of carbon monoxide and a natural gas leak (see fig. 4). Four of the 7 boilers that failed inspection were located in a student dormitory. The inspection report designated most of these boiler deficiencies as critical hazards that posed an imminent danger to life and health, which required the school to address them within a day. School officials told us they continued to operate the boilers and use the dormitory after the inspection because there was no backup system or other building available to house the students. Despite the serious risks to students and staff, most repairs were not completed for about 8 months after the boiler inspection. Indian Affairs and school officials could not provide an explanation for why repairs took significantly longer than Indian Affairs' required time frames. Limited capacity among school staff, challenges recording abatement information in the data system, and limited funding have hindered schools' development and implementation of abatement plans, according to school and Indian Affairs officials. Additionally, Indian Affairs has not taken needed steps to build the capacity of school staff to abate safety and health deficiencies, such as by offering basic training for staff in how to maintain and conduct repairs to school facilities. While some regional officials told us that they may provide limited assistance to schools when asked, such ad hoc assistance is not likely to build schools' capacity to abate deficiencies because it does not address the larger challenges faced by schools. Several officials at Indian Affairs' safety office and BIA regional offices acknowledged they do not have a plan to build schools' capacity to address safety and health deficiencies. Absent such a plan, schools will continue to face difficulties in addressing unsafe and unhealthy conditions in school buildings. Finally, we found that Indian Affairs has not consistently monitored whether schools have established safety committees, despite policy requirements for BIA regions to ensure all schools do so. Safety committees, which are composed of school staff and students, are vital in preventing injuries and eliminating hazards, according to Indian Affairs guidance. Examples of committee activities may include reviewing inspection reports or identifying problems and making recommendations to abate unhealthy or unsafe conditions. However, BIA safety officials we interviewed in three regions estimated that about half or fewer of BIE schools had created safety committees in their respective regions, though they were unable to confirm this because they do not actively track safety committees. Without more systemic monitoring, Indian Affairs is not in a position to know whether schools have fulfilled this important requirement. To ensure that all BIE schools are positioned to address safety and health problems with their facilities and provide student environments that are free from hazards, we recommended that Interior (1) develop a plan to build schools' capacity to promptly address safety and health problems with facilities and (2) consistently monitor whether schools have established required safety committees. Interior agreed with these recommendations. In conclusion, because Indian Affairs has neither conducted required annual inspections for BIE schools nationwide nor provided updated guidance and tools to its safety inspectors, it lacks complete and accurate safety and health information on school facilities. As a result, Indian Affairs cannot effectively determine the magnitude and severity of safety and health deficiencies at schools and is thus unable to prioritize deficiencies that pose the greatest danger to students and staff. Further, Indian Affairs has not developed a plan to build schools' capacity to promptly address deficiencies or consistently monitored whether schools have established required safety committees. Without taking steps to improve oversight and support for BIE schools in these key areas, Indian Affairs cannot ensure that the learning and work environments at BIE schools are safe, and it risks causing harm to the very children that it is charged with educating and protecting. Interior agreed with our recommendations to address these issues and noted several actions it plans to take. Chairman Calvert, Ranking Member McCollum, and Members of the Subcommittee, this concludes my prepared remarks. I will be happy to answer any questions you may have. If you or your staff have any questions about this testimony or the related report, please contact Melissa Emrey-Arras at (617) 788-0534 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this statement and the related report include Elizabeth Sirois (Assistant Director), Edward Bodine (Analyst-in- Charge), Lara Laufer, Jon Melhus, Liam O'Laughlin, Matthew Saradjian, and Ashanta Williams. 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 summarizes the information contained in GAO's March 2016 report, entitled Indian Affairs: Key Actions Needed to Ensure Safety and Health at Indian School Facilities , GAO-16-313 . The Department of the Interior's (Interior) Office of the Assistant Secretary-Indian Affairs (Indian Affairs) lacks sound information on safety and health conditions of all Bureau of Indian Education (BIE) school facilities. Specifically, GAO found that Indian Affairs' national information on safety and health deficiencies at schools is not complete and accurate because of key weaknesses in its inspection program, which prevented GAO from conducting a broader analysis of schools' safety and health conditions. Indian Affairs' policy requires its regional safety inspectors to conduct inspections of all BIE schools annually to identify facility deficiencies that may pose a threat to the safety and health of students and staff. However, GAO found that 69 out of 180 BIE school locations were not inspected in fiscal year 2015, an increase from 55 locations in fiscal year 2012. Agency officials told GAO that vacancies among regional staff contributed to this trend. As a result, Indian Affairs lacks complete information on the frequency and severity of health and safety deficiencies at BIE schools nationwide and cannot be certain all school facilities are currently meeting safety requirements. Number of Bureau of Indian Education School Locations That Were Inspected for Safety and Health, Fiscal Years 2012-2015 Indian Affairs is responsible for assisting schools on safety issues, but it is not taking needed steps to support schools in addressing safety and health deficiencies. While national information is not available, officials at several schools GAO visited said they faced significant difficulties addressing deficiencies identified in annual safety and health and boiler inspections. Inspection documents for two schools GAO visited showed numerous high-risk safety and health deficiencies--such as missing fire extinguishers--that were identified in the prior year's inspection report, but had not been addressed. At another school, four aging boilers in a dormitory failed inspection due to elevated levels of carbon monoxide, which can cause poisoning where there is exposure, and a natural gas leak, which can pose an explosion hazard. Interior's policy in this case calls for action within days of the inspection to protect students and staff, but the school continued to use the dormitory, and repairs were not made for about 8 months. Indian Affairs and school officials across several regions said that limited staff capacity, among other factors, impedes schools' ability to address safety deficiencies. Interior issued an order in 2014 that emphasizes building tribes' capacity to operate schools. However, it has not developed a plan to build BIE school staff capacity to promptly address deficiencies. Without Indian Affairs' support of BIE schools to address these deficiencies, unsafe conditions at schools will persist and may endanger students and staff.

The Navy operates thousands of shore activities worldwide and employs over 1 million military and civilian personnel. Hundreds of Navy Fund Administering Activities at the field level provide budgeting and accounting for more than 9,000 Navy cost centers. A cost center is the lowest level in the Navy's financial management chain of command and may be a ship, an aircraft squadron, a staff office, or a department or division of a shore activity where identification of costs is required. DFAS, which organizationally reports to the Under Secretary of Defense (Comptroller), was created in January 1991 to streamline and standardize DOD's finance and accounting procedures, systems, and operations while reducing the costs of such services. Ownership of many DOD financial management systems, including some Navy systems, was transferred to DFAS. At the same time, many mixed financial management systems, such as logistics systems which provide inventory and property financial data, remained under the control of the services or other DOD components. Policy guidance and direction related to accounting system development and operations is performed by the DOD Comptroller's Office. In the past, Navy activities reported financial information to Defense Accounting Offices maintained by DFAS which, in turn, generated monthly reports to DFAS Cleveland Center. Beginning in fiscal year 1995, DFAS began consolidating its Navy Defense Accounting Offices into six sites called operating locations. Information from these operating locations will continue to be reported to DFAS Cleveland Center. Navy financial management systems have many long-standing problems that prior system development efforts have not fixed. For example, according to the Naval Audit Service, during the 1980s, Navy spent over $260 million on two failed attempts to consolidate and standardize its accounting systems. Both the Standard Automated Financial System and the Integrated Disbursing and Accounting Financial Management System were terminated in 1989 due to design problems, excessive cost escalations, and slippages in completion time. Navy's financial management system problems continue even though many of Navy's systems have been transferred to DFAS. For example, DOD's fiscal year 1995 Federal Managers' Financial Integrity Act (FMFIA) report stated that a majority of DOD's financial systems did not comply with Office of Management and Budget (OMB) Circular A-127 and that many perform similar functions, resulting in inefficiencies and disparate business practices. Navy's Statement of Assurance, used to prepare the DOD Federal Managers' Financial Integrity Act report, also stated that its systems did not comply with Circular A-127's integration, accounting classification codes, and general ledger requirements. In August 1991, DFAS began to review DOD's accounting systems and to develop a plan to (1) decrease the number of financial systems and (2) correct systems deficiencies. In December 1993, DFAS developed an Interim Migratory Strategy, consisting of the following two phases. First, DFAS planned to reduce DOD's 91 general fund systems to 11 interim migratory systems. The interim migratory systems were to be selected from the military services' existing financial systems that were considered to be the least deficient. In addition, DFAS planned to identify and correct the interim migratory systems deficiencies. In particular, DFAS plans called for enhancing the systems to comply with DOD's standard general ledger, key accounting requirements, and standard budget and accounting classification code by October 1, 1997. Second, DFAS planned to eventually select the best interim migratory system(s) to implement DOD-wide as its target system(s). DFAS has not established time frames for this effort. In June 1994, DFAS Cleveland Center selected STARS Field Level to serve as Navy's interim migratory system for field-level general fund accounting. The Assistant Secretary of the Navy for Financial Management concurred with STARS' selection. DFAS Cleveland and Navy personnel deemed STARS the newest, least deficient, and most advanced of Navy's 25 existing general fund accounting systems. Through April 30, 1996, the largest of the former field-level systems had been converted to STARS Field Level at 923 activities, and 122 activities remained to be converted to STARS Field Level. In addition to STARS Field Level, the STARS umbrella includes other components--an on-line bill paying component and components that provide financial data to Navy's major claimants. DFAS Cleveland Center is also in the process of developing a STARS financial reporting module at the departmental level. The STARS enhancement effort is intended to ensure that all STARS components comply with DOD's key accounting requirements and standard general ledger as well as to implement other improvements. In April 1996, DFAS created the Defense Accounting System Program Management Office to centrally manage the consolidation and modernization of DFAS accounting systems. After the period of our review, DFAS selected STARS as one of three DFAS target general fund accounting systems, under the oversight of this Program Management Office. To assess Navy's efforts to reduce the number of accounting systems and implement and enhance STARS, we examined DOD, DFAS, and Navy documents and conducted interviews with appropriate officials. We also reviewed STARS system documentation and compared it to the financial management system architecture guidance in the Joint Financial Management Improvement Program's Framework for Federal Financial Management Systems. We also interviewed the Director of the STARS Project Office on this issue. To evaluate DFAS Cleveland Center's plans to enhance STARS, we examined STARS project planning documentation, such as its April 18, 1996, Plan of Action and Milestones and software project plans. We also reviewed analyses related to implementing various key accounting requirements in STARS prepared by an outside contractor. We interviewed officials from this contractor, the STARS Project Office, DFAS Cleveland Center, and Navy's Fleet Material Support Office (FMSO)--which serves as the primary STARS Central Design Agency. To review the implementation of STARS at the field level, we judgmentally selected 18 Navy shore activities that converted to STARS Field Level between July 1993 and March 1995, from a universe of east and west coast activities. We visited each of these sites, examined documents related to various aspects of Navy's financial management operations, and identified areas applicable to or interfacing with field-level accounting and reporting. We obtained sample financial reports with explanations of their purpose and use, conducted interviews with field-level financial managers, and reviewed supporting accounting and reporting documentation. During this review, we noted any problems concerning accuracy, timeliness, and usefulness and examined their cause and resultant effect on field-level financial operations. We performed our work at the Office of the DOD Comptroller, DFAS Headquarters, DFAS Cleveland Center's STARS Project Office, Navy's FMSO (Mechanicsburg, PA), and the 18 Navy shore activities listed in appendix I. The Department of Defense provided written comments on a draft of this report. These comments are presented and evaluated in the "Agency Comments and Our Evaluation" section of this report and are reprinted in appendix II. Our work was performed from April 1995 through early August 1996 in accordance with generally accepted government auditing standards. We believe that savings will accrue as a result of eliminating the duplication and inefficiencies of supporting and maintaining Navy's 25 existing accounting systems, although we did not attempt to quantify such savings. In October 1994, a contractor to the STARS Project Office completed an economic analysis that compared the costs of developing and implementing STARS to continuing with the existing systems. This economic analysis estimated that converting five of Navy's existing general fund accounting systems to STARS (primarily at the field level) would save $162 million in the first 5 years. This initial estimated savings, primarily in maintenance and operating costs, was reduced by the estimated STARS Field Level system development, maintenance, operating, and training costs of $145 million, for a net savings of $17 million. Over 15 years, net savings were projected to total $293 million. We did not assess the reliability of these estimates. However, we note that achieving the projected level of net savings could be diminished by the need to provide additional training and technical support to field activities in using STARS Field Level. These issues are discussed later in this report. In addition, the October 1994 economic analysis was not a total life-cycle economic analysis of all STARS components. For example, it did not include costs to enhance all of the STARS components to bring them into compliance with DOD's standard general ledger, key accounting requirements, and the standard budget and accounting classification code. The Major Automated Information Systems Review Council, which is reviewing the STARS project, directed the STARS Project Office to conduct a total life-cycle economic analysis of all STARS components. This analysis is expected to be completed by December 31, 1996. In addition, as discussed in the next section, DFAS has not developed a complete system architecture for STARS--basically a blueprint for what the system will do and how it will operate. As a result, any estimate of STARS total costs will be incomplete. We also found that, in less than 2 years, actual obligations to enhance STARS in certain areas were significantly higher than budgeted. The STARS Project Office estimated that in fiscal years 1995 and 1996, STARS software development costs would total $35.6 million. Of this amount, $18.8 million was budgeted for projects pertaining to the key accounting requirements, the budget and accounting classification code, and the consolidation efforts. As of July 23, 1996, actual obligations for the software projects related to these three areas were $24.5 million, or 30 percent, above the budget estimate, although total STARS software development obligations were close to what was estimated. In addition, some software development projects have already exceeded their total budget. For example, the STARS Project Office estimated that for fiscal years 1995-1997 (1) property and inventory accounting and (2) cash and accounts payable key accounting requirement enhancements would each cost $500,000. However, as of July 23, 1996, obligations for these enhancement efforts were $1.1 million and $1.2 million, respectively. Neither of these projects is scheduled to be completed in fiscal year 1996, although, according to DFAS, an accounts payable function was implemented for one STARS component--STARS Field Level (but not for the STARS claimant module). In addition, STARS budget estimates were incomplete and lacked supporting documentation. For example, these budget estimates did not include DFAS' internal costs, such as the STARS Project Office. In fiscal year 1996, the STARS Project Office personnel costs alone were estimated at $1.4 million. Moreover, the STARS Project Office could not find documentation for much of the July 1995 budget estimate and instead provided us with a written rationale on the methodology it used to estimate the STARS software development costs. According to this rationale, the STARS Project Office consulted with FMSO and, based on these discussions, used prior projects of similar scope and size as a basis for the estimates. However, the STARS Project Office used projects related to only one STARS component to estimate the cost of enhancing all of the STARS components. Each STARS component would require different levels of effort to modify since the components do not have the same program attributes. The STARS enhancement effort is not guided by a target system architecture. A target systems architecture is a composite of all interrelated functions, information, data, and applications associated with a system. Specifically, such a systems architecture is an evolving description of an approach to achieving a desired mission. It describes (1) all functional activities to be performed to achieve the desired mission, (2) the system elements needed to perform the functions, (3) the designation of performance levels of those system elements, and (4) the technologies, interfaces, and locations of functions. The lack of a target STARS architecture increases the likelihood of project failure, additional development and maintenance costs, and a system that does not operate efficiently or effectively. Moreover, the information contained in a complete architecture provides the opportunity to perform a thorough alternatives analysis for the selection of the most effective system at the least cost. According to a February 1994 DFAS memorandum, the decision to choose STARS Field Level was "an intuitive one based on the collective experience of the capitalized Navy field general fund accounting network...." We have found that successful organizations manage information systems projects as investments and use a disciplined process--based on explicit decision criteria and quantifiable measures assessing mission benefits, risks, and cost--to select information system projects. In addition, recent OMB guidance recommends that agencies select information technology projects based on rigorous technical evaluations in conjunction with executive management business knowledge, direction, and priorities.Further, the Congress and the administration recognized the value of treating information system projects as investments by enacting the Information Technology Management Reform Act of 1996 (Public Law 104-106, Division E), which calls for agency heads, under the supervision of the Director of OMB, to design and implement a process for maximizing the value of their information technology acquisitions and assessing and managing the associated risks, including establishing minimum criteria on whether to undertake an investment in information systems. Managers can use the detailed information found in the systems architecture to enhance their analysis of these critical issues. Although STARS was selected without the benefit of an established architecture, such an architecture can provide needed structure and discipline as the STARS enhancement projects move forward. For example, it is unlikely that Navy and DFAS could ever achieve the requirement set forth in the Chief Financial Officers (CFO) Act and OMB Circular A-127 that agencies implement an integrated financial management system without the structure provided by a STARS financial management systems architecture. In order to implement a single, integrated financial management system, Circular A-127 specifies that agencies should plan and manage their financial management systems in a unified manner with common data elements and transaction processing. A critical step in accomplishing this is the development of a financial management systems architecture. According to the Joint Financial Management Improvement Program Framework for Federal Financial Management Systems, a financial management systems architecture provides a blueprint for the logical combination of financial and mixed systems to provide the budgetary and financial management support for program and financial managers. Preparing a financial management system architecture is also consistent with the best practices we found in leading organizations, which established and managed a comprehensive architecture to ensure the integration of mission- critical systems through common standards. In addition, DOD Directive 7740.2, Automated Information System Strategic Planning, states that automated information system strategic processes shall be supported by information architectures that address the information requirements, flows, and system interfaces throughout the organization, including headquarters, major commands, and separate operating agencies. Although the decision to enhance STARS was made over 2 years ago, DFAS Cleveland Center has not yet developed a target STARS system architecture which would include a definition of the systems' expected functions, features, and attributes, including internal and external interfaces, and data flows. An architecture is particularly critical since several of the STARS enhancements are not only to correct existing system problems but are expected to add new functions to STARS (either programmed as part of STARS or through interfaces with other systems) at considerable cost. For example, the STARS Project Office plans to add an accounts payable function to the STARS claimant module and plans to interface STARS with a property system. (STARS does not currently collect property data.) In addition, without an architecture, DFAS is not in a position to reasonably estimate the total cost to enhance STARS. For example, as previously mentioned, actual obligations to enhance STARS to comply with the cash and accounts payable and property and inventory key accounting requirements were already double the total $500,000 budget estimate for fiscal years 1995-1997, even though these projects were still in the planning stage. Further, complex development efforts such as these pose a greater technical risk of failure which can be mitigated by developing a target architecture. The Director of the STARS Project Office agreed that a STARS architecture should be developed. He stated that he plans to develop a STARS architecture that would include identifying the data sources of systems that interface with STARS. Although STARS is a DFAS system, many of the systems that interface with STARS are controlled by Navy. As a result, a STARS architecture cannot be developed without the direct involvement of Navy and the identification of all feeder systems, interfaces, and supportive detailed data elements. Therefore, it is imperative that DFAS and Navy's Assistant Secretary of the Navy (Financial Management and Comptroller) work cooperatively to develop a STARS target architecture to ensure that STARS will meet the needs of its primary user in an effective manner. Our analysis noted instances of incomplete planning and missing or slipped milestones that strongly suggest that STARS enhancements will not meet DOD requirements in the near future. We believe that these problems are symptomatic of the lack of a STARS system architecture. As one of the first steps in any systems development effort, the development of an architecture would guide the enhancement efforts and set the appropriate time frames for the completion of major tasks. One example that highlights STARS architecture and planning issues is DFAS' evaluation of how another system could provide property accounting data to STARS. A June 1996 contractor analysis of this property system found that differences between the STARS and the property system's lines of accounting would have to be resolved before an interface is developed. Moreover, as of July 1, 1996, the property system had been implemented at only one Navy site and only eight additional sites have been scheduled to implement the property system. As a result, even if the interface issues between STARS and the property system were resolved, only a very limited amount of Navy property data could be transmitted. Additionally, a STARS contractor was directed not to work on certain problem areas related to the cash procedures and accounts payable key accounting requirement.According to the STARS Project Office Director, the necessary analysis that the contractor was to complete will be done internally, although no specific plans existed as of early August, 1996. We also found several instances of milestones that were date-driven rather than based on an analysis of the tasks to be completed. DFAS' September 1995 Chief Financial Officers Financial Management 5-Year Plan stated that STARS key accounting requirement deficiencies would be corrected by September 30, 1997. However, the April 18, 1996, STARS Plan of Action and Milestones stated that STARS enhancements would comply with DOD's key accounting requirements by October 1, 1996. The plan included no reason for the accelerated time frame. The STARS Project Office Director stated that the October 1, 1996, milestone for completing the programming, testing, and data conversion for modifying STARS to comply with the key accounting requirements was not derived from an assessment of the scope of these projects. Rather, the implementation date was established to coincide with the Navy's requirement to prepare and have audited financial statements. In addition, we reviewed the April 18, 1996, STARS Plan of Action and Milestones and found that it did not include several key analysis tasks that are needed to successfully implement the DOD standard general ledger and some of the key accounting requirements. The Plan of Action and Milestones also indicates missing and slipped milestones. For example, we found that the plan did not address how one of the STARS modules, which currently has its own general ledger account structure, will be brought into compliance with DOD's standard general ledger; did not address how STARS will be enhanced to comply with the audit trail key accounting requirement which states that all transactions be traceable to individual source records maintained in the system; did not specify how the systems analysis for enhancing STARS field-level and headquarters claimant modules to meet the key accounting requirement for budgetary accounting will be performed and by whom, and did not provide for analyzing and documenting the current environment and identifying needed changes, which is the approach planned in making most key accounting requirement analyses; did not provide for identifying needed changes and solutions to control weaknesses as part of the analysis of the current environment related to the system control function of STARS field-level and headquarters claimant modules; and provided, in several cases, milestones for completing the analyses of the current STARS environment and planning for future STARS enhancements that were dated several months before a contractor was scheduled to provide them. We also found that the lack of an overall plan or architecture contributed to the lack of participation of one of Navy's key systems development offices. Specifically, although Navy's FMSO is the primary Central Design Agency for STARS, it has had a limited role in the STARS enhancement project. For example, in December 1994, the STARS Project Office tasked FMSO with completing, by December 1995, functional descriptions and/or system specifications to enhance STARS to comply with six key accounting requirements, including those related to accounts receivable and accounts payable. On September 14, 1995, FMSO was also tasked with completing, by March 31, 1996, an expanded functional requirement analysis and detailed system specifications for the key accounting requirements related to general ledger control and financial reporting for the STARS claimant module. A project status report dated May 30, 1996, showed that FMSO had not completed these tasks and had (1) spent little time on the analyses required for the accounts receivable, cash procedures and accounts payable, and general ledger and (2) spent no time on the other key accounting requirements analyses. According to FMSO officials, the STARS Project Office Director instructed them to work on other priorities. Additionally, FMSO officials stated that they did not know whether the milestones and costs for modifying the STARS components to comply with the key accounting requirements were reasonable because the scope of the modifications to be made were not known. Our review of STARS Field Level implementation at 18 Navy shore activities disclosed problems related to training and technical support. Specifically, field staff received limited training. Representatives of over half of the activities told us that the STARS Field Level training (1) did not focus on areas specifically related to their daily jobs, (2) was provided by instructors, often contractors, that had STARS Field Level knowledge but did not have a working knowledge of Navy accounting and/or the activity's existing accounting system, and (3) did not include follow-up training in most cases. Further, only about one-half of these activities had received training in using available software that would allow them to use the system more effectively and efficiently. After we brought these training deficiencies to the attention of the Director of the STARS Project Office, he agreed that training needed to be improved. According to the Director, the STARS Project Office has collected information on the field activities' training needs and plans to develop a set of training requirements. However, he stated that additional STARS training will be contingent on available funding. We also found that DFAS provided insufficient STARS Field Level technical support. For example, representatives at six activities cited DFAS' failure to provide a central focal point or people with sufficient knowledge to provide timely answers to questions and responses to problems. The Director of the STARS Project Office agreed that STARS technical support was a concern. He stated that he planned to consider options to address this concern and that better training would also reduce the number of user problems. Because the DFAS STARS enhancement project was not guided by a target systems architecture--a critical step in any systems development effort--DFAS' efforts to enhance STARS and correct numerous shortcomings have not been adequately planned, in conjunction with Navy, the system's primary user, to mitigate technical and economic risks. This is particularly true for planned new STARS functions, such as property, which would entail the greatest risk. As a result, the likelihood that the large investment already made and planned for this project will not yield a reliable, fully integrated Navy general fund accounting system is increased. In addition, STARS implementation has been hampered by limited training and insufficient technical support, which will have to be addressed as the enhancement project moves forward. To increase the likelihood that the STARS enhancement project will result in an efficient, effective, and integrated Navy general fund accounting system, we recommend that the Under Secretary for Defense (Comptroller), in conjunction with the Assistant Secretary of the Navy (Financial Management and Comptroller), expeditiously develop a target STARS architecture. As part of this process, the Comptroller should (1) identify the economic and technical risks associated with the implementation of STARS enhancements, (2) develop a plan to avoid or mitigate these risks, and (3) obtain the Major Automated Information Systems Review Council's assessment and approval. Until this architecture is complete, the Comptroller should cease the funding of enhancements to STARS components that add new functions to STARS. Also, once a target STARS architecture has been developed and approved, we recommend that the Director, DFAS, enhance its Plan of Action and Milestones to ensure that it contains (1) the steps that will have to be taken to achieve this architecture, including key analysis tasks which relate to how STARS modules will meet the key accounting requirements, (2) the parties responsible for performing these steps, and (3) realistic milestones. In addition, to improve STARS Field Level's day-to-day operations at the field level, we recommend that the Director, DFAS, provide additional user training, particularly in functions that allow users to use the system more effectively and efficiently and provide a central focal point for enhanced technical support through such means as establishing a "hot line" staffed by knowledgeable personnel. In providing written comments on a draft of this report, DOD generally agreed with our findings but did not concur with our overall recommendation that it cease funding of STARS enhancements until the target architecture is completed. The full text of DOD's comments is provided in appendix II. DOD's response stated that since 1991, DOD has made substantial functional and technical improvements, compliance improvements, and significant financial reporting refinements to STARS. While DFAS has implemented some STARS improvements, STARS does not yet fully comply with DOD's key accounting requirements or standard general ledger, which is why the enhancement effort was started. With respect to our recommendations, DOD agreed that a STARS target architecture must be completed which includes the identification of source data in the target system for all interfaced systems. However, DOD stated that STARS is a fully operational system with a documented architecture of current interfaces, processes, and procedures except for Navy-owned logistic systems. According to DOD, as new enhancements are added to STARS, they will be added to the target architecture. We disagree that STARS has a current documented architecture. DFAS was unable to provide us with an architecture. In addition, DOD did not concur with our recommendation to stop funding enhancements that add functions to STARS until the target architecture is complete. DOD's comments indicated that STARS enhancements must continue so that the migratory strategy can be completed as soon as possible because (1) Navy's funding has been either curtailed or terminated beginning in fiscal year 1997 in anticipation of completing the enhancements, (2) key accounting provisions are needed in the current system to establish needed controls and meet CFO reporting requirements, and (3) a "learning curve" situation would be created because personnel resources would have to be removed and later returned to the initial staffing level. Continuing to develop STARS enhancements without the benefit of a completed target architecture runs counter to the basic purpose of developing such an architecture--to provide structure and discipline to a system enhancement effort before changes are made to ensure that the best decisions are made in terms of operational effectiveness, flexibility, maintenance, and cost. Although Navy has funds available now to work on the enhancements, to spend them without a proper planning effort has not proven in the past to be an effective use of resources. Without a target architecture, DOD runs a high risk of spending millions of dollars enhancing STARS and implementing a system that still will not meet the CFO Act financial reporting requirements nor be developed in a timely and cost-effective manner. Indeed, as we discussed in the report, the STARS enhancement project has already experienced incomplete planning, missed milestones, and budget overruns. In regard to DOD's point that personnel resources would have to be removed and later returned to the initial staffing level, creating a "learning curve" situation, we believe that any personnel currently assigned to the enhancement efforts could be reassigned to the architecture development effort. This would allow them to use the expertise they have gained from working on the enhancements to efficiently produce an accurate and complete target architecture. Once the architecture is completed, these personnel could then continue to use their expertise on the systems development efforts that DFAS and Navy decide to pursue in light of the architecture results. DOD concurred with our remaining recommendations. In regard to the establishment of a "hot line," DOD's response noted that it had established a "hot line" to address technical system problems at DFAS Cleveland Center and the Defense Mega Center in Mechanicsburg. DOD's response also stated that, by December 31, 1996, DFAS will perform a follow-on review to determine the feasibility of expanding the "hot line" service to DFAS operating locations. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Committee on Armed Services, the House Committee on National Security, the Senate Committee on Governmental Affairs, the House Committee on Government Reform and Oversight, and the House and Senate Committees on Appropriations. We are also sending copies to the Secretary of Defense, the Secretary of the Navy, and the Director of the Office of Management and Budget. We will also make copies available to others on request. The head of a federal agency is required by 31 U.S.C. 720 to submit a written statement on actions taken on these recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight within 60 days of the date of this report. You must also send a written statement to the House and Senate Committees on Appropriations with the agency's first request for appropriations made more than 60 days after the date of this report. If you or your staffs have any questions concerning this report, please contact me at (202) 512-9095. Major contributors to this report are listed in appendix III. The following are GAO's comments on the Department of Defense's letter dated September 26, 1996. 1. See the "Agency Comments and Our Evaluation" section of this report. Pat L. Seaton, Senior Evaluator Julianne H. Hartman, Senior Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO reviewed the Defense Finance and Accounting Service's (DFAS) efforts to reduce the number of Navy accounting systems and to enhance and implement a Navy-wide system to account for general fund operations. GAO found that: (1) DFAS selected the Navy's Standard Accounting and Reporting System (STARS) to serve as the Navy's system for general fund accounting; (2) although believed to be the newest, least deficient, and most advanced of the Navy's 25 existing general fund accounting systems, STARS still has serious shortcomings; (3) savings will accrue as a result of eliminating duplicate and inefficient accounting systems, but could be diminished by the need to provide additional training and technical support; (4) STARS was selected without the benefit of an established architecture, and the lack of a target systems architecture will make it difficult to guide STARS enhancement efforts, estimate enhancement costs, and evaluate alternatives that may be more effective or less expensive; (5) the STARS Plan of Action and Milestones did not include several key analysis tasks and accounting requirements, and several instances of incomplete planning and slipped milestones strongly suggest that STARS enhancements will not meet Department of Defense (DOD) requirements; (6) this piecemeal approach to STARS enhancement could result in costly and time-consuming redesign efforts; and (7) implementation of STARS at field-level activities was not completely successful, since DFAS provided limited training and insufficient technical support.

Mr. Chairman and Members of the Committee: I am pleased to be here today to provide an update on the Census Bureau's dress rehearsal for the 2000 Census and the Bureau's readiness for carrying out the 2000 Decennial Census. The dress rehearsal, currently under way at three sites--Sacramento, CA; 11 counties in the Columbia, SC area; and Menominee County in Wisconsin, including the Menominee American Indian Reservation--is designed to demonstrate major operations, procedures, and questions that are planned for the decennial census. At your request, my statement focuses on how key census-taking operations have performed thus far during the dress rehearsal and the implications that may exist for 2000. When we last testified before Congress in March 1998, we noted that, although the Bureau had made progress in addressing some of the problems that occurred during the 1990 Census, key activities faced continuing challenges. The situation today is much the same. On the one hand, certain census activities, such as staffing the dress rehearsal operations, appear to have gone well. On the other hand, measures of other activities, such as the mail response rate, suggest that the Bureau still faces major obstacles to a cost-effective census. Moreover, while the dress rehearsal activities done thus far have demonstrated the Bureau's general ability to execute the dress rehearsal according to its operational timetable and plan, the important outcome measure--the quality of the data collected--is not yet available. Further, the Bureau's general ability to conduct the dress rehearsal according to its operational plan, while encouraging, is not necessarily a predictor of success in 2000. Because the dress rehearsal was performed at three sites, the capacity of regional and headquarters offices, as well as a number of essential census-taking operations, could not be fully tested under census-like conditions. is using sampling and statistical estimation methods at the Sacramento site, in accordance with its plans for a sampling census. At the South Carolina site, the Bureau's procedures are to follow up on all nonresponding households just as it was to do nationwide in the 1990 Census. At the Menominee dress rehearsal site, the Bureau is to follow up on all nonresponding households, but it is also using sampling and statistical estimation to improve the accuracy of the population count. My comments today are based on our ongoing review of key census-taking operations that could significantly affect the cost and accuracy of the 2000 Census. They include such activities as (1) creating a complete and accurate address list, (2) obtaining a high level of public cooperation through an effective census promotion and outreach effort, (3) staffing census-taking operations with an adequate workforce, (4) processing census data accurately and using technology efficiently and effectively, and (5) carrying out field activities including both nonresponse follow-up and sampling and statistical estimation procedures. To assess these activities, we (1) made several visits to the dress rehearsal sites and the Bureau's data capture center in Jeffersonville, IN; (2) observed key census-taking operations; (3) interviewed Bureau headquarters officials, staff from regional and local census offices, and individual enumerators and their supervisors; and (4) reviewed relevant documents and data the Bureau prepared about these operations. To obtain a local perspective on the dress rehearsal, we conducted in-person and telephone interviews with local officials at the three dress rehearsal sites on their experiences in reviewing address lists, promoting the census, and recruiting and hiring census workers. Because the dress rehearsal is still under way and more comprehensive data on the results of the dress rehearsal are not yet available, our observations today should be considered preliminary and the Bureau's data are subject to change pending further refinements and analysis. One of our long-standing concerns has been the Bureau's ability to build a complete and accurate address list and develop precise maps. Accurate addresses are critical for delivering questionnaires, avoiding unnecessary and expensive follow-up efforts at vacant or nonexistent residences, and establishing a universe of households for sampling and statistical estimation. Precise maps are essential for counting persons at their proper locations--the cornerstone of congressional reapportionment and redistricting. Bureau maps are also used for certain census-taking operations such as nonresponse follow-up that entails following up on households that fail to mail back a census questionnaire. To build its address list, which is known as the Master Address File (MAF), the Bureau initially planned, in part, to (1) use addresses provided by the Postal Service, (2) merge these addresses with the address file the Bureau created during the 1990 Census, (3) conduct limited checks of the accuracy of selected addresses, and (4) send the addresses to local governments and Indian tribes for verification as part of a process called Local Update of Census Addresses. However, as we reported in March 1998, the Bureau concluded in September 1997 that its reliance on postal and 1990 Census addresses to construct its 2000 Census address list would not yield a sufficiently complete and accurate list. The Bureau therefore decided that redesigned procedures were needed in order to generate a MAF for the 2000 Census that, as a whole, was 99 percent complete. Under the revised approach, after local address review, the Bureau plans to verify physically the completeness and accuracy of the address file for the 2000 Census by canvassing neighborhoods across the country. The Bureau expects the new approach will cost an additional $108.7 million. that, based on the 1995 test census results. For the 1995 test census, about 7.7 percent of the census questionnaires were reported to be undeliverable at the Oakland, California test site and 4.5 percent at the Paterson, New Jersey test site. In addition, the census maps appeared to be of uneven quality and usefulness at the dress rehearsal locations. For example, local census officials in Sacramento and South Carolina said that the census maps were inaccurate and contained a variety of errors, such as streets that were incorrectly placed and named. In both locations, problems with census maps led some enumerators to use commercially available maps rather than those supplied by the Bureau. In Menominee, because of the rural nature of the site, maps were particularly important. Houses generally lacked numbered street addresses, and, as a result, enumerators had to locate them, in part, by using maps. However, Bureau officials told us that while the quality of the Menominee maps is improving over the course of the dress rehearsal, the maps still have problems that make it difficult for enumerators to locate houses. As I noted, the Bureau recognized that it needed to revise its approach to building the census address list and to improve the quality of its map products. However, the Bureau's revised approach to developing its address list is not without risk. Although elements of the revised approach have been used and tested in earlier censuses, the Bureau has not used or tested them together, nor in the sequence as presently designed for the 2000 Census. Furthermore, because the Bureau made the decision to change its address list development procedures in September 1997--after major dress rehearsal address list development efforts were already in place--the revised approach was not used during the dress rehearsal. As a result, it will not be known until the 2000 Census whether the Bureau's redesigned procedures will allow it to meet its goal of a 99 percent complete address list. The Bureau is scheduled to begin its 2000 Census field canvassing address list efforts in August. We will continue to monitor the Bureau's efforts to build the census address list. 55 percent response rate that the Bureau expected it would achieve without these efforts. The Bureau always finds that mail response rates during census tests, including the dress rehearsal, are lower than those obtained during an actual decennial census, when public awareness of the census is generally much greater. Table 1 shows the anticipated dress rehearsal mail response rates for the three sites and the rates the Bureau actually achieved. Despite the fact that the Bureau generally met its response rate goals for the dress rehearsal, significant concerns remain about the degree to which the Bureau will be able to meets its mail response goal for 2000. By way of comparison, the 1988 dress rehearsal for the 1990 Census generated mail response rates that ranged from 49 percent to 56 percent for mailout/mailback operations, and 58 percent for update/leave operations.The mail response rate to the 1990 Census was 65 percent--slightly less than the 67 percent response rate that the Bureau hopes for in 2000. More importantly, the Bureau does not currently plan to use in 2000 a key ingredient of the response rate achieved during the dress rehearsal--a second mailing. According to a Bureau official, concerns about public confusion have contributed to the Bureau's decision not to use a second questionnaire mailing in 2000. The preliminary results of the dress rehearsal suggest that the Bureau may need to reconsider its decision. At both the South Carolina and Sacramento sites, the Bureau obtained approximately a 7-percentage point "bump" in response rates by sending a second questionnaire to all households located in mailout/mailback areas. According to a senior Bureau offical, this 7 percentage point increase represents real additions to the count and does not include duplicate submissions from households that already had responded. The Bureau traditionally has found that simply raising awareness of the census is insufficient; through its various outreach and promotion programs, the Bureau must also motivate people to return their questionnaires. The difficulty in doing this was demonstrated during the 1990 Census when the Bureau found that, although about 93 percent of the public was aware of the census, the mail response rate was only 65 percent--10 percentage points lower than the mail response rate to the 1980 Census. Today, I will highlight two of the more important components of the Bureau's efforts to build public awareness and cooperation through its outreach and promotion campaign: paid advertising and partnerships and community outreach. With regard to the Bureau's paid advertising campaign, in October 1997, the Bureau announced it had hired Young & Rubicam, a private advertising agency, to market the census. The advertising campaign is based on the theme "This is your future--don't leave it " and stresses how responding to the census questionnaire benefits one's community. This advertising effort was evident during our visits to the dress rehearsal sites, where we often observed billboards bearing Census 2000 advertising messages, such as "How America Knows What America Needs," "The Future Takes Just a Few Minutes to Complete," and "Pave a Road With These Tools." In convenience stores, we observed signs that told passers-by that " Gives Life to New Healthcare Centers." In Sacramento, we observed outdoor advertising in languages appropriate for the neighborhood. The census was also promoted through broadcast and print media, as well as through less traditional methods such as advertisements on shopping bags at a chain of discount stores. $0.35 million for production and media costs for nontraditional advertising $0.23 million for Menominee media costs; and $1.12 million for Sacramento media costs. The Bureau's use of partnership and community outreach activities and, in particular, its use of Complete Count Committees to help promote the census are other key components of the Bureau's outreach and promotion campaign. According to the Bureau, Complete Count Committees are intended to help the Bureau take the census by, among other activities, planning and implementing a locally-based promotion effort to publicize the importance of the 2000 Census. The committees are to consist of local leaders, such as representatives of government, education, media, community, religious, and businesses organizations. For the dress rehearsal, the Bureau attempted to form committees in Sacramento and Menominee, as well as in the City of Columbia and the 11 surrounding counties participating in the dress rehearsal. The Bureau recommended that the committees could, among other initiatives, form subcommittees to reach specific segments of the population such as senior citizens; sponsor promotional events; obtain commitments from businesses to promote and support the census; provide the Bureau with testing and training space to assist in the employment of enumerators; and work with local media to cover and publicize census activities. This past spring, the Bureau sent a Complete Count Committee handbook, in which the Bureau described its plan for implementing the Complete Count Committee program for the 2000 Census, to the highest elected officials in about 39,000 local and tribal governments. The handbook suggested a structure for organizing a grassroots outreach campaign and provided an outline and schedule of nearly five-dozen activities that governments could undertake not only to promote the census, but also assist the Bureau in its data collection and enumerator recruiting responsibilities as well. important, what the committees can expect from the Bureau. The Bureau expects that the committees will secure their own funding and will rely on the Bureau for only a very limited amount of direct assistance. For example, at the dress rehearsal site in South Carolina, the Bureau hired two partnership specialists to help mobilize local groups. These specialists had to distribute their time and energy among the City of Columbia and the 11 surrounding counties included in the dress rehearsal--a workload that is consistent with what will be expected in 2000 when the Bureau plans to have 320 partnership specialists in place across the nation. Our work at the dress rehearsal sites suggests that the effectiveness of the partnership effort was undermined by an apparent mismatch between the Bureau's expectations of the committees and what the committees could realistically accomplish. In both South Carolina and Menominee, a message we consistently heard from local officials associated with the committees was that they lacked the human and financial resources to promote the census, communication and guidance from the Bureau were insufficient, and Bureau assistance was limited. As a result, Complete Count Committees in some South Carolina counties were never formed, while others became inactive and some local officials expressed confusion and frustration over what was expected. Local outreach and promotion appeared to go more smoothly in Sacramento. This was likely due in part to the fact that there was only one Bureau partnership specialist in Sacramento assisting only one Complete Count Committee for Sacramento. However, as I have noted, for the 2000 Census, workloads for the Bureau partnership specialists closer to those I have described for South Carolina are more likely be the norm. Overall, therefore, the dress rehearsal experience suggests that the Bureau needs to ensure that it has realistic expectations about the contributions that Complete Count Committees will be able to make in promoting the census, building the response rate, and assisting the Bureau. as many as 2.6 million applicants, because for a variety of reasons, most applicants never make it through the employment process. Despite the uncertainties surrounding the Bureau's ability to staff the 2000 Census, staffing the dress rehearsal appears to have gone better than expected thus far. As shown in table 2, one measure of the success of the Bureau's staffing efforts, applicants' acceptance of job offers for nonresponse follow-up (where the demand for employees is greatest), far exceeded the Bureau's expectations. Moreover, managers of the local Census Bureau offices at the dress rehearsal sites we spoke to said that the quality of the newly hired employees' work was typically good. According to Bureau data, at all three dress rehearsal sites, enumerator productivity came very close to the Bureau's goal of 1.5 nonresponse follow-up cases completed per hour and enumerator turnover appears to have been lower than expected. The Bureau attributes its apparently successful dress rehearsal staffing efforts to several factors, including a competitive pay plan and aggressive recruitment. Key features of the Bureau's pay plan include locality-based wages and bonuses for exceeding production targets. In addition, when the Bureau recognized that it was having difficulty recruiting a large enough pool of qualified applicants to fill its needs for nonresponse follow-up and later census operations in South Carolina, the Bureau raised enumerator pay rates from $9.50 per hour to $10.50 per hour effective April 3, 1998. Enumerator pay was $12.50 per hour in Sacramento and $11.25 per hour in Menominee. public libraries. In fact, recruiting literature appeared to be more prevalent than materials that promoted the census itself. Translating data from completed census forms into a useable format represents another challenge for the Bureau. The Bureau plans to have data capture centers process a total of about 1 billion pages of census questionnaires in 99 work days beginning in March 2000. The Bureau plans to take advantage of commercial off-the-shelf hardware and software through its contractor Lockheed Martin, rather than rely on in-house products. During the dress rehearsal, the Bureau is testing the accuracy of the data input by the new scanning equipment and software designed to perform this operation. Bureau officials reported that this operation met all high-priority processing deadlines, despite experiencing system bugs that will need to be addressed before 2000. The purpose of the dress rehearsal was to test and debug the system in an operational environment in advance of Census 2000. However, additional load testing is still necessary because the system could not be run during the rehearsal at performance levels that will be needed in 2000. During the dress rehearsal, the scanning equipment used to electronically record responses off census forms experienced system crashes due to flaws in the software. To deal with this problem, the Bureau was forced to cut back the number of scanners in operation at any one time. According to Bureau officials, the software subcontractor, is resolving this and other problems through intensive testing, and will have a new version of its software available for further testing in late August. According to Bureau officials, another problem related to scanning is the frequency at which the scanners needed to be cleaned of accumulated dust. Initially, the Bureau had planned to clean the machines every 2 hours. However, dust accumulated faster than expected, which necessitated a 5-minute cleaning after each 15 minutes of use. Bureau officials said that poor paper quality appears to be one factor that led to the accumulation of dust. The Bureau and the Government Printing Office are studying the problem. computer-generated images--to test the performance of its scanning equipment. Bureau officials believe that sufficient time remains to complete more testing, incorporate lessons learned from the dress rehearsal, and make technology enhancements before Census 2000. Of the Bureau's numerous field operations, two of the largest and most logistically challenging under the Bureau's current design are nonresponse follow-up and a procedure called Integrated Coverage Measurement (ICM), a survey in which residents in a sample of blocks are interviewed. ICM and enumeration data are used in dual system estimation to adjust for coverage errors in the enumeration. As currently planned, the Bureau is to reduce its nonresponse follow-up workload for the 2000 Census by sampling nonresponding households. By using a sample-based nonresponse follow-up, the Bureau would reduce the time necessary to complete this activity. This in turn would expedite the beginning of ICM data collection, improving the Bureau's ability to meet the target date for delivery of census data at the end of December. In addition, compressing the nonresponse follow-up data collection period could shorten the average time between census day and visits to households, thereby reducing the likelihood of enumeration errors caused by households that move between census day and nonresponse follow-up. The Bureau plans to conduct a nationwide ICM. However, as noted earlier, for the dress rehearsal, the Bureau only sampled for nonresponse and is conducting the ICM in Sacramento. In South Carolina, the Bureau procedures are to follow up on all nonresponding households and do a coverage evaluation operation, just as it did nationally in the 1990 Census. At the Menominee site, the Bureau is to follow up on all nonresponding households and additionally, is using the ICM. completed on time at the Sacramento and Menominee sites, and about a week ahead of schedule in South Carolina. We observed that ICM operations began as scheduled in Sacramento. Major ICM field operations are scheduled to last until late August 1998. The Bureau's procedures called for it to take additional steps to prevent contamination of the ICM data. According to Bureau officials, these included efforts to separate the management and implementation of the ICM operation from the nonresponse follow-up operation. For example, the ICM operation was administered entirely by the Bureau's Seattle Regional Office rather than the local census office in Sacramento. Additionally, nonresponse follow-up enumerators were not told which blocks were included in the ICM, and ICM enumerators were told that they could not tell anyone which blocks had been assigned to them. The quality of the dress rehearsal data, as measured by the extent to which it is complete and accurate, is still to be determined. With the ICM still in progress, the full results of the ICM will not be known for several months. Moreover, a key question for which information is not yet available is the degree to which the Bureau had to rely on proxy responses from neighbors, letter carriers, and others to complete its nonresponse workload in a timely manner. As part of our ongoing work, we will review the quality of the data collected during the ICM and nonresponse follow-up operations, the Bureau's procedures for maintaining the independence of enumeration and ICM data, and, more generally, the extent to which the Bureau was able to implement its field operations as planned. In summary, Mr. Chairman, within the constraints and limitations imposed by the dress rehearsal setting, the Bureau to date has shown a general ability to implement the dress rehearsal at the three sites according to its operational timetable and plan. The Bureau has also shown an ability to adapt to changing requirements as demonstrated by such actions as redesigning its address list development procedures to produce a more accurate and complete list and by increasing wage rates in South Carolina to improve recruiting. the population count and the extent to which proxy data are used--are not yet available. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions you or Members of the Committee 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 the Bureau of the Census' dress rehearsal for the 2000 Census and the Bureau's readiness for carrying out the 2000 Decennial Census, focusing on how key census-taking operations have performed thus far during the dress rehearsal and the implications that may exist for 2000. GAO noted that: (1) when it last testified before Congress in March 1998, GAO noted that although the Census Bureau had made progress in addressing some of the problems that occurred during the 1990 Census, key decennial census activities faced continuing challenges; (2) the census dress rehearsal, under way at three sites, is the last remaining field test before the decennial census is administered; (3) within the constraints and limitations imposed by the dress rehearsal setting, the Bureau to date has shown a general ability to implement the dress rehearsal at the three locations according to its operational timetable and plan; (4) certain census activities, such as staffing the dress rehearsal operations and completing field operations on schedule, appear to have gone well; (5) however, the dress rehearsal experiences also have underscored the fact that the Bureau still faces major obstacles to a cost-effective census; (6) for example, mail response rates remain problematic, and local partnerships had limited success; (7) further, the Bureau's general ability to conduct the dress rehearsal according to its operational plan, while encouraging, is not necessarily a predictor of success in 2000; (8) because the dress rehearsal was performed at three sites, the capacity of regional and headquarters offices, as well as a number of essential census-taking operations, could not be fully tested under census-like conditions; and (9) the most important outcome measure--the quality of the census data collected--is not yet available.

The Army has around 97,000 "medium tactical wheeled vehicles" (about 57,000 5-ton trucks and 41,000 2-1/2-ton trucks) in its fleet. The M939 accounts for more than half its 5-ton trucks. The truck is used to carry personnel or pull equipment under all weather and road conditions, including rain, snow, ice, unpaved roads, sand, and mud (see fig. 1). The active Army uses formal and informal programs to train 5-ton truck drivers. The formal program is aimed at military personnel whose official primary occupation will be "88M Motor Transport Operator"--or truck driver. The program lasts 6 weeks and is taught in schools at Fort Leonard Wood, Missouri, and Fort Bliss, Texas. Fort Leonard Wood trains about 90 percent of all 88M students. Fort Bliss for the most part trains the "overflow" of students that Fort Leonard Wood cannot accommodate. The formal instruction program calls for about 1 week in the classroom and 5 weeks of hands-on training. Students who complete the program do not immediately receive a license to drive a 5-ton truck; they are licensed at their next duty station after undergoing additional training and testing there. The Army Transportation Center and School at Fort Eustis, Virginia, is responsible for the content of the instruction program used by the formal training schools. It aligns under the Army Training and Doctrine Command at Ft. Monroe, Virginia. According to Army officials, informal programs are taught at installations or units that need occasional truck drivers but are not authorized any or enough 88M drivers to handle their needs. Occasional drivers do not drive trucks as their primary occupation; they do so on a part-time or as-needed basis. Informal programs are usually 40 to 120 hours long and combine classroom and driving time. Graduates are not automatically licensed and must usually meet additional driving and testing requirements by their units. Occasional drivers receive the same license as 88M drivers and, accordingly, may be required to perform the same driving maneuvers. The Army Reserve trains both Reserve and National Guard 88M drivers using a two-part program that contains the same instructional material as the formal program. The first part (81 hours) is conducted at the soldier's home station during weekend drills. The second part (120 hours) is usually conducted at a Reserve training center during a 2-week active duty session. Like active Army truck drivers, program graduates must undergo additional training and testing by their units before being licensed. Graduates of the Army's truck driver training programs are not skilled enough to safely handle 5-ton trucks in some situations for which they should have received training. This is because of instructor shortages and limited training conditions. Graduates are either partially trained or untrained in some skills found in the instruction program. In addition, the schools do not teach driving skills that are essential to performing the 5-ton truck's primary mission. One of the Army's two formal truck driver training schools, the school at Fort Leonard Wood, Missouri, operates with sizable instructor shortages. Because of this Fort Leonard Wood operates at a higher student-instructor ratio than called for in the instruction program. In fiscal year 2000, the Fort Leonard Wood facility trained nearly 90 percent of the Army's 88M drivers in spite of these shortages. Instructors at the informal and Reserve programs also said that their programs suffer from instructor shortages. During the first 9 months of 2000, Fort Leonard Wood operated with an average of 53 percent of its authorized instructors on-hand to teach the program. The main reasons were 1) fewer personnel were assigned to teach than were authorized and 2) even fewer were available (on-hand) than were assigned due to other commitments (such as bus driving, funeral and parade duty, leave, etc.). Authorized refers to the number of instructors the Army determines are needed to teach a program; assigned refers to the number of instructors the Army allocates to teach a program; and on-hand refers to the number of instructors that are present and teaching a program. Figure 2 shows the number of instructors authorized, assigned, and on-hand at Fort Leonard Wood in the first 9 months of 2000, when on average about 45 of 84 authorized instructors were available. Assuming that (1) the Army continues assigning instructors at about 85 percent of authorized levels and that (2) the number of instructors on-hand remains constant at about 53 percent of those assigned, the Army would have to increase its present authorized level of instructors from 84 to158, an increase of 88 percent, in order to have a full complement on-hand. The formal instruction program calls for a 6-to-1 student-instructor ratio-- and Fort Leonard Wood is structured to operate at this ratio when staffed at 100 percent of its authorized level. In the first 9 months of 2000, our review showed that Fort Leonard Wood operated overall at a higher ratio of about 9 to 1. Nonetheless, training officials stated that the school has been conducting the behind-the-wheel (hands-on) training portion of the program at the 6-to-1 ratio the instruction program calls for. This means one instructor overseeing 3 trucks with two students per truck. However, Army regulations stipulate a 1-to-1 truck-instructor ratio when a student driver is behind the wheel. In December 1998, Fort Leonard Wood requested a waiver to allow the 6-to-1 ratio when students were driving trucks. While the request has yet to be officially approved, school officials claim that if required to maintain the 1-to-1 ratio, each student might drive as little as 30 miles during the entire course, instead of the present target of about 100 miles per student on average. Instructor shortages affect the quantity and quality of training. Students do not get sufficient hands-on driving experience and are not trained in all the skills required by the instruction program. Program officials at Fort Leonard Wood said that at times, instructors could fully teach only about three-quarters of the instruction program's required tasks. For example, in the second half of fiscal year 1999 two training modules--driving off-road and basic vehicle control--were often carried out only in part or demonstrated but not practiced. These two modules account for almost 93 percent of the 85.5 hours students are supposed to spend driving trucks. Because of instructor shortages during these two quarters, the average number of miles driven by each student at Fort Leonard Wood dropped from nearly 100 to less than 50. In addition, hands-on training is presently limited to mostly driving in controlled settings only. Students drive in convoys on unpaved but graded and regularly maintained training routes at no more than 25 mph - receiving almost no training in how to drive on public highways or in suburban settings. One group of trainers stated that with more instructors, they could take students on some realistic training rather than the "follow-the- leader" driving students now receive. Students are also not being taught all the tasks that 5-ton-truck drivers are expected to perform. Training officials at the two formal programs stated they thought drivers should be trained in hauling loads or pulling equipment--the primary mission of 5-ton trucks. While the instruction program calls for 20 percent of all vehicles to operate with a load in the cargo area, this is not being done, according to training officials, because of logistical problems that make it difficult to train this skill. Pulling equipment is not taught because it is not specified in the instruction program. Therefore, students must learn these essential skills after graduation and rotation to their next duty stations. Neither the Marine Corps, which co-trains its 5-ton truck drivers with the Army at Fort Leonard Wood, nor the smaller Fort Bliss school, which mostly trains the overflow from Fort Leonard Wood, experience as severe instructor shortages as Fort Leonard Wood. Thus, neither encounters problems teaching the instruction program in its entirety. According to Marine Corps training officials, its detachment is authorized 76 instructors, and in the first 9 months of 2000, averaged having 70 instructors assigned and 65 on-hand (93 percent). During that same period of time, Fort Bliss training officials stated its school was authorized 17 instructors but actually had 18 assigned and on-hand (106 percent). During the first 9 months of 2000, the Marine Corps program averaged a higher percentage of its assigned instructors on-hand than the Fort Leonard Wood Army program - 93 percent versus 63 percent (see fig. 3). This, according to Marine Corps training officials, was mostly because their instructors did not have other commitments or assignments as did Army instructors. Also, the average class size for the Marine Corps was much smaller than that for the Army (44 versus 70 students), and they had more instructors available to teach (65 on average versus the Army's 45). Because of the smaller class size and larger number of on-hand instructors, the Marine Corps can staff each truck at the 1-to-1 instructor- to-truck ratio regulations call for. This, according to them, allows students to gain driving skills in uncontrolled settings such as driving off-post, on public highways, and in various urban settings. On the other hand, the Fort Bliss school actually had a surplus of instructors: it had 106 percent of its assigned instructors on-hand (see fig. 3). According to program officials, their instructors also did not have other commitments and assignments as did Fort Leonard Wood Army instructors. During fiscal year 2000, Fort Bliss also graduated fewer students, utilized less of its overall available classroom capacity, averaged smaller class sizes, and conducted about one-third the classes that Fort Leonard Wood conducted (see fig. 4). Student Opinions Show Varied Satisfaction With Training Received We surveyed 139 students at the two formal school programs, 72 students at 10 informal programs, and 98 students at 1 Army Reserve training program. We asked them to rate their satisfaction with the type of training there were receiving in various driving techniques and conditions. As table 1 shows, students at Fort Bliss felt better about the training they received in many driving skills than their counterparts at Fort Leonard Wood. Students in the Reserve program were the most satisfied overall with the training they received, while students in the informal programs were generally the least satisfied. According to the instruction program, the majority of driving training time (about 65 hours) should be dedicated to driving on and off roads through woods, streams, brush, sand, mud, snow, ice, rocky terrain, ditches, gullies, and ravines. However, we found that neither of the two formal schools provides all these conditions in its training routes. Students at Fort Bliss are well trained to drive in sand because the school's training routes have sand. But the school seldom sees snow or ice because these conditions seldom occur there. And the school's training routes we observed were for the most part flat and unchallenging. One route we drove offered few or no opportunities to drive through woods and brush, over rocky terrain, or through gullies and ravines. The problem, according to school officials, is that the land the training routes are on is too flat and lacking in undergrowth. Training officials also told us that money constraints and the fact that Fort Bliss' mission is to handle the overflow of students from Fort Leonard Wood impede the development of more challenging driving routes. Training routes at Fort Leonard Wood also offered limited obstacles or challenges. We drove what school officials said was the most difficult training route and found that it did go through some woods and rocky terrain and over some hills and inclines. However, it contained no sand and engineering units maintained the surface the trucks drove on by routinely smoothing out bumps, ruts, and other obstacles. When adverse weather, dangerous road conditions, or other problems arise, the formal schools hesitate to allow students to drive because of safety concerns. However, the Army has determined that simulators can be used to teach some driving skills that cannot be taught in high risk driving conditions because of the dangers involved. Because of safety concerns, the Fort Leonard Wood command has issued an oral directive prohibiting students from driving off the installation. As a result, students do not learn to drive trucks in traffic at highway speeds or in urban settings. Furthermore, the training command frequently cancels hands-on driver training in the presence of ice, snow, or fog because it believes the risk of student drivers having a serious accident outweighs the benefits of the driving experience. Not training under adverse weather and road conditions limits the ability of drivers to handle a truck safely in these situations when they rotate to their new duty stations and begin to drive. In May 2000 the Analysis Center at the Army Training and Doctrine Command completed a study that concluded, among other things, that students graduating from the formal schools were only about 15-percent proficient in skills needed to drive in fog, ice, or snow and 27-percent proficient in skills needed to drive on sand. The study concluded that simulators could overcome these and other shortcomings in driver training. It reviewed 31 critical driving tasks taught at the formal schools and concluded that simulators could help students obtain higher proficiency levels in as many as 22 of them. The study also concluded that simulators might help reduce the potential for accidents both during training and--most importantly--during the first year after training by increasing driving proficiency in fog, snow, or ice. Formal training program personnel agreed, stating that they cannot teach students to drive under some of the more common hazardous conditionsbecause it is too dangerous. Other Army officials also said that simulators, especially more advanced ones, can recreate such situations and give students a sense of driving under these conditions without putting lives at risk. Training personnel at both formal schools, Army Transportation School officials, as well as the simulator study itself strongly cautioned, however, that simulators should not replace actual behind-the-wheel driving time. The private sector uses simulators in its truck driving schools and considers them very useful. Officials at two commercial driving schools stated that their simulators help students learn to drive under various high-risk driving and weather conditions, including braking with a load on steep inclines or on wet and icy surfaces. Some safety rules relating to M939 trucks are not being communicated effectively. Moreover, many informal training programs seem to be unaware of available assistance from the Army Transportation School. Better communication is key to improving the flow of this type of information. The M939 series trucks are not supposed to be driven over 40 mph, even under ideal conditions. However, we found that some licensed drivers, students, instructors, and supervisors alike were either unaware of the speed limit, had forgotten about it, or did not know this restriction is still in effect for M939s without anti-lock brake systems. Two-thirds of licensed drivers we interviewed, as well as about one-third of student drivers in formal training programs and over two-thirds of student drivers in informal training programs, did not know or could not recall the 40-mph limit. And none in a group we interviewed from a recently graduated formal program class were able to tell us the correct maximum speed limit. Although nearly all the 65 formal and Reserve program instructors we interviewed could state the correct speed limit, only about two-thirds of informal program instructors and driver supervisors could do so. By contrast, all of the nearly 100 students we interviewed at the Army Reserve training program knew of the speed limit, and for a simple reason: all the M939 trucks used for training had a dashboard sticker to remind the driver of the speed limit. (See fig. 5.) There also appears to be a communication problem between informal program instructors and the Army Transportation School. Although the instructors believe their training programs are good ones, they also stated they do not have enough time to focus on improving and upgrading these programs and would like more input from "knowledgeable personnel," such as those at the Fort Eustis Transportation School who developed the formal training program. Some said they could have avoided difficulties they encountered in developing a high-quality informal program if such expertise had been available. Many suggested that standardized, Army- wide training packages tailored for each type of vehicle would be an efficient and economical way of training informal drivers. However, none of the instructors we interviewed knew that the Transportation School has a program available designed specifically for informal training of M939 drivers. In November 1999, the Transportation School distributed a CD-ROM driver training program, which includes lessons on driving and performing operator maintenance on the M939 to Army standards. Transportation School officials stated that the program was sent to around 1,800 different Army locations (according to the number and location of M939 trucks) and is also available through the Army's web site. While facing similar instructor shortages and limited driving conditions, the informal and Reserve training programs we reviewed must also try to train drivers in a shorter time than the formal programs. The reserves also have problems with their equipment. The 10 informal programs we reviewed ranged between 40 and 120 hours (compared to 6 weeks for the formal program). As a result, instructors focus mostly on teaching the basics (driving on surfaced roads, backing up on flat surfaces, and performing some required maintenance and service). Instructors teach more difficult skills only if time and circumstances allow. Several instructors questioned how their 40 to 80 hour programs could possibly teach as much as was taught in the 6-week formal course. The reserves have problems not only with instructor shortages, but also with training equipment. Reserve officials said their 5-ton truck driver training programs are generally understaffed because of a lack of available senior noncommissioned officers to teach. Also, because programs are usually not authorized a fleet of trucks exclusively for training, units must borrow trucks from the installation where training is taking place or from other nearby Army installations. The training unit is responsible for picking up and returning the trucks or for paying to have the trucks delivered and returned. They also pay an established usage fee to the units that lend the trucks. This is costly, especially if a borrowed vehicle needs repair work before it can pass the required safety inspection so that it can be used for training. Reserve training officials told us that this happens frequently and adversely impacts training. Army regulations require that truck drivers undergo a so-called "check ride" and "sustainment training" once a year (once every 2 years for the Army Reserve and National Guard). Performing these procedures-which are aimed at identifying and correcting poor driving habits, maintaining high driving proficiency levels, and ensuring safe driving-is the responsibility of the driver's assigned unit. Both procedures must also be documented in personnel driving records. However, we found that they are either not being performed or are not being recorded as required. We reviewed over 450 driving records and found that over 80 percent did not contain an entry indicating a check ride had been performed every year and for each type of vehicle in which the driver was licensed to drive. Eighty-five percent of records also did not have an entry documenting that sustainment training had been given annually as required. Seventy percent of the drivers we interviewed (both 88M drivers and occasional drivers) stated they either did not know what a check ride was or had not been given one annually. Three-quarters of the drivers we interviewed also said they had not attended an annual sustainment training course. Supervisors are responsible for administering check rides to assess a driver's capabilities and overall driving habits. According to Army officials, unit commanders and supervisors must also develop and implement annual sustainment training programs, in part, on the basis of the results of check rides. A number of supervisors told us that they do not always conduct formal check rides because of personnel shortages and high operating tempo; rather, they try to assess drivers' skills and give correctional guidance--a sort of "informal" check ride--whenever they ride with a driver. None of them knew about the Transportation School's informal driver training program, which includes guidelines for sustainment training. The Army Safety Center maintains a ground accident database that has been used in the past to identify accident anomalies that in turn led to safety improvements involving the operation of M939 series 5-ton trucks. The database, however, is not complete because not all data fields in accident investigation reports are always filled in. The database is also not being analyzed on a regular basis to identify trends or recurring problems. One of the purposes of the ground database is to provide demographic information that can be used for statistical comparisons. The Army Safety Center did so in 1998 when it compared accident rates of different Army trucks and found that the M939 series trucks had a much higher serious accident rate than other similar trucks. In other, earlier studies, the Center reviewed M939 accident data and found a series of recurring accident conditions. On the basis of these studies, the Army Tank-automotive and Armaments Command in December 1992 issued the first of several Army-wide messages warning of these problems and imposing the 40-mph speed limit on the M939. Also on the basis of these studies, the Command conducted additional studies on the M939, which in turn led to an estimated $122.4 million in recommended design modifications. We analyzed nearly 400 M939 accident reports dating from 1988 through 1999 contained in the Safety Center's database and found that four of the 36 data fields of information we requested for our analysis were often not filled in. Safety Center personnel acknowledged that the missing data could weaken any conclusions reached using these fields. Two fields - Was the Driver Licensed at the Time of the Accident and What was the Driver's Total Accumulated Army Motor Vehicle Mileage - contained no information 45 and 50 percent of the time respectively, and because of this, could not be included in the analyses we performed. Two other Fields -What Was the Mistake Made and Why Was the Mistake Made-were also often left blank. Our analysis also revealed patterns that, if studied further, might be useful in improving training programs. For example, many of the reported accidents occurred on wet or slippery surfaces or when the truck was hauling cargo or pulling equipment. Furthermore, three-quarters of accidents involved occasional drivers (those trained at informal schools). Some patterns we identified are illustrated in figure 6. Instructor shortages are affecting the quality and quantity of truck driver training, especially at Fort Leonard Wood. The end result is that student drivers are not fully trained in all aspects of the instruction program when they graduate. This places an additional burden on the drivers' assigned units, which must further train these drivers, and on supervisors, who must be more vigilant in identifying drivers' shortcomings. If formal schools had enough instructors on-hand, they would presumably be able to teach the entire instruction program. The student imbalance between the schools at Fort Leonard Wood, which is understaffed, and Fort Bliss, which has smaller class sizes and a lower student-instructor ratio, creates an ineffective use of resources. This imbalance places an unnecessarily heavy burden on Fort Leonard Wood. If the annual student load were more equally distributed between the two schools, student graduates from Fort Leonard Wood might receive more complete training. The formal schools are not adhering to the instruction program, which calls for some training with trucks carrying cargo. Further, no training is provided in how to pull equipment. With a high percentage of M939 accidents taking place under these two conditions, the formal schools should provide some training in these areas. Similarly, students are not being trained to drive under different weather and surface conditions. While it is understandable why formal schools hesitate to take the risk of having students drive under hazardous or high- risk conditions, it is also necessary that students receive such training. An army study concluded that simulators can provide an effective means of safely training drivers in high-risk weather and different road-surface situations. Because annual check rides and sustainment training are not always being performed, unsafe driving habits may go undetected. Further, if corrective oversight or training is not recorded, unit commanders and supervisors cannot know which drivers need attention. Although performing and recording check rides and sustainment training may be time-consuming, these procedures can save lives. Some important safety information, such as M939 speed limit restrictions, is not always being passed on to or remembered by drivers, supervisors, and trainers. Using inexpensive devices, such as dashboard stickers, is a simple way to remind these personnel of the speed restrictions. The Safety Center's accident database could be used to identify trends that may show the need for greater training emphasis in certain driving maneuvers. A periodic analysis of the database could assist school officials, instructors, and supervisors in adjusting instruction programs or mentoring drivers. However, such analysis would prove more useful if all fields of information contained in the database were complete. We recommend that the Secretary of the Army direct the Commander of the Training and Doctrine Command to review and modify, as needed, instructor levels for the formal training programs to ensure that the programs are adequately staffed to teach the anticipated class size; balance the student load between the two schools by bringing the Fort Bliss school up to fuller capacity and/or increasing the number of classes annually taught there, thereby reducing the student load and associated problems created by such at Fort Leonard Wood; enforce the instruction program used by the two formal schools to ensure that students receive hands-on training in driving trucks loaded with cargo and also modify the program to include driving when pulling equipment-- two essential skills in performing the primary mission of the 5-ton tactical fleet; and consider using simulators at the two formal schools to safely teach known training shortfalls such as driving under hazardous conditions, with the understanding that simulators not be used to replace hands-on driving conducted under less risky conditions. We also recommend that the Secretary of the Army issue instructions to all applicable major army commands to require adherence to Army regulations on check rides and sustainment training of licensed truck drivers and require that warning stickers indicating speed restrictions be prominently displayed in the cabs of all M939 trucks not equipped with anti-skid brake systems. We further recommend that the Secretary of the Army direct the Commander of the Army Safety Center to ensure that all information fields in accident reports are properly filled in periodically review accident data for the presence of trends or anomalies for the purposes of informing trainers and supervisors of any information that may help them perform their duties or help improve safety. In oral comments on a draft of this report, Department of Defense officials concurred with all our recommendations. We are providing copies of this report to the Honorable Donald H. Rumsfeld, Secretary of Defense; the Honorable Joseph W. Westphal, Ph.D., Acting Secretary of the Army; and interested congressional committees. Copies will also be made available to other interested parties upon request. If you or your staff have questions concerning the report, please call me at (202) 512-5559. Our scope and methodology is explained in appendix I. GAO contacts and staff acknowledgments to this report are listed in appendix II. Our objectives were to (1) evaluate the capacity of the Army's 5-ton truck driver training programs to fully train drivers, (2) determine whether oversight procedures and processes for these drivers are being followed, and (3) determine whether and how the Army uses accident data to improve training, supervision, and safety. To evaluate the capacity of the Army's 5-ton truck driver training programs to fully train drivers, we reviewed applicable training programs in terms of compliance and completeness at both of the Army's formal schools (Fort Leonard Wood and Fort Bliss) and 10 different informal training facilities located at 4 installations. We also reviewed the training provided at one of eight Army Reserve training centers. Reserve training centers all use the same Program of Instruction. We reviewed these programs for compliance with existing regulations and standard operating procedures established by the various training components. To assess the completeness of training, we made observations and collected documentation relating to the actual training being conducted and compared that documentation to the training specified in each training schools/program's instruction program and also in relation to the primary mission of the 5-ton truck fleet. We also discussed these issues with officials responsible for designing the training programs, training command personnel, driving instructors, and student drivers to gain their perspectives. Lastly we compared the formal Marine Corps 5-ton training program and two commercial sector training programs to the Army's formal program to identify any training techniques and/or devices that might benefit 5-ton training curriculums. To determine whether oversight procedures and processes for these drivers are being followed, we documented the duties of supervisors of medium tactical vehicles as found in Department of Defense and Army guidance, instructions, procedures, and regulations. Through observations and discussions with nearly 80 driver supervisors and nearly 200 truck drivers stationed at 12 different Army and National Guard units, we then assessed the degree to which they accomplished these responsibilities or followed required documentary procedures. In addition, at the units visited we collected over 450 historical driving records for truck operators and reviewed them for required annual supervisory annotations relating to check ride and sustainment training specified in Army regulations. To ensure we collected information representative of the universe of existing 5-ton truck informal training programs and the administering of driver supervision responsibilities, we selected--for review and observation purposes--four installations aligned under the U.S. Army Forces Command. This major command, according to the Army Materiel Command's Logistic Support Activity, controls 94 percent of the active army's M939 series 5-ton trucks in the continental United States. Because Army automated record-keeping systems cannot provide 5-ton truck densities or locations below the major command level, we engaged the services of Army Internal Review personnel to assist us. Within the four installations, we requested that Internal Review personnel set up meetings with subordinate commands conducting the majority of 5-ton truck driver training and with commands maintaining the largest concentrations of 5- ton trucks and/or drivers. In discussing accident data with Army Safety Center personnel, we learned of Army notifications currently in effect and relevant to the safe handling of 5-ton trucks that resulted from past analyses performed on the Center's ground accident database. We reviewed these notifications, including existing Army regulations and procedures pertaining to how this information is to be disseminated Army-wide. We then queried 5-ton truck driver-trainers, student drivers, supervisors, and licensed drivers to gain an understanding of how knowledgeable they were of restrictions imposed by these notifications. To determine whether and how the Army uses accident data to improve training, supervision, and safety, we interviewed safety center personnel and obtained and reviewed past studies and analyses conducted by the Center. In addition to identifying data that could be useful in improving training or supervision, we analyzed 12 years of demographic accident information pertaining to M939 series 5-ton tactical cargo trucks. Our analysis of this information, compiled for us by Army Safety Center personnel, included Class A, B, and C accidents occurring from January 1988 through December 1999 and for which some degree of fault was attributable to an M939 driver. This truck series accounts for about one- half of the Army's 5-ton fleet and is the series specifically mentioned in the request letter. We focused on identifying the presence of any demographic anomalies or commonality factors that, when compiled statistically, might prove beneficial to trainers, supervisors, or the safer operation of M939 series trucks. We also discussed the results of our accident analysis with Army Safety Center officials, trainers, and supervisors to obtain their input and/or concurrence. We performed our work from May 1999 through July 2000 in accordance with generally accepted government auditing standards. In addition to those named above, Aisha A.Mahmood, Stefano Petrucci, William R. Simerl, Lorelei St. James, and Gerald L. Winterlin made key contributions to this report.

Instructor shortages are affecting the quality and quantity of Army truck driver training. Fort Leonard Wood, which trains about 90 percent of truck drivers, is especially affected by the instructor shortage. The result is that student drivers are not fully trained in all aspects of the instruction program when they graduate. If formal schools had enough instructors, they would presumably be able to teach the entire instruction program. The student imbalance between the schools at Fort Leonard Wood and Fort Bliss creates an ineffective use of resources. If the annual student load were more equally distributed between the two schools, student graduates from Fort Leonard Wood might receive more complete training. The formal schools are not adhering to the instruction program, which calls for some training with trucks carrying cargo. Furthermore, no training is provided on how to pull equipment. Similarly, students are not being trained to drive under different weather and surface conditions. Because annual check rides and sustainment are not always being performed, unsafe driving habits may go undetected. Although performing and recording check rides and sustainment may be time-consuming, these procedures can save lives. The Army Safety Center's accident database could be used to identify trends that may show the need for greater training emphasis in certain driving maneuvers. A periodic analysis of the database could assist school officials, instructors, and supervisors to adjust instruction programs or mentor drivers. However, such analysis would be more useful if information in the database were complete.

Since 1994, when the Dietary Supplement Health and Education Act (DSHEA) was enacted, sales of dietary supplements have soared. In 2000, total U.S. sales for herbal and specialty supplements reached $5.8 billion. Surveys have found that many older Americans use these supplements to maintain overall health, increase energy, improve memory, and prevent and treat serious illness, as well as to slow the aging process, among other purposes. Products frequently used by seniors to address aging concerns include herbal supplements such as evening primrose, ginkgo biloba, ginseng, kava kava, saw palmetto, St. John's wort, and valerian, and specialty supplements such as chondroitin, coenzyme Q10, dehydroepiandrosterone (DHEA), glucosamine, melatonin, omega-3 fatty acids (fish oil), shark cartilage, and soy proteins. (See the appendix for details regarding these substances.) FDA, FTC, and state government agencies all have oversight responsibility for products marketed as anti-aging therapies. In general, the law permits FDA to remove from the market products under its regulatory authority that are deemed dangerous or illegally marketed. FDA's regulation of dietary supplements is governed by the Federal Food, Drug, and Cosmetic Act as amended by DSHEA in 1994. DSHEA does not require manufacturers of dietary supplements to demonstrate either safety or efficacy to FDA prior to marketing them. However, if FDA subsequently determines that a dietary supplement is unsafe, the agency can ask a court to halt its sale. For dietary supplements, the Secretary of the Department of Health and Human Services may declare the existence of an imminent hazard from a dietary supplement, after which the Secretary must initiate an administrative hearing to determine the matter, which may then be reviewed in court. DSHEA does not require dietary supplement manufacturers to register with FDA, or to identify to FDA the products they manufacture, and dietary supplement manufacturers are not required to provide the adverse event reports they receive to FDA. However, FDA does regulate nutritional and health claims made in conjunction with dietary supplements. FTC has responsibility for ensuring that advertising for anti-aging health products and dietary supplements is truthful and can be substantiated. FTC can ask companies to remove misleading or unsubstantiated claims from their advertising, and it can seek monetary redress for conduct injurious to consumers in appropriate cases. FTC published an advertising guide for the dietary supplements industry in November 1998, which reminded the industry that advertising must be truthful and that objective product claims must be substantiated. State agencies can take action against firms that fraudulently market anti-aging and other health products. Health risks associated with dietary supplements come in a number of forms. First, some dietary supplements have been associated with adverse effects, some of which can be serious. Second, individuals with certain underlying medical conditions should avoid some dietary supplements. Third, some frequently used dietary supplements can have dangerous interactions with prescription or over-the-counter drugs that are being taken concurrently. Fourth, dietary supplements may contain harmful contaminants. Finally, dietary supplements may contain more active ingredient than indicated on the product label. Research suggests that among healthy adults, most dietary supplements, when taken alone, have been associated with only rare and minor adverse effects. Other supplements are associated with more serious adverse effects. For example, research suggests that DHEA may increase the risk of breast, prostate, and endometrial cancer, and shark cartilage has been associated with thyroid hormone toxicity. Adverse event reports can also signal possible risks from dietary supplements. FDA publishes lists of dietary supplements for which evidence of harm exists. In 1998, the agency published a guide to dietary supplements, which included a list of supplements associated with illnesses and injuries. FDA has also issued warnings and alerts for dietary supplements and posted them to its Web site. For example, the most recent alert reiterated the agency's concern, first noted in 1993, that the herbal product comfrey represents a serious safety risk to consumers from liver toxicity. Consumption of some substances has been shown to be inadvisable, or contraindicated, for persons with some preexisting medical conditions. For example, ginseng is not recommended for persons with hypoglycemia. Kava kava may worsen symptoms of Parkinson's disease. Saw palmetto is contraindicated for patients with breast cancer, and valerian should not be used by those with liver or kidney disease without first consulting a physician. A recent study also suggested that echinacea (promoted to help fight colds and flu), ephedra (promoted as an energy booster and diet aid), garlic, ginkgo biloba, ginseng, kava kava, St. John's wort, and valerian may pose particular risks to people during surgery, with complications including bleeding, cardiovascular instability, and hypoglycemia. According to a recent survey, about half of seniors who use a dietary supplement do not inform their doctor. Another survey found that seniors often used dietary supplements with a prescription medication. Since seniors take more prescription medicines on average than do younger adults, the risk of drug-supplement interactions may be higher. For example, evening primrose, ginkgo biloba, ginseng, glucosamine, and St. John's wort magnify the effect of blood-thinning drugs such as warfarin or coumadin. We also identified reports suggesting that ginkgo biloba may reduce the effects of seizure medications and glucosamine may have a harmful effect on insulin resistance. Contaminanted products can also pose significant health risks to consumers. For example, supplements have been found to be contaminated with pesticides or heavy metals, some of which are probable carcinogens and may be toxic to the liver and kidney or impair oxygen transport in the blood. One commercial laboratory found contamination in samples from echinacea, ginseng, and St. John's wort products. As much as 20 times the level of pesticides allowable by the U.S. Pharmacopeia was found in two samples of ginseng. Overall, 11 percent of the herbal products and 3 percent of the specialty supplements tested were contaminated in some way. Amounts of active ingredients that exceed what is indicated on a product label may increase the risk of overdose for some patients. Some scientific studies have found that there may be significantly more active ingredient in some herbal and specialty supplement products than is indicated on the label. Studies of DHEA, ephedra, feverfew (promoted as a migraine prophylaxis), ginseng, SAM-e (promoted as an antidepressant and in the treatment of symptoms associated with osteoarthritis), and St. John's wort have found that a number of products have substantially more active ingredient than indicated on the label. One study of DHEA found one brand contained 150 percent of the amount of active ingredient indicated on the label. In a study of ephedra, one product was shown to have as much as 154 percent of the active ingredient indicated on the label.Studies of ginseng have found some products contained more than twice as much active ingredient as indicated on the product label. Recognizing that there are some safety risks, trade associations that represent manufacturers, suppliers, and distributors of dietary supplements have created and adopted voluntary programs to reduce the risks of potentially harmful products by standardizing manufacturing practices. Some unproven anti-aging products can cost hundreds or thousands of dollars apiece. For example, rife machines, which emit light or electrical frequencies and claim to kill viruses and parasites, are frequently advertised on the Internet and can cost up to $5,000. Some herbal product packages for cancer cures can cost nearly $1,000. FTC provided us with a partial estimate of economic harm based on 20 cases involving companies that fraudulently marketed unproven health care products commonly used by seniors and for which national sales data were available. FTC estimated the average annual sales for those products at nearly $1.8 million per company. Consumers may be purchasing products that contain much less active ingredient than indicated on the label. Results of commercial laboratory tests and scientific studies that analyzed product contents for active ingredient levels have shown that some dietary supplement products contain far less active ingredient than labeled. For some products, analyses have found no active ingredient. Academic studies have shown similar results. In an analysis of DHEA products, nearly one-fifth contained only trace amounts or no active ingredient. In analyses of garlic products, most were found to release less than 20 percent of their active ingredient.One study of ginseng found that 35 percent of the products tested contained no detectable levels of an active ingredient, and another found no detectable levels in 12 percent of the tested products. Studies of SAM- e and St. John's wort products also found that tested samples often contained less active ingredient than indicated on the label. Federal efforts to protect seniors from health fraud include providing educational materials on avoiding health fraud, funding research to evaluate popular anti-aging therapies, and carrying out enforcement activities against companies that have violated regulations. At the state level, agencies are working to protect consumers of health products by enforcing state consumer protection and public health laws, although anti- aging and alternative products have received limited attention. Both FDA and FTC sponsor educational activities that focus on health fraud and seniors. For example, public affairs specialists in several FDA district offices had exhibits at senior health fairs and health conferences where they distributed educational materials on how to avoid health fraud, as well as cautionary guidance on purchasing medicines and medical products online. To help seniors discriminate between legitimate and fraudulent claims, FTC publishes a range of consumer education materials on certain frequently promoted products and services, including hearing aids and varicose vein treatments. The agency also publishes guidelines on how to spot false claims and how to differentiate television shows from "infomercials." Federal support of research on alternative therapies is provided by NIH's National Center for Complementary and Alternative Medicine (NCCAM). It has developed research programs to fund clinical trials to evaluate the safety and efficacy of some popular products and therapies for conditions such as arthritis, cardiovascular diseases, and neurological disorders. There are studies, either ongoing or planned, to examine the effects of glucosamine/chondroitin, melatonin, St. John's wort, ginkgo biloba, and others. In addition, the agency funds specialized, multidisciplinary research centers on alternative medicine in such areas as cardiovascular disease, neurological disorders, aging, and arthritis. FDA enforcement actions taken against products that it judged to be unapproved drugs or medical devices include court cases filed to halt the distribution of laetrile products that claimed to cure cancer and to halt the sale of "Cholestin," a red yeast rice product with lovastatin that was marketed with cholesterol-lowering claims. FDA also took action to halt the marketing of the "Stimulator," a device that the manufacturer claimed would relieve pain from sciatica, swollen joints, carpal tunnel syndrome, and other chronic conditions. According to FDA officials, an estimated 800,000 of these devices were sold between 1994 and 1997, with many purchased by senior citizens. FDA has notified some dietary supplement manufacturers that their promotional materials illegally claimed that their products cure disease. For example, some manufacturers of colloidal silver products have claimed efficacy in treating HIV and other diseases and conditions. Even though FDA banned colloidal silver products as a U.S. over-the-counter drug in September 1999, after concluding that it was not aware of any substantial scientific evidence that supported the advertised disease claims, colloidal silver products may still be marketed as dietary supplements as long as they are not promoted with claims that they treat or cure disease. FDA notified several dozen Internet-based companies making such claims that their therapeutic claims may be illegal. Despite these oversight activities, colloidal silver products claiming "natural antibiotic" properties to address numerous health conditions remain available. FDA has not initiated any administrative rulemaking activities to remove from the market certain substances that its analysis suggests pose health risks, but has sought voluntary restrictions and attempted to warn consumers. For example, aristolochic acid, a known potent carcinogen and nephrotoxin, is believed to be present in certain traditional herbal remedies as well as a number of dietary supplement products. Following reports of aristolochic-acid-associated renal failure cases in Europe, FDA has recently taken several steps. In May 2000, FDA issued a "letter to industry" urging leading dietary supplement trade associations to alert member companies that aristolochic acid had been reported to cause "severe nephropathy in consumers consuming dietary supplements containing aristolochic acid." In this letter, FDA concluded that any dietary supplement that contained aristolochic acids was adulterated under the law and that it was unlawful to market such a product. FDA has also announced that herbal comfrey products containing pyrrolizidine alkaloids may cause liver damage. The agency's letter to eight leading dietary supplement trade associations urged them to advise their members to stop distributing comfrey products containing pyrrolizidine alkaloids. However, even though FDA has told firms that market dietary supplements that products containing comfrey are adulterated and unlawful, some firms continue to market them, and the agency is left to identify and take action to remove them on a case-by-case basis as it becomes aware of them. FDA can also monitor dietary supplements by conducting inspections of manufacturing facilities, during which its inspectors look at sanitation, buildings and facilities, equipment, production, and process controls. However, the agency inspects less than 5 percent of facilities annually. Publication of good manufacturing practice (GMP) regulations would improve FDA's enforcement capabilities, since DSHEA provides that dietary supplements not manufactured under conditions that meet GMPs would be considered adulterated and unlawful. A proposed GMP rule has been developed and is under review by the Office of Management and Budget. In 1997, FTC launched an effort to find companies making questionable claims for health products on the Internet, as well as in other media. This initiative, "Operation Cure.All," primarily involved conducting Web-based searches on specified dates to identify Web sites making unsubstantiated claims that use of their products would prevent, treat, or cure serious diseases and conditions. The searches were conducted with the participation of FDA, CDC, and some state attorneys general and other organizations. Evaluations of "Operation Cure.All" have found that some companies have made changes in their Web advertising as a result of receiving e-mail alerts from FTC about potentially unsupported advertising claims. In 1997, an estimated 13 percent of notified companies withdrew their claims or Web site, while 10 percent made some changes. In 1998, an estimated 28 percent of companies withdrew their claims or Web site, while 10 percent made some changes. By comparison, the percentage of companies that made no changes in both years exceeded 60 percent. FTC has brought over 30 dietary supplement cases, including those from "Operation Cure.All," against companies making unsupported claims since the agency released guidelines on its approach to substantiation of advertised claims in 1998. The states we contacted varied in their efforts to protect consumers from fraudulent or harmful health products, but in general focused little attention on anti-aging and alternative medicine products. State agencies reported that they receive relatively few complaints regarding these products. However, many officials said that consumers are being harmed in ways that are unlikely to be reported to state agencies and that misleading advertising and questionable health products are serious problems. States have identified a number of questionable health care products, services, and advertising claims that may affect older consumers. States can protect consumers from fraudulent or harmful health products through two approaches. The first is enforcement of state consumer protection laws against false or misleading advertising. The second is through their public health authority to ensure food, drug, and medical device safety. With some exceptions, the states we contacted take action only if there is a pattern of complaints or an acute health problem associated with a particular substance or device. Seven of the fourteen states we contacted were involved to some degree in monitoring or enforcement activity, and three have ongoing efforts to review advertising, labels, or products to enforce their health and consumer protection laws. The risk of harm to seniors from anti-aging and alternative health products has not been specifically identified as a top public health priority or a leading enforcement target for federal and state regulators. However, evidence demonstrates that many senior citizens use anti-aging products and that consumers who suffer from aging-related health conditions may be at risk of physical and economic harm from some anti-aging and alternative health products, including dietary supplements, that make misleading advertising and labeling claims. The medical literature has identified products that are safe under most conditions, but can be harmful for consumers with certain health conditions. Other products, such as St. John's wort, are promising for some conditions, but are also associated with adverse interactions with some prescription medications. Senior citizens may have a higher risk of physical harm from the use of anti-aging alternative medicine products because they have a high prevalence of chronic health conditions and consume a disproportionate share of prescription medications compared to younger adults. This concludes my prepared statement, Mr. Chairman. I will be happy to respond to any questions that you or Members of the Committee may have. For more information regarding this testimony, please call me at (202) 512- 7119. Key contributors include Martin T. Gahart, Carolyn Feis Korman, Anne Montgomery, Mark Patterson, Roseanne Price, and Suzanne Rubins. We focused our review on those herbal and specialty supplements that a recent survey by Prevention Magazine found were most frequently used by senior citizens for conditions associated with aging. For each supplement, we have listed in table 1 the health claims frequently associated with the products, although we have not attempted to validate the merits of any of the claims. We also list adverse effects that have been associated with the supplements, conditions for which the supplements might be contraindicated, and prescription medications with which the supplements might have dangerous interactions.

Dietary supplements marketed as anti-aging therapies may pose a potential for physical harm to senior citizens. Evidence from the medical literature shows that a variety of frequently used dietary supplements can have serious health consequences for seniors. Particularly risky are products that may be used by seniors who have underlying diseases or health conditions that make the use of the product medically inadvisable or supplements that interact with medications that are being taken concurrently. Studies have also found that these products sometimes contain harmful contaminants or much more of an active ingredient than is indicated on the label. Although GAO was unable to find any recent, reliable estimates of the overall economic harm to seniors from these products, it did uncover several examples that illustrate the risk of economic harm. The Food and Drug Administration (FDA) and the Federal Trade Commission (FTC) have identified several products that make advertising or labeling claims with insufficient substantiation, some costing consumers hundreds or thousands of dollars apiece. The potential for harm to senior citizens from health products making questionable claims has been a concern for public health and law enforcement officials. FDA and FTC sponsor programs and provide educational materials for senior citizens to help them avoid health fraud. At the state level, agencies are working to protect consumers of health products by enforcing state consumer protection and public health laws, although anti-aging and alternative products are receiving limited attention. This testimony summarized a September report (GAO-01-1129).

Established as a department in 1913, Labor carries out its mission by administering and enforcing a variety of federal labor laws guaranteeing workers' rights to a workplace free from safety and health hazards, a minimum hourly wage and overtime pay, family and medical leave, freedom from employment discrimination, and unemployment insurance. Labor also protects workers' pension rights; provides job training programs; helps workers find jobs; works to strengthen free collective bargaining; and keeps track of changes in employment, prices, and other national economic measures. About three-fourths of Labor's almost $35 billion budget is composed of mandatory spending on income maintenance programs, such as the unemployment insurance program. Table 1 shows Labor's appropriation and authorized staff-year spending for fiscal year 1998. Fiscal year 1998 appropriations (millions) Unemployment insurance and other income maintenance expenses Occupational Safety and Health Administration Mine Safety and Health Administration Pension and Welfare Benefits Administration Office of the Inspector General Included under employment training. Labor's diverse functions are carried out by different offices in a decentralized organizational structure. Labor has 24 component offices or units and more than 1,000 field offices to support its various functional responsibilities (see fig. 1). However, its many program activities fall into two major categories: enhancing workers' skills through job training and ensuring worker protection. A third category relates to developing economic statistics, such as the Consumer Price Index (CPI) and unemployment data, which are used by business, labor, and government in formulating fiscal and monetary policy and in making cost-of-living adjustments. reliable information for executive branch and congressional decision-making. The Results Act is aimed at improving program performance. It requires that agencies, in consultation with the Congress and after soliciting the views of other stakeholders, clearly define their missions and articulate comprehensive mission statements that define their basic purposes. It also requires that they establish long-term strategic goals and link annual performance goals to them. Agencies must then measure their performance against the goals they have set and report publicly on how well they are doing. In addition to monitoring ongoing performance, agencies are expected to evaluate their programs and to use the results from these evaluations to improve the programs. The Results Act requires virtually every executive agency to develop a strategic plan covering a period of at least 5 years from the fiscal year in which it is submitted and to submit the plan to the Congress and the Office of Management and Budget (OMB). OMB provided guidance on the preparation and submission of strategic plans as a new part of its Circular No. A-11--the basic instructions for preparing the president's budget--to underscore the essential link between the Results Act and the budget process. The strategic plans are to include six elements: (1) a mission statement, (2) long-term goals and objectives, (3) approaches or strategies to achieve the goals and objectives, (4) a discussion of the relationship between long-term goals and annual performance goals, (5) key external factors affecting goals and objectives, and (6) evaluations used to establish goals and objectives and a schedule for future evaluations. OMB required agencies to submit major parts of their draft strategic plans during the spring of 1997. The completed strategic plan was due to OMB and the Congress by September 30, 1997. The act requires agencies to submit annual performance plans tied to the agencies' budget request to reinforce the connections between the long-term strategic goals outlined in the strategic plans and the day-to-day activities of program managers and staff. Labor is expected to submit its first annual performance plan, which covers fiscal year 1999, this week along with its budget request. Labor's decentralized structure makes it both more important and more difficult to ensure a system of accountability as envisioned in the Results Act. Labor's September 30, 1997, strategic plan reflects Labor's decentralized approach and the difficulty it presents for establishing departmentwide goals and monitoring their attainment. Labor has traditionally operated as a set of individual components, each working largely independently with limited central direction and control. This decentralized organizational structure may allow Labor more flexibility to meet a variety of needs and focus resources in the field. However, it also makes adopting the better management practices envisioned by the Results Act more challenging. That is, articulating a comprehensive departmentwide mission statement, which is linked to results-oriented goals, objectives, and performance measures, is difficult because of the historical lack of central planning and the existing decentralized organizational structure. Labor chose to present individual plans for 15 of its 24 component offices along with a strategic plan overview. This option was not inappropriate--it was specifically allowed by OMB. While OMB Circular A-11 strongly encourages agencies to submit a single, agencywide strategic plan, it states that an agency with disparate functions, such as Labor, may prepare several strategic plans for its major components or programs. Circular A-11 further provides that when an agency does prepare multiple strategic plans for component units, these should not be merely packaged together and submitted as a single strategic plan because the size and detail of such a compilation would reduce the plan's usefulness. Moreover, the agency is to prepare an agencywide strategic overview that will link individual plans by giving an overall statement of the agency's mission and goals. Labor's overview contains six departmentwide goals. Five of these are results-oriented, and the sixth describes the process that will support the achievement of the other goals: lifelong learning and skill development; promoting welfare to work; enhancing pension and health benefits security; safe, healthy, and equal opportunity workplaces; helping working Americans balance work and family; and maintaining a departmental strategic management process. The strategic plan Labor submitted to OMB and to the Congress on September 30, 1997, addressed many of the concerns we raised in our review of the draft plan submitted to OMB and provided to the Congress for consultation 4 months earlier, and it incorporated many improvements that made it more responsive to the Results Act. Labor's revised strategic overview and all but one of the 15 component unit plans include all six elements required by the act. Further, the overview's mission statement provides a more complete description of Labor's basic purpose. Moreover, discussions of strategies to achieve goals and external factors that could affect the achievement of goals are discussed alongside individual goals, which facilitates the understanding of how particular strategies and external factors are linked to each goal. The overview also attempts to address Labor's traditionally decentralized management approach, which has posed numerous management challenges for Labor in the past. For example, the sixth departmentwide goal, maintaining a departmental strategic management process, was added to the formally submitted plan. This may be an indication of a renewed emphasis by Labor to develop a more strategic approach to departmental management, an improvement that we have recommended in the past. Other indications of this renewed approach to departmentwide leadership are evident in the similar organizational style of each of the component plans and the clear links between the strategic overview and the plans. For example, in the revised overview, the strategic goals of each of the units are highlighted under the appropriate departmentwide goal. Similarly, in the plans for each of the component units, the unit strategic goals are categorized according to the departmentwide goal to which they correspond. 15 agency goals listed under departmental goal 4--safe, healthy, and equal opportunity workplaces--are organization-specific rather than reflective of goals necessary to achieve the overall mission regardless of where the responsibility is placed organizationally. For example, there is no single stated goal of reducing workplace fatalities, injuries, and illnesses. Instead, four separate goals reflect that intended result in different kinds of workplaces where the Occupational Safety and Health Administration (OSHA), the Mine Safety and Health Administration (MSHA), the Employment and Training Administration (ETA), or the Office of the Assistant Secretary for Administration and Management (OASAM) has responsibility. A fifth goal reflects the responsibility of yet another component unit--the Employment Standards Administration (ESA)--to "minimize the human, social, and financial costs of work-related injuries" by encouraging the prompt return to work after injury in federal workplaces. Establishing goals that reflect organizational units is useful for traditional accountability purposes, such as monitoring resources, processes, and outputs, but less useful for results-oriented planning. A mission-focused rather than organizationally focused planning process would improve Labor's ability to examine its operations to find a less costly, more effective means of meeting its mission. In past work, we have traced the management problems of many federal agencies to obsolete organizational structures that are inadequate for modern demands. For example, our work has shown that the effectiveness of federal program areas as diverse as employment assistance and training, rural development, early childhood development, and food safety has been plagued by fragmented or overlapping efforts. A frequently cited example of overlap and ineffectiveness is the federal food safety system, which took shape under as many as 35 laws and was administered by 12 different agencies, yet had not effectively protected the public from major foodborne illnesses. As federal agencies become more outcome-oriented, they sometimes find that outmoded organizations must be changed to better meet customer needs and address the interests of stakeholders. develop the plan, nor does it specify how future evaluations will help assess Labor's success in achieving its stated goals. Instead, the overview discusses how evaluations in the regulatory agencies have lagged behind those in the employment and training area. In that respect, it is even more important that Labor provide schedules or timelines for future evaluations, identify the evaluations that will be done, and highlight how future program evaluations will be used to improve performance. Along those lines, we reported earlier that the experiences of OSHA as a pilot project could provide insight into how evaluations can be managed. OSHA has been involved in a number of activities geared toward making the management improvements intended by the Results Act. We believe that although not a requirement of the strategic planning process, it would be helpful for Labor to build on the experiences gained from the OSHA pilot project--identifying lessons learned and whether best practices or other lessons could be applied departmentwide or in units with similar functions. A focus on results, as envisioned by the Results Act, implies that federal programs that contribute to the same or similar results should be closely coordinated to ensure that goals are consistent and, as appropriate, program efforts are mutually reinforcing. In our review of the strategic plan, we noted that Labor should improve the management of crosscutting program efforts by ensuring that those programs are appropriately coordinated to avoid duplication, fragmentation, and overlap. For example, while Labor's plan refers to a few other agencies with responsibilities in job training programs and notes that Labor plans to work with them, the plan contains no discussion of what specific coordination mechanism Labor will use to realize efficiencies and possible strategies to consolidate or coordinate job training programs to achieve a more effective job training system. Realizing the benefits of strategic planning will require that Labor has effective information management systems. Instead, we have found a lack of reliable and consistent information needed to monitor performance of individual programs and to disseminate information for use by others. Labor must also meet the challenge that faces all government agencies of ensuring information security, getting ready for the year 2000, and ensuring that it has an adequate systems architecture. management activities, which would include addressing these specific and general issues. Labor appointed a chief information officer in August 1996. In 1996, OMB raised a question regarding this individual also serving as the Assistant Secretary for Administration and Management, since the Clinger-Cohen Act requires that information resources management be the primary function of the chief information officer. Because it is unclear whether one individual can fulfill the responsibilities required by both positions, OMB has asked Labor to evaluate its approach and report to OMB by the end of fiscal year 1998. Performance measurement, one of the Results Act's most important features, will require that Labor address a lack of reliable management information across the Department. Under the act, executive branch agencies are required to develop performance plans that use performance measurement to reinforce the connection between the long-term strategic goals outlined in their strategic plans and the day-to-day activities of their managers and staff. The annual performance plans are to include performance goals for an agency's program activities as listed in the budget, a summary of the necessary resources to conduct these activities, the performance indicators that will be used to measure performance, and a discussion of how the performance data will be validated and verified. Successful performance measurement requires that agencies recognize that they must balance their ideal performance measurement systems against real-world considerations, such as the cost and effort involved in gathering and analyzing data, while ensuring that the data they do collect are sufficiently complete, accurate, and consistent to be useful in decisionmaking. Although we have not yet reviewed Labor's performance plan for fiscal year 1999, our past reviews of individual programs throughout the agency have found critical program performance information to be lacking, unreliable, or inconsistent. Examples can be found in ETA and OSHA. management information that would allow it to monitor its performance in meeting the program's statutory and regulatory deadlines. Without information on the extent and cause of missed time periods, ETA cannot ensure that agricultural employers have workers when they are needed. OSHA provides an example of the questionable reliability of some of Labor's data. As we reported in December 1996, OSHA, in its Integrated Management Information System (IMIS), does not always appropriately characterize or fully capture information on settlement agreements it has reached with employers, nor does it always change inspection data in a timely manner to reflect the terms of a settlement agreement. As a result, information regarding the number or type of violations and penalty amounts associated with a particular inspection can be distorted or inaccurate because it may not include reductions in penalties that occur as part of the settlement process. In addition, the depiction within its database of the relationship between a fatality or injury and the violations detected can be misleading. Not only do unreliable data limit effective management of OSHA's programs; they can also affect the private sector because, unlike some other government-maintained databases, OSHA's IMIS database is publicly accessible. Academia relies on its accuracy in conducting policy research, while some private sector employers use its data in their commercial activities. For example, a database information service company based in Maplewood, New Jersey, offers standard reports and customized searches of Labor's data to assist both public and private sector organizations with screening companies before contracting with them for products or services. In our work on Job Corps--administered by ETA--we also found that reported information did not provide an accurate picture of program activities and results. Our survey of employers who were reported as hiring Job Corps participants showed that about 15 percent of the job placements in our sample were potentially invalid: A number of employers reported that they had not hired students whom Labor had reported placed with their businesses, and other employers of Job Corps participants identified by Labor could not be found. many of the programs are administered by state and local agencies with federal funding and oversight, such as ETA's Job Training Partnership Act (JTPA) programs. For example, as we reported in September 1996, we found a lack of consistency among Labor and other agencies administering employment-focused programs for the disabled. Those that collected data on program outcomes--such as data on whether participants got jobs and kept them, what wages they received, and whether they received employee benefits such as health insurance--used different definitions for key data. They also had different eligibility criteria, paperwork requirements, software, and confidentiality rules that limited comparisons of program performance. The need for consistent data is particularly significant given the challenges Labor faces in meeting the goals of workforce development within the context of an uncoordinated system of multiple employment training programs operated by numerous departments and agencies. For fiscal year 1995, we identified 163 federal employment training programs, with a total budget of $20.4 billion, operated by a total of 15 federal departments and agencies; Labor had responsibility for 37 of these programs. Although many of these programs had similar goals and overlapping missions, they often had inconsistent measures for program success--where there were measures at all. As a result, we do not know whether individual programs are effective or whether the federal government's efforts to improve skills, employment, and wages of workers are successful. In carrying out its mission, Labor produces some information for use outside the Department by both government and private sector entities. Examples include the prevailing wage rates applicable under certain statutes and statistical data in the field of labor economics, such as the CPI. This information--like the performance management information Labor uses--can be affected by weaknesses in Labor's information management systems. ESA, for example, sets prevailing wage rates under the Davis-Bacon Act for construction job classifications in some 3,000 individual counties or groups of counties and for four different types of construction. Employers on federal construction projects must pay workers wages at or above these rates. Wage rate determinations are based on voluntarily submitted wage and benefit data from employers and third parties, such as unions or trade groups, on construction projects. In May 1996, we reported that Labor's wage determination process contained weaknesses that could permit the use of fraudulent or inaccurate data in the setting of prevailing wage rates. If these weaknesses allow the use of erroneous data, the result may be in either of two directions. If the wage rate is set too low, construction workers may be paid less than the amount to which they are entitled; if the rate is too high, the government may pay excessive construction costs. Labor has begun to address these process weaknesses. Its long-term strategy involves an initiative funded at about $4 million in its fiscal year 1997 budget to develop, evaluate, and implement alternative reliable wage determination methodologies that would provide accurate and timely wage determinations at reasonable cost. We recommended some additional steps, however, that would, in the short-term, improve the verification of wage data submitted by employers. The House Appropriations Committee subsequently directed Labor to ensure that an appropriate portion of the funds appropriated for the program in fiscal year 1997 is used to implement those recommendations and requested that we review the success of those efforts. We expect to begin this study in early 1998. weights were updated more frequently. Because BLS has updated these weights only every 10 years or so, we recommended more frequent updating of the market basket expenditure weights to make the CPI more timely in its representation of consumer expenditures. Information management is the subject of two new areas we have added this year to our list of areas at high risk of fraud, waste, abuse, or mismanagement: information security and the year 2000 problem, both of which apply to Labor as well as to all other government agencies. Information security generally involves an agency's ability to adequately protect the information it collects from unauthorized access. Ensuring information security is an ongoing challenge for Labor, especially given the sensitivity of some of the employee information being collected. Ensuring confidentiality is also essential to the quality of the information collected, given the voluntary nature of many of the surveys that Labor administers, such as the wage reports used to set Davis-Bacon prevailing wage rates. The second area involves the need for computer systems to be changed to accommodate dates beyond the year 1999. This year 2000 problem stems from the common practice of abbreviating years by their last two digits. Thus, miscalculations in all kinds of activities, such as benefit payments, could occur because the computer system would interpret 00 as 1900 instead of 2000. Labor, along with other agencies that use dates to process information, is faced with the challenge of developing strategies to deal with this potential problem area in the near future. We have been asked to look at a number of efforts in individual Labor units to assess their progress toward making their computer systems capable of accommodating 21st century dates. challenge to obtain complete, reliable, and consistent information throughout the Department is formidable. However, while solutions to complex information management and technology problems are not simple, they do exist. For example, as computer-based information systems have become larger and more complex over the past 10 years, the importance of, and reliance on, what is called a "systems architecture" has correspondingly increased. Simply put, an architecture is the blueprint to guide and constrain the development and evolution of a collection of related systems. This is done first in logical terms, such as defining the organization's functions, providing high-level descriptions of its information systems and their interrelationships, and specifying how and where information flows. Second, this blueprint explains operations in technical terms, such as specifying hardware, software, data communications, security, and performance characteristics. The Congress has recognized the importance of such architecture in improving the effectiveness and efficiency of federal information systems. The Clinger-Cohen Act of 1996 requires, among other provisions, that department-level chief information officers develop, maintain, and facilitate the implementation of integrated systems architecture. A sound systems architecture would ensure that data being collected and maintained within an organization are structured and stored in a manner that makes them accessible, understandable, and useful throughout the organization. Labor's programs touch the lives of nearly every American because of the Department's responsibilities for employment training, job placement, and income security for workers when they are unemployed, as well as workplace conditions. Labor's mission is an urgent one. Each day or week or year of unemployment or underemployment is one too many for individuals and their families. Every instance of a worker's being injured on the job or not paid legal wages is one that should not occur. Every employer frustrated in attempts to find competent workers or to understand and comply with complex or unclear regulations contributes to productivity losses our country can ill afford. And every dollar wasted in carrying out the Department's mission is one we cannot afford to waste. Labor currently has a budget of $34.6 billion and about 16,700 staff to carry out its program activities. Over the years, our work on the effectiveness of these programs has called for more efficient use of these resources, and we have recommended that Labor improve its strategic planning process. The current federal effort to improve strategic planning seeks to shift the focus of government decision-making and accountability away from a preoccupation with activities--such as awarding grants and conducting inspections--to a focus on the results of those activities such as real gains in employability, safety, or program quality. Labor's strategic planning efforts are still very much a work in progress. Like other agencies, Labor must focus more on the results of its activities and on obtaining the information it needs for a more focused, results-oriented management decision-making process. The Results Act provides a statutory framework needed to manage for results, and Labor has begun to improve its management practices in ways that are consistent with that legislation. The benefits of the Results Act can be particularly important for a decentralized department such as Labor. However, such an organizational structure provides challenges in meeting the legislation's objectives. Today's information systems offer the government unprecedented opportunities to deliver high-quality services, tailored to the public's changing needs, more effectively, faster, and at lower cost. Moreover, better systems can enhance the quality and accessibility of important knowledge and information, both for the public and for federal managers. It is increasingly important that Labor take advantage of these opportunities and address its information management weaknesses as it implements the Results Act if the benefits envisioned are to be fully realized. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions that you or Members of the Subcommittee may have. H-2A Agricultural Guestworker Program: Changes Could Improve Services to Employers and Better Protect Workers (GAO/HEHS-98-20, Dec. 31, 1997). Job Corps: Participant Selection and Performance Measurement Need to Be Improved (GAO/T-HEHS-98-37, Oct. 23, 1997). The Results Act: Observations on Department of Labor's June 1997 Draft Strategic Plan (GAO/HEHS-97-172R, July 11, 1997). Managing for Results: Using GPRA to Assist Congressional and Executive Branch Decisionmaking (GAO/T-GGD-97-43, Feb. 12, 1997). High-Risk Series: Information Management and Technology (GAO/HR-97-9, Feb. 1997). OSHA's Inspection Database (GAO/HEHS-97-43R, Dec. 30, 1996). Information Technology Investment: Agencies Can Improve Performance, Reduce Costs, and Minimize Risks (GAO/AIMD-96-64, Sept. 30, 1996). Education and Labor: Information on the Departments' Field Offices (GAO/HEHS-96-178, Sept. 16, 1996). People With Disabilities: Federal Programs Could Work Together More Efficiently to Promote Employment (GAO/HEHS-96-126, Sept. 3, 1996). Executive Guide: Effectively Implementing the Government Performance and Results Act (GAO/GGD-96-118, June 1996). Davis-Bacon Act: Process Changes Could Raise Confidence That Wage Rates Are Based on Accurate Data (GAO/HEHS-96-130, May 31, 1996). Multiple Employment Training Programs: Major Overhaul Needed to Reduce Costs, Streamline the Bureaucracy, and Improve Results (GAO/T-HEHS-95-53, Jan. 10, 1995). Multiple Employment Training Programs: Basic Program Data Often Missing (GAO/T-HEHS-94-239, Sept. 28, 1994). Executive Guide: Improving Mission Performance Through Strategic Information Management and Technology (GAO/AIMD-94-115, May 1994). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed the: (1) Department of Labor's progress in strategic planning as envisioned by the Government Performance and Results Act of 1993; and (2) challenge Labor faces in ensuring the effective information management necessary for Labor to fully realize the benefits of that planning. GAO noted that: (1) Labor's decentralized management structure makes adopting the better management practices envisioned by the Results Act--that is, articulating a comprehensive departmentwide mission statement linked to obvious results-oriented goals, objectives, and performance measures--more challenging; (2) Labor's September 30, 1997, strategic plan reflected its decentralized approach and the difficulty it presents for establishing departmentwide goals and monitoring their attainment; (3) Labor chose to present individual plans for 15 of its 24 component offices along with a strategic plan overview; (4) the overview contained five departmentwide goals that are generally results-oriented and a departmentwide management goal; (5) however, GAO is concerned that the lack of a departmentwide perspective in the development of Labor's strategic plan makes it organizationally driven rather than focused on mission; (6) several of the goals of the component units responsible for ensuring safe and healthful workplaces are similar yet listed separately for each unit; (7) a more mission-focused approach would improve Labor's ability to identify ways in which its operations might be improved to minimize potential duplication and promote efficiencies; (8) in order to measure performance--the next step required under the Results Act--Labor will need information that is sufficiently complete, reliable, and consistent to be useful in decisionmaking; (9) GAO's work has raised questions about how well Labor is meeting this management challenge; (10) GAO has found data to be missing, unreliable, or inconsistent in agencies throughout the Department; (11) Labor, as well as all other federal agencies, must also address two information management issues GAO has described this year as high risk because of vulnerabilities to waste, fraud, abuse, and mismanagement; (12) the first, information security, involves the agency's ability to protect information from unauthorized access; (13) the second requires Labor to rapidly change its computer systems to accomodate dates in the 21st century; and (14) while Labor has appointed a chief information officer, as required under the Clinger-Cohen Act of 1996, to oversee these and other information management issues, questions remain as to whether or not other duties required of the individual appointed will allow her to devote the attention necessary to ensure success in this critical management area.

DHS's mission is to lead the unified national effort to secure America by preventing and deterring terrorist attacks and protecting against and responding to threats and hazards to the nation. DHS is also responsible for ensuring that the nation's borders are safe and secure, that they welcome lawful immigrants and visitors, and that they promote the free flow of commerce. Created in 2002, DHS assumed control of about 209,000 civilian and military positions from 22 agencies and offices that specialize in one or more aspects of homeland security. The purpose behind the merger was to improve coordination, communication, and information sharing among these multiple federal agencies. Figure 1 shows DHS's organizational structure and table 1 identifies DHS's principal organizations and describes their missions. Within the department's Management Directorate, headed by the Under Secretary for Management, is the Office of the Chief Information Officer (CIO). The CIO's responsibilities include setting departmental IT policies, processes, and standards, and ensuring that IT acquisitions comply with DHS IT management processes, technical requirements, and approved enterprise architecture, among other things. Additionally, the CIO chairs DHS's Chief Information Officer Council (CIO Council), which is responsible for ensuring the development of IT resource management policies, processes, best practices, performance measures, and decision criteria for managing the delivery of IT services and investments, while controlling costs and mitigating risks. DHS spends billions of dollars each year on IT investments to perform both mission-critical and support functions that frequently must be coordinated among components, as well as among external entities. Of the $5.6 billion that DHS plans to spend on 363 IT-related investments in fiscal year 2012, $4.4 billion is planned for the 83 the agency considers to be a major investment; namely, costly, complex, and/or mission critical. Of these 83 major IT investments, 68 are under development and have planned fiscal year 2012 costs of approximately $4 billion. Examples of major investments under development that are being undertaken by DHS and its components include: U. S. Customs and Border Protection--Automated Commercial Environment/International Trade Data System will incrementally replace existing cargo processing technology systems with a single system for land, air, rail, and sea cargo and serve as the central data collection system for federal agencies needing access to international trade data in a secure, paper-free, web-enabled environment. Immigration and Customs Enforcement --TECS Modernization is to replace the legacy mainframe system developed by the U.S. Customs Service in the 1980s to support its inspections and investigations. Following the creation of DHS, those activities were assigned to CBP and ICE, respectively. CBP and ICE are now working to modernize their respective portions of the system in a coordinated effort with separate funding and schedules. ICE's portion of the investment will include modernizing the investigative case management and related support modules of the legacy system. National Protection and Programs Directorate--National Cybersecurity Protection System, also referred to as EINSTEIN, is an integrated system that includes intrusion detection, analytics, intrusion prevention, and information sharing capabilities that are used to defend the federal executive branch civilian agencies' IT infrastructure from cyber threats. It consists of the hardware, software, supporting processes, training, and services that are being developed and acquired to support DHS's mission requirements. The success of major IT investments are judged by, among other things, the extent to which they deliver promised system capabilities and mission benefits on time and within cost. Consequently, our best practices research and extensive experience at federal agencies, as well as OMB guidance, stress the importance of federal IT investments meeting cost and schedule milestones. GAO's Information Technology Investment Management guidancehighlights the need to regularly determine each IT project's progress toward cost and schedule milestones using established criteria and calls for corrective efforts when milestones are not being met. The guidance also calls for such corrective efforts to be defined and documented. OMB plays a key role in helping federal agencies manage their investments by working with them to better plan, justify, and determine how much they need to spend on projects and how to manage their approved projects. In December 2010, OMB issued its 25 Point Implementation Plan to Reform Federal Information Technology Management, a plan to change IT management throughout the federal government by strengthening the role of investment review boards to enable them to more adequately manage agency IT portfolios, redefining the role of agency CIOs and the Federal CIO Council to focus on portfolio management, and implementing face-to-face reviews to identify IT investments that are experiencing performance problems and to select them for a TechStat session--a review of selected IT investments between OMB and agency leadership that is led by the Federal CIO. In addition, OMB provides agencies with tools to measure how effectively investments are meeting established cost and schedule parameters. Specifically, OMB requires federal agencies to provide information on their IT investments as a part of their yearly budget submissions, and to do so using an exhibit 53, in which they list all of their IT investments and their associated costs, and an exhibit 300, also called the Capital Asset Plan and Business Case, which includes an investment's cost and schedule commitments. Further, in June 2009, OMB deployed the IT Dashboard, a website that displays near real-time information on, among other things, the cost and schedule performance of all of an agency's major IT investments. The IT Dashboard provides, among other things, a cost and schedule performance rating for each major IT investment's subsidiary project. These ratings are based on the extent to which the project is meeting its cost and schedule commitments. For example, projects experiencing a 10 percent or greater cost and/or schedule variance are considered to be at an elevated risk of not delivering promised capabilities on time and within budget, and, as such, require management attention. We have previously reported on the cost and schedule challenges associated with major DHS IT investments, such as those with CBP's Secure Border Network (SBInet) and NPPD's United States Visitor and Immigrant Status Indicator Technology (US-VISIT). For example, in 2007 we reported that the Secure Border Network had experienced significant cost and schedule shortfalls due, in part, to the project not having fully defined activities. In addition, in May 2010, we reported that continued delays to the investment were likely because, among other things, it had not developed a reliable integrated master schedule and the schedule did not adequately capture all necessary activities. In these reports, we made recommendations to strengthen the program weaknesses to keep the investment on schedule and within cost. With regard to the US-VISIT investment, we noted in a November 2009 report that officials had not adopted an integrated approach to scheduling, executing, and tracking the work that needed to be accomplished to deliver the Comprehensive Exit project to more than 300 ports of entry on schedule and within cost. Accordingly, we recommended that DHS strengthen management of the project by ensuring that it develop and maintain integrated scheduling plans in accordance with applicable key practices; DHS concurred with the recommendations. Further, in 2011, as a part of our High Risk series, because of acquisition weaknesses, major investments, such as the recently canceled SBInet, continued to be challenged in meeting capability, benefit, cost, and schedule expectations. Based on our prior work, we identified and provided to DHS key actions and outcomes critical to addressing this and other challenges. Most recently, we reported in July 2012 that DHS was making progress in developing and implementing a new IT governance process. We found that DHS had developed a new governance framework and that the associated policies and procedures were generally consistent with recent OMB guidance and with best practices for managing projects and portfolios identified in GAO's Information Technology Investment Management framework; however, the agency had not yet finalized most policies and procedures and was not fully using best practices for the implementation. Accordingly, we made recommendations to DHS to, among other things, strengthen its new governance process and related IT management capabilities; the agency agreed to implement the recommendations. GAO, High Risk Series: An Update, GAO-11-278 (Washington, D.C.: February 2011). GAO, Information Technology: DHS Needs to Further Define and Implement Its New Governance Process, GAO-12-818 (Washington, D.C.: July 2012). As discussed previously, our best practices research and experience at federal agencies as well as OMB guidance stress the importance of investments meeting their cost and schedule commitments. OMB requires agencies to report to the IT Dashboard information on the cost and schedule performance of all their major IT investments. Our analysis of the cost and schedule performance for DHS's 68 major IT investments shows that approximately two-thirds of these investments and their subsidiary projects were meeting cost and schedule commitments; the remaining one-third had at least one subsidiary project that was not meeting its commitments. Specifically, out of the 68 major investments under development, 47 were meeting their cost and schedule commitments. (See app. II for a listing of the 47 investments and subsidiary projects that are meeting their commitments.) The remaining 21 investments had one or more subsidiary projects that were not meeting cost and/or schedule commitments; the total planned cost for all projects in development for the 21 investments is approximately $1 billion. Table 2 lists the investments experiencing cost and/or schedule shortfalls, and the total planned project cost for each investment. A list of the investments and their subsidiary projects experiencing cost and/or schedule shortfalls is included in appendix III. Of the 21 investments with a shortfall, 5 had one or more subsidiary project with a cost shortfall, 18 had one or more project with a schedule shortfall, and 2 had a project with both a cost and schedule shortfall. These shortfalls potentially impact the total cost of investments and can delay the implementation of key systems. For example: TSA's Federal Air Marshal Service Mission Scheduling and Notification System: project to modernize the core scheduling software component of the system, which, among other things, determines the allocation of federal air marshals to flights and coordinates and communicates mission assignments, was delayed. NPPD's Critical Infrastructure Technology and Architecture investment: project to develop an information-sharing application to be used by federal, state, and local stakeholders to increase their capability to combat terrorist use of improvised explosive devices had cost overruns of approximately 16 percent ($296,000). CBP's Northern Border, Remote Video Surveillance System investment: project to incorporate IT Security improvements to the remote video surveillance systems in Buffalo, New York, and Detroit, Michigan, was delayed by approximately 2 months. FEMA's Disaster Assistance Improvement Plan: a subsidiary project--site usability enhancements--that included enhancements to the DisasterAssistance.gov website to improve usability by making it easier and more intuitive for users to apply for and find information about disaster assistance from federal, state, local, tribal, and private nonprofit organizations was delayed. The primary causes of the shortfalls in cost and schedule associated with DHS's 21 major IT investments were (in descending order of frequency): inaccurate preliminary cost and schedule estimates, technical issues in the development phase, changes in agency priorities, lack of understanding of user requirements, and dependencies on other investments that had schedule shortfalls. A summary of these causes by investment and the associated component are shown in table 3 and are followed by (1) our analysis of these causes by category and (2) discussion of our past work on the department's major investments and related IT management processes where we identified some of these same causes and made recommendations to strengthen management in these areas. Specifically, our analysis of these causes by category showed: Inaccurate preliminary cost and schedule estimates: Inaccurate cost and schedule estimates in eight investments resulted in significant cost and schedule increases. For example: Preliminary schedule estimates for a project under CBP's Non- Intrusive Inspection Systems Program investment--which supports the detection and prevention of contraband from entering the country--were inaccurate due to underestimating the time needed to complete a key task. Specifically, project officials did not accurately estimate how long it would take to complete an environmental assessment because they did not consider all requirements in their initial planning, thus resulting in a schedule delay of approximately 2 months. The NPPD investment called Critical Infrastructure Technology and Architecture had a project--integral to developing an information sharing application to be used by federal, state, and local stakeholders to increase their capability to combat terrorist use of improvised explosive devices--where actual costs for completing critical tasks were about 16 percent over the cost estimated at project initiation. According to investment officials, this was due in part to project staff developing the cost estimates very quickly and not fully validating them before proceeding with the project. TSA's Hazmat Threat Assessment Program (which performs a threat assessment on commercial truck drivers who transport hazardous materials to determine the threat status to transportation security) had a schedule shortfall with a project, because, in part, the time needed to modify a contract was not accurately estimated, which led to a schedule delay of nearly 3 months. Technology issues in the development phase: Technical issues in the development phase caused cost or schedule slippages in six investments. Examples include: Changes made to one part of ICE's Detention and Removal Operations Modernization investment, which is designed to upgrade IT capabilities to support efficient detention and removal of non-U.S. citizens, created a cascading effect, leading to changes to other parts of the system and contributed to delays of more than a month. Issues in establishing a testing and development environment that matched the production environment delayed project testing in several projects under FEMA's Disaster Assistance Improvement Plan investment (which is to ease the burden on disaster survivors by providing them with a mechanism to access and apply for disaster assistance). Technical complications during deployment caused the schedule to slip by 79 days on a project under CBP's Land Border Integration investment, which assists with the processing of inbound and outbound travel at border patrol checkpoints nationwide. Specifically, the handheld devices used for scanning license plates used a wireless spectrum that had interference problems at certain sites, and resolving this issue took more time than had been planned for. Changes in agency priorities: Four investments experienced cost and schedule slippages due to changing priorities at the agency level. In particular, The schedules were delayed for two NPPD US-VISIT investments: the Arrival and Departure Information System, which collects arrival and departure information on non-U.S. citizens traveling to the United States as well as current immigration status updates for each traveler, and the Automated Biometric Identification System, a fingerprint repository and biometric-matching system. Delays were due to a management decision to focus on accelerating the development of other investments or projects, which took resources (i.e., personnel) away from the investment. Consequently, the Arrival and Departure Information System's fiscal year 2011 maintenance release project was delayed approximately 3 months, and the Automated Biometric Identification System's fiscal year 2011 product support project was delayed by approximately 7 months. A critical subsidiary project to deliver predictive analytical capabilities under USCG's Business Intelligence investment, which is designed to reduce organizational uncertainty and risk in decision making, had a schedule delay of approximately 3 months due to changing priorities. Project officials said that Coast Guard management directed resources to other projects with a higher priority, thus limiting the ability to work on the predictive analytics capability project. Lack of understanding user requirements: Three investments had slippages resulting from misunderstanding or inadequately developed user requirements and expectations. A project under USCIS's Claims 4 investment, which is a processing system for the adjudication of naturalization applications, was delayed by 2 weeks because inadequate user requirements led to a design flaw that required additional time to address. Customer priorities and expectations for ICE's Detention and Removal Operations Modernization investment changed over time, which contributed to schedule delays of more than a month. The schedule for a CBP TECS Modernization investment project, which supports the screening of travelers entering the United States, was delayed due to users requesting that the application in development interface with a separate system. The project was delayed by 3 months while program officials developed new requirements. Dependencies on other component's investments that had schedule shortfalls: Investments also encountered schedule slippages when interdependent investments encountered delays. For example: USSS's Information Integration and Technology Transformation investment to provide advanced security measures to electronically send, receive, and track access to USSS's unclassified and classified information was delayed approximately 6 months due to a component's project being delayed. Costs for a project under FEMA's Disaster Assistance Improvement Plan investment rose approximately 27 percent ($210,000) due, in part, to the delayed deployment of another investment. Other causes of cost and schedule slippages that were cited by department officials included delays in receiving funding and gaps in leadership due to key management turnover. Specifically, The schedule for three projects under TSA's Federal Air Marshal Service Mission Scheduling and Notification investment was delayed due to delays in receiving full funding. DHS had provided the investment with partial funding, and thus investment officials produced an investment plan based on that funding level; when full funding was subsequently restored, the plan had to be updated, which resulted in delays. The costs for a key subsidiary project of NPPD's Infrastructure Security Compliance, Chemical Security Assessment Tool, which is to provide for the electronic submission of chemical facility data and controlled use of such data, rose approximately 20 percent ($719,000) due, in part, to multiple director-level program changes, which led to corresponding changes in the investment's vision and direction. In our past work on DHS's investments and related IT management processes, we have identified some of these same causes and made recommendations to strengthen management in these areas. For example, with regard to cost estimating, we reported that forming a reliable estimate of costs provides a sound basis for measuring against actual cost performance and that the lack of such a basis contributes to variances. To help agencies establish such a capability, we issued a guide in March 2009 that was based on the practices of leading organizations. In a July 2012 report examining how well DHS is implementing these practices, we reported that the department had weaknesses in cost estimating. Accordingly, we made recommendations to DHS to strengthen its cost estimating capabilities, and the department has plans and efforts under way to implement our recommendations. GAO, Department of Homeland Security: Assessments of Selected Complex Acquisitions, GAO-10-588SP (Washington, D.C.: June 2010). A variety of best practices exist to guide the successful acquisition of IT investments, including how to develop and document corrective actions for projects experiencing cost and schedule shortfalls. In particular, GAO's Information Technology Investment Management framework calls for agencies to develop and document corrective efforts for underperforming projects. It also states that agencies are to ensure that, as projects develop and costs rise, the project continues to meet mission needs at the expected levels of cost and risk; if projects are not meeting expectations or if problems have arisen, agencies are to quickly take steps to address the deficiencies. In addition, DHS policy requires corrective actions when cost or schedule variances exceed 8 percent. DHS developed and documented corrective efforts for 12 of the 21 major investments with a shortfall, but the remaining 9 did not have documented corrective efforts. Table 4 depicts the investments with shortfalls and whether corrective efforts had been developed and documented. DHS took corrective actions to address investment shortfalls in 12 investments. Actions for the 12 included: CBP: Automated Commercial Environment /International Trade Data System had schedule shortfalls due to an inadequate testing and development environment; they were resolved by leveraging CBP's disaster recovery site to perform the testing. CBP: Land Border Integration investment schedule delays due to technical complications were resolved through the use of risk management processes (e.g., identification, assessment, tracking, and mitigation of risks) identified in the investment's July 2011 risk management plan, which addressed the cause of the investment shortfalls. CBP: Non-Intrusive Inspection Systems Program, which had schedule shortfalls due to inaccurate estimates, tracked the project status and risks via project health status reports and other mitigation strategies. CBP: The Remote Video Surveillance System investment officials developed and documented an investment rebaseline to address the investment's schedule shortfall, which was due to an inaccurate initial project schedule estimate. CBP: The TECS Modernization investment--which had schedule shortfalls due to system development being delayed due to questions about whether planned enhancements duplicated functions performed by another agency system--program officials briefed key management on the differences between the system functions and development was allowed to continue. FEMA: Disaster Assistance Improvement Plan cost and schedule shortfalls were due to, among other things, dependencies on other investments. DHS developed a remediation plan for each shortfall to limit the negative impact. ICE: Detention and Removal Operations Modernization investment schedule shortfalls were due in part to a lack of understanding of user requirements; to address these issues, investment officials worked with key stakeholders to engage users to more thoroughly identify user requirements. NPPD: Critical Infrastructure Technology and Architecture investment's cost shortfalls, which were due to inaccurate initial cost estimates, were resolved by investment officials through several corrective efforts, including completing the project's life cycle cost estimate. NPPD: Infrastructure Security Compliance, Chemical Security Assessment Tool investment schedule was delayed due to multiple changes in leadership and in the investment's direction. Project officials developed and documented an investment rebaseline, which was approved in February 2012. It was intended to, among other things, develop a more accurate schedule. TSA: The Hazmat Threat Assessment Program investment schedule was delayed because the time needed to adjust a contract had not been accurately estimated. In response, investment officials documented an investment rebaseline, which was approved in March 2012. TSA: The Security Technology Integrated Program investment had schedule shortfalls from inaccurate estimates of the time needed to revise a contract. To resolve these issues, officials developed and documented an initiative to improve methods used to identify and track risks and resolve the schedule shortfalls. This effort is intended to help the investment avoid additional schedule changes. USSS: The Information Integration and Technology Transformation investment had one project with schedule shortfalls due to dependencies on another component's investment that had schedule slippages; issues were addressed by following the mitigation actions detailed in the investment's risk management plan. With regard to the remaining nine investments, three were unable to provide us with documentation, even though project officials stated that they had developed some corrective efforts, and six did not engage in corrective efforts to address shortfalls. Of the three investments, officials from TSA's Federal Air Marshal Service Mission Scheduling and Notification System investment, for example, reported that they had addressed the project's schedule shortfall--which was due, in part, to a support contractor not having adequate staffing--by performing the work within the agency instead of relying on the contractor. Further, according to TSA officials, the cost and schedule shortfalls on the Air Cargo Security investment, which were due to technical complications and dependencies on other investments, were addressed by establishing a new cost and schedule baseline. Nonetheless, this lack of documentation is inconsistent with the direction of DHS's guidance and related best practices, and it shows a lack of process discipline and attention to key details, which raises concern about the thoroughness of corrective efforts. Of the six investments without any corrective efforts, officials from these investments (namely, the Office of the Chief Information Officer's Human Resources IT investment, NPPD's US-VISIT Automated Biometric Identification System and Arrival and Departure Information System investments, USCG's Business Intelligence investment, NPPD's National Cybersecurity Protection System, and USCIS's Claims 4 investment), stated that they did not develop and document corrective efforts because they believed DHS's guidance does not call for it in their circumstances. Specifically, the officials said that although DHS's guidance calls for corrective actions to be developed and documented when an investment or its projects experiences a life cycle cost or schedule variance of 8 percent or greater, the variances on their project activities thus far were not large enough to constitute such a life cycle variance. The impact of this is that multiple projects can continue to experience shortfalls--which increases the risk that investments will experience serious lifecycle cost and schedule variances--without having to develop and document corrective actions and thus alert top management about potential problems and associated risks. This is inconsistent with the direction of OMB, which requires agencies to report (via the IT Dashboard) on the cost and schedule performance of their projects and considers those projects with a 10 percent or greater variance to be at an increased level of risk of not being able to deliver promised capabilities on time and within budget, and thus they require special attention from management. It is also inconsistent with our best practices research and experience at federal agencies, which stresses that agencies report to management when projects are not meeting expectations or when problems arise and quickly develop and document corrective efforts to address the problems. Further, our research and work at agencies has shown that waiting to act until significant life cycle variances occur can sometimes be risky and costly, as life cycle schedules are typically for multiyear periods, allowing the potential for underperforming projects to continue to vary from their cost and schedule goals for an extended amount of time without any requirement for corrective efforts. Consequently, until these guidance shortcomings are addressed and each underperforming project has defined and documented corrective actions, the department's major investments these projects support will be at an increased risk of cost and schedule shortfalls. Most of the projects comprising DHS's 68 major IT investments are meeting their cost and schedule commitments, but 21 major investments--integral to DHS's mission and costing approximately $1 billion--have projects that are experiencing significant cost and schedule shortfalls. These shortfalls place these investments at increased risk of not delivering promised capabilities on time and within budget, which, in turn, pose a risk to DHS's ability to fully meet its mission of securing the homeland. DHS guidance does not require projects experiencing significant cost and schedule shortfalls to develop and document corrective efforts until they cause a life cycle cost and schedule variance. This increases risk and is contrary to effective IT investment practices. Given that DHS is currently establishing and implementing new IT governance processes, the department is positioned to address the guidance shortfalls. We recommend that the Secretary of Homeland Security direct the appropriate officials to: Establish guidance that provides for developing corrective efforts for major IT investment projects that are experiencing cost and schedule shortfalls of 10 percent or greater, similar to those identified in this report. Ensure that major IT investment projects with shortfalls of 10 percent or greater have defined and documented corrective efforts. In its written comments signed by the Director for the Departmental GAO- OIG Liaison Office and reprinted in appendix IV, DHS concurred with our recommendations and estimated that it would implement the first recommendation by September 30, 2013, and the second one immediately. It also commented that the department was pleased that the report positively acknowledged that DHS (1) is meeting cost and schedule commitments for most of its major IT investments and (2) has plans and efforts under way to improve cost estimating capabilities and implement a center of excellence for requirements engineering. The department also provided technical comments, which we have incorporated where appropriate. We are sending copies of this report to interested congressional committees and the Secretary of Homeland Security. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions on the matters discussed in this report, please contact me at (202) 512-9286 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. The objectives of our review were to determine the (1) extent to which Department of Homeland Security (DHS) IT investments are meeting their cost and schedule commitments, (2) primary causes of any commitment shortfalls, and (3) adequacy of DHS's efforts to address these shortfalls and causes. To address our first objective, we analyzed how each of DHS's 68 major investments under development was performing against its cost and schedules commitments, as reported by the agency to the Office of Management and Budget (OMB) for inclusion on OMB's federal IT Dashboard. More specifically, we analyzed the extent to which each of these investments had met or exceeded, as of March 2012, cost and schedule commitments established when the investment was initiated. In doing this, we identified investments that had a project exceeding 10 percent of its cost and schedule commitments. We focused on these investments and their subsidiary projects because OMB considers them to be at an increased level of risk of not being able to deliver promised capabilities on time and within budget, and thus requiring special attention from management. To assess the reliability of the IT Dashboard data we analyzed, we corroborated the data by interviewing investment and other DHS officials to determine whether the information on the dashboard was consistent with that reported by DHS. In addition, we followed up on the status of implementation of previous GAO recommendations to improve the quality Specifically, we analyzed of information on OMB's federal IT Dashboard.plans and related documentation describing efforts by DHS to increase the scrutiny and quality of data submitted to the IT Dashboard. As part of this, we also interviewed department officials including those from the Office of the Chief Information Officer who are responsible for reviewing and submitting DHS's investment cost and schedule data to the federal IT Dashboard. The documentation and interviews provided us a level of assurance that the data we used for this engagement were, in fact, reliable. For our second objective, we used a structured interview instrument to survey the DHS and component officials responsible for the investments experiencing cost and schedule shortfalls in order to identify the causes of the shortfalls. As part of surveying these officials, we analyzed project and related documentation to corroborate the causes reported to us via the survey. We then analyzed these causes for commonalities, grouped them accordingly, and tallied the frequency of each cause by investment. In addition, we compared the causes to our prior reports on major DHS investments and related IT management processes to identify the extent to which we had made recommendations to address the causes associated with the department's investment cost and schedule shortfalls. To address our third objective, we initially identified and reviewed relevant criteria on developing and documenting corrective actions to address investment shortfalls. Specifically, these criteria included DHS's Acquisition Directive 102 (AD-102), DHS's Capital Planning and Investment Control Guide, and GAO's Information Technology Investment Management guide. We then used a structured interview instrument to survey DHS and component officials responsible for those investments experiencing shortfalls; we used the survey to identify whether any corrective actions had been developed and documented to address investment shortfalls. We also reviewed investment planning and execution documentation (e.g., project plans, project status reports, program meeting minutes, and acquisition program baselines) to corroborate information provided by the officials during the survey process. We then compared these corrective efforts to the criteria to identify any gaps and in those cases where there were, we reviewed documentation and interviewed agency officials to assess the reason for the gaps and any negative impacts. GAO, Information Technology Investment Management: A Framework for Assessing and Improving Process Maturity, GAO-04-394G (Washington, D.C.: Mar. 1, 2004). obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. Table 5 lists the DHS major IT investments that were meeting their cost and schedule commitments. Table 6 lists the DHS major IT investments with cost and/or schedule shortfalls, their costs and subsidiary projects, whether or not they had a cost and/or schedule shortfall, and their planned costs. In addition to the contact named above, the following staff also made key contributions to this report: Gary Mountjoy (assistant director), Scott Borre, Camille Chaires, and Nancy Glover.

DHS has responsibility for the development and management of the IT systems for the 22 federal agencies and offices under its jurisdiction. Of its 363 IT investments, 68 are in development and are classified by DHS as a "major" investment that requires special management attention because of its mission importance. Given the size and significance of these investments, GAO was asked to determine the (1) extent to which DHS IT investments are meeting their cost and schedule commitments, (2) primary causes of any commitment shortfalls, and (3) adequacy of DHS's efforts to address these shortfalls and their associated causes. To address these objectives, GAO analyzed recent cost and schedule performance for DHS's major IT investments, as reported to OMB. To identify the primary cause(s) of any shortfalls and whether any corrective efforts were being taken to address them, GAO analyzed project plans and related documentation and interviewed responsible DHS officials and compared the corrective efforts to applicable criteria to assess their adequacy. Approximately two-thirds of the Department of Homeland Security's (DHS) major information technology (IT) investments are meeting their cost and schedule commitments (i.e., goals). Specifically, out of 68 major IT investments in development, 47 were meeting cost and schedule commitments. The remaining 21--which total about $1 billion in spending--had one or more subsidiary projects that were not meeting cost and/or schedule commitments (i.e., they exceeded their goals by at least 10 percent, which is the level at which the Office of Management and Budget (OMB) considers projects to be at increased risk of not being able to deliver planned capabilities on time and within budget.) The primary causes for the cost and schedule shortfalls were (in descending order of frequency): inaccurate preliminary cost and schedule estimates, technology issues in the development phase, changes in agency priorities, lack of understanding of user requirements, and dependencies on other investments that had schedule shortfalls. Eight investments had inaccurate cost and schedule estimates. For example, DHS's Critical Infrastructure Technology investment had a project where actual costs were about 16 percent over the estimated cost, due in part to project staff not fully validating cost estimates before proceeding with the project. In addition, six investments had technical issues in the development phase that caused cost or schedule slippages. For example, DHS's Land Border Integration investment had problems with wireless interference at certain sites during deployment of handheld devices used for scanning license plates, which caused a project to be about 2.5 months late. In past work on DHS investments, GAO has identified some of the causes of DHS's shortfalls and made recommendations to strengthen management in these areas (e.g., cost estimating, requirements), and DHS has initiated efforts to implement the recommendations. DHS often did not adequately address shortfalls and their causes. GAO's investment management framework calls for agencies to develop and document corrective efforts to address underperforming investments. DHS policy requires documented corrective efforts when investments experience cost or schedule variances. Although 12 of the 21 investments with shortfalls had defined and documented corrective efforts, the remaining 9 did not. Officials responsible for 3 of the 9 investments said they took corrective efforts but were unable to provide plans or any other related documentation showing such action had been taken. Officials for the other 6 investments cited criteria in DHS's policy that excluded their investments from the requirement to document corrective efforts. This practice is inconsistent with the direction of OMB guidance and related best practices that stress developing and documenting corrective efforts to address problems in such circumstances. Until DHS addresses its guidance shortcomings and ensures each of these underperforming investments has defined and documented corrective efforts, these investments are at risk of continued cost and schedule shortfalls. GAO is recommending that the Secretary of Homeland Security direct the appropriate officials to address the guidance shortcomings and develop corrective actions for all major IT investment projects having cost and schedule shortfalls. In commenting on a draft of this report, DHS concurred with GAO's recommendations.

NEDCTP's mission is to deter and detect the introduction of explosive devices into U.S. transportation systems. As of February 2016, NEDCTP has deployed 787 of the 997 canine teams for which it has funding available in fiscal year 2016 across transportation systems. There are four types of LEO canine teams: aviation, mass transit, maritime, and multimodal; and two types of TSI canine teams: multimodal and PSC. Table 1 shows the number of canine teams by type for which funding is available, describes their roles and responsibilities, and costs per team to TSA. TSA's start-up costs for LEO teams include the costs of training the canine and handler, and providing the handler's agency a stipend. The annual costs to TSA for LEO teams reflect the amount of the stipend. TSA's start-up and annual costs for TSI canine teams are greater than those for LEO teams, because TSI handlers are TSA employees and therefore the costs include the handlers' pay and benefits, service vehicles, and cell phones, among other things. PSC teams come at an increased cost to TSA compared with other TSI teams because of the additional 2 weeks of training and costs associated with providing decoys (i.e., persons pretending to be passengers who walk around the airport with explosive training aids). In fiscal year 2016, approximately $121.7 million of amounts appropriated to TSA were available for its canine program. For fiscal year 2017, TSA is requesting approximately $131.4 million, a $9.7 million increase compared to the prior fiscal year. According to a TSA official, the increase is for projected pay increases and 16 additional positions to support canine training and operations, among other things. Figure 1 shows LEO, TSI, and PSC teams performing searches in different environments. Conventional canines undergo 15 weeks of explosives detection training, and PSCs 25 weeks, before being paired with a handler at TSA's Canine Training Center (CTC), located at Lackland Air Force Base. Conventional canine handlers attend a 10-week training course, and PSC handlers attend a 12-week training course. The 2 additional weeks are used to train PSC teams in actual work environments. Canines are paired with a LEO or TSI handler during their training course. After canine teams complete this training, and obtain initial certification, they acclimate to their home operating environment for a 30-day period. Upon completion of the acclimation period, CTC conducts a 3-day operational transitional assessment to ensure canine teams are not experiencing any performance challenges in their home operating environment. After initial certification, canine teams are evaluated on an annual basis to maintain certification. During conventional explosives detection evaluations, canine teams must demonstrate their ability to detect all the explosive training aids the canines were trained to detect in five search areas (e.g., aircraft). The five search areas are randomly selected among all the possible types of search areas, but according to CTC, include the area that is most relevant to the type of canine team. For example, teams assigned to airports will be evaluated in areas such as aircraft and cargo. Canine teams must find a certain percentage of the explosive training aids to pass their annual conventional evaluation. In addition, a specified number of nonproductive responses--when a canine responds to a location where no explosives odor is present--are allowed. After passing the conventional evaluation, PSC teams are required to undergo an additional annual evaluation that includes detecting explosives on a person, or being carried by a person. PSC teams are tested in different locations within the sterile areas and passenger screening checkpoints of an airport. A certain number of persons with explosive training aids must be detected, and a specified number of nonproductive responses are allowed for PSC certification. TSA has taken steps to enhance NEDCTP since we issued our 2013 report. For example, TSA has used data, such as the results of covert tests, to assess the proficiency and utilization of its canine teams. However, further opportunities exist for TSA to assess its program related to the use and cost of PSC teams. In January 2013, we reported that TSA collected and used key canine program data in its Canine Website System (CWS), a central management database, but it could better analyze these data to identify program trends. For example, we found that TSA did not analyze training minute data over time (from month to month) and therefore was unable to determine trends related to canine teams' compliance with the requirement to train 240 minutes each month. Similarly, TSA collected monthly data on the amount of cargo TSI teams screened in accordance with the agency's requirement, but had not analyzed these data over time to determine if, for example, changes were needed in the screening requirement or the number of teams deployed. Table 2 highlights some of the key data elements included in CWS at the time of our prior review. In January 2013, we recommended that TSA regularly analyze available data to identify program trends and areas that are working well and those in need of corrective action to guide program resources and activities. These analyses could include, but not be limited to, analyzing and documenting trends in proficiency training minutes, canine utilization, results of short notice assessments (covert tests) and final canine responses, performance differences between LEO and TSI canine teams, as well as an assessment of the optimum location and number of canine teams that should be deployed to secure the U.S. transportation system. TSA concurred with our recommendation, and in June 2014 we reported on some of the steps it had taken to implement the recommendation. Specifically, TSA monitored canine teams training minutes over time by producing annual reports. For example, TSA analyzed canine teams' compliance with the training requirement throughout fiscal year 2013 to identify teams repeatedly not in compliance with the monthly requirement. Field Canine Coordinators subsequently completed comprehensive assessment reviews for their canine teams, which involved reporting on the teams that did not meet the requirement. TSA also reinstated short notice assessments in July 2013, since they had suspended them in May 2012. We reported that in the event a team fails a short notice assessment, the Field Canine Coordinator completes a report that includes an analysis of the team's training records to identify an explanation for the failure. According to TSA officials, in March 2014, NEDCTP stood up a new office, known as the Performance Measurement Section, to perform analyses of canine team data. Those actions, among others, addressed the intent of our recommendation by positioning TSA to identify program trends to better target resources and activities based on what is working well and what may need corrective action. Therefore, we closed the recommendation as implemented in August 2014. Since we closed the recommendation, according to TSA officials, the agency has continued to take steps to enhance its canine program. For example, TSA eliminated the monthly 240-minute training requirement and instead requires canine teams to train on all explosives training aids they must be able to detect, in all search areas (e.g., aircraft), every 45 days. In April 2015, TSA also eliminated canine teams' requirement to screen a certain volume of air cargo. Instead, TSA requires TSI-led canine teams to spend at least 40 percent of their time on utilization activities, such as patrolling airport terminals and screening air cargo. Canine teams can spend the rest of the time on administrative activities, such as taking their canine to the veterinarian. Handlers record their daily activities in a web-based system, which allow TSA to assess how the canine teams are being used. According to TSA, utilization time increased five percent in fiscal year 2015 since the requirement changed. In February 2016, TSA officials told us that starting in fiscal year 2016, TSA increased the number of short notice assessments required from two to five per year for each state and local law enforcement agency that participates in NEDCTP. According to a TSA official, the number was increased since TSA believes such assessments are helpful in determining the proficiency of canine teams. Furthermore, CTC placed 34 Regional Canine Training Instructors in the field to review canine teams' training records and assist them in resolving any performance challenges, such as challenges in detecting a particular explosive aid. We also reported in January 2013 that TSA's 2012 Strategic Framework called for the deployment of PSC teams based on risk; however, airport stakeholder concerns about the appropriateness of TSA's protocols for resolving PSC team responses resulted in these teams not being deployed to the highest-risk airports or utilized for passenger screening. We recommended that TSA coordinate with airport stakeholders to deploy future PSC teams to the highest-risk airports, and ensure that deployed PSC teams are utilized as intended, consistent with the agency's statutory authority to provide for the screening of passengers and their property. TSA concurred with our recommendation, and in June 2014, we reported that the PSC teams for which TSA had funding and not already deployed to a specific airport at the time our 2013 report had been deployed to or allocated to the highest-risk airports. We also reported that, according to TSA officials, of all the airports where PSC teams had been deployed, all but one airport had agreed to allow TSA to conduct screening of individuals using PSC teams at passenger screening checkpoint queues. According to TSA, the agency was successful in deploying PSC teams to airports where they were previously declined by aviation stakeholders for various reasons. For example, TSA officials explained that stakeholders have realized that PSCs are an effective means for detecting explosives odor, and no checkpoints have closed because of a nonproductive response. In January 2015, we closed the recommendation as implemented after TSA deployed all remaining PSC teams (those which had previously been allocated) to the highest-risk airports and all PSC teams were being utilized for passenger screening. Since we closed the recommendation, TSA has continued to allocate and deploy additional PSC teams for which it has received funding to the highest-risk airports based on its assessment of how high the risks are to particular airports. In addition, from November 2015 to January 2016, TSA relocated PSC teams located at 7 lower-risk airports to higher-risk airports. As a result, TSA has PSC teams deployed at nearly all category X airports, which are generally higher-risk airports. According to TSA officials, all category X airports will have PSC teams by the end of calendar year 2016. In our January 2013 report, we found that TSA began deploying PSC teams in April 2011 prior to determining the teams' operational effectiveness, and had not completed an assessment to determine where within the airport PSC teams would be most effectively utilized. In June 2012, the DHS Science and Technology Directorate (S&T) and TSA began conducting effectiveness assessments to help demonstrate the effectiveness of PSC teams, but the assessment was not inclusive of all areas of the airport (i.e., the sterile area, passenger screening checkpoint, and public side of the airport). During the June 2012 assessment of PSC teams' effectiveness, TSA conducted one of the search exercises used for the assessment with three conventional canine teams. Although this assessment was not intended to be included as part of DHS S&T and TSA's formal assessment of PSC effectiveness, the results of this assessment suggested, and TSA officials and DHS S&T's Canine Explosives Detection Project Manager agreed, that a systematic assessment with both PSCs and conventional canines could provide TSA with information to determine whether PSCs provide an enhanced security benefit compared with conventional LEO aviation canine teams that have already been deployed to airport terminals. As a result, we recommended that TSA expand and complete testing, in conjunction with DHS S&T, to assess the effectiveness of PSCs and conventional canines in all airport areas deemed appropriate prior to making additional PSC deployments to help (1) determine whether PSCs are effective at screening passengers, and resource expenditures for PSC training are warranted, and (2) inform decisions regarding the type of canine team to deploy and where to optimally deploy such teams within airports. TSA concurred, and we testified in June 2014 that through its PSC Focused Training and Assessment Initiative--a two-cycle assessment to establish airport-specific optimal working areas, assess team performance, and train teams on best practices--TSA had determined that PSC teams are effective and should be deployed at the passenger checkpoint queue. Furthermore, in February 2014, TSA launched a third PSC assessment cycle to increase the amount of time canines can work and enhance their ability to detect explosives placed in areas more challenging to detect. Since our June 2014 testimony, TSA has continued to carry out the third assessment cycle. According to TSA officials, as of February 2016, 68 PSC teams have undergone the assessment. Additionally, TSA officials told us they began a fourth assessment cycle in January 2016 to test PSC teams and all other canine teams on threats identified through intelligence. Although TSA has taken steps to determine whether PSC teams are effective and where in the airport environment to optimally deploy such teams, TSA has not compared the effectiveness of PSCs and conventional canines in order to determine if the greater cost of training canines in the passenger screening method is warranted. In June 2014, we reported that TSA did not plan to include conventional canine teams in PSC assessments because conventional canines have not been through the process used with PSCs to assess their temperament and behavior when working in proximity to people. We acknowledged TSA's position that half of deployed conventional canines are of a breed not accepted for use in the PSC program, but noted that other conventional canines are suitable breeds, and have been paired with LEO aviation handlers working in proximity with people since they patrol airport terminals, including ticket counters and curbside areas. In December 2014, TSA reported that it did not intend to include conventional canine teams in PSC assessments and cited concerns about the liability of operating conventional canines in an unfamiliar passenger screening environment. In January 2015, we closed the recommendation as not implemented, reiterating that conventional canines paired with LEO handlers work in close proximity with people since, like PSCs, they also patrol airport terminals. Consistent with our recommendation, we continue to believe that opportunities exist for TSA to conduct an assessment to determine whether conventional canines are as effective at detecting explosives odor on passengers when compared to PSC teams working in specific areas, such as the passenger checkpoint queue. If such an assessment were to indicate that conventional canines are equally as effective at detecting explosives odor on passengers as PSCs, then limiting proficiency training requirements of PSCs to those that currently apply to conventional canine teams could save TSA costs associated with maintaining PSC teams. Also, as we reported in January 2013, TSA was considering providing some PSCs to LEOs to work on the public side of the airport. Should TSA determine that the additional investment for PSCs is warranted, it could reduce the agency's program costs if it deployed PSCs with LEO handlers rather than TSI handlers. Specifically, TSA could save approximately $100,000 per team each year, as a PSC team led by a LEO handler would cost TSA about $54,000 annually (the amount of the stipend), compared with about $154,000, the annual cost per TSI-led PSC team (see table 1). Chairman Johnson, Ranking Member Carper, and Members of the committee, this completes my prepared statement. I would be happy to respond to any questions you may have at this time. For questions about this statement, please contact Jennifer Grover at (202) 512-7141 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 Chris Ferencik (Assistant Director), Chuck Bausell, Lisa Canini, Michele Fejfar, Eric Hauswirth, Susan Hsu, Richard Hung, Brendan Kretzschmar, Thomas Lombardi, and Ben Nelson. Key contributors for the previous work that this testimony is based on are listed in those products. 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 has implemented a multilayered system composed of people, processes, and technology to protect the nation's transportation systems. One of TSA's security layers is comprised of nearly 800 deployed explosives detection canine teams--a canine paired with a handler. These teams include PSC teams trained to detect explosives on passengers and conventional canines trained to detect explosives in objects, such as cargo. In January 2013, GAO issued a report on TSA's explosives detection canine program. This testimony addresses the steps TSA has taken since 2013 to enhance its canine program and further opportunities to assess the program. This statement is based on GAO's January 2013 report, a June 2014 testimony, and selected updates conducted in February 2016 on canine training and operations. The products cited in this statement provide detailed information on GAO's scope and methodology. For the selected updates, GAO reviewed the president's fiscal year 2017 budget request for TSA and interviewed TSA officials on changes made to NEDCTP since June 2014, the last time GAO reported on the program. The Transportation Security Administration (TSA) has taken steps to enhance its National Explosives Detection Canine Team Program (NEDCTP) since GAO's 2013 report, but further opportunities exist for TSA to assess its canine program and potentially reduce costs. TSA Uses Data to Assess Canine Team Proficiency and Utilization: In January 2013, GAO reported that TSA needed to take actions to analyze NEDCTP data and ensure canine teams are effectively utilized. GAO recommended that TSA regularly analyze available data to identify program trends and areas that are working well and those in need of corrective action to guide program resources and activities. TSA concurred, and in June 2014, GAO reported that the agency had taken actions that address the recommendation. GAO subsequently closed the recommendation as implemented in August 2014. Since then, according to TSA officials, the agency has continued to enhance its canine program. For example, TSA reported that it requires canine teams to train on all explosives training aids they must be able to detect--any explosive used to test and train a canine--in all search areas (e.g., aircraft), every 45 days. TSA has Deployed PSC Teams to the Highest-Risk Airports: GAO found in January 2013 that passenger screening canine (PSC) teams were not being deployed to the highest-risk airports as called for in TSA's 2012 Strategic Framework or utilized for passenger screening. GAO recommended that TSA coordinate with airport stakeholders to deploy future PSC teams to the highest-risk airports and ensure that deployed teams were utilized as intended. TSA concurred, and in June 2014, GAO reported that PSC teams had been deployed or allocated to the highest-risk airports. In January 2015, GAO closed the recommendation as implemented after TSA deployed all remaining PSC teams to the highest-risk airports and all teams were being utilized for passenger screening. Opportunities May Exist for TSA to Reduce Canine Program Costs : GAO reported in 2013 that TSA began deploying PSC teams prior to determining their operational effectiveness and identifying where within the airport these teams would be most effectively utilized. GAO recommended that TSA take actions to comprehensively assess the effectiveness of PSCs. TSA concurred and has taken steps to determine the effectiveness of PSC teams and where in the airport to optimally deploy such teams. However, TSA did not compare the effectiveness of PSCs and conventional canines in detecting explosives odor on passengers to determine if the greater cost of training PSCs is warranted. In December 2014, TSA reported that it did not intend to do this assessment because of the liability of using conventional canines to screen persons when they had not been trained to do so. GAO closed the recommendation as not implemented, stating that conventional canines currently work in close proximity with people as they patrol airport terminals, including ticket counters and curbside areas. GAO continues to believe that opportunities may exist for TSA to reduce costs if conventional canines are found to be as effective at detecting explosives odor on passengers as PSCs. GAO is making no new recommendations in this statement.

In our earlier work on studies comparing federal and non-federal pay, we noted how the composition of the federal workforce has changed over the past 30 years, with the need for clerical and blue collar roles diminishing, and the need for professional, administrative, and technical roles increasing. Today's federal jobs require more advanced skills at higher grade levels than federal jobs in years past. As a result, a key management challenge facing the federal government in an era of fiscal austerity is balancing the size and composition of the federal workforce so it is able to deliver the high quality services that taxpayers demand, within the budgetary realities of what the nation can afford. As we have previously stated, inadequate planning prior to personnel reductions jeopardizes the ability of agencies to carry out their missions. For example, in the wake of extensive federal downsizing in the 1990s-- done largely without adequate planning or sufficient consideration of the strategic consequences--agencies faced challenges deploying the right skills when and where they were needed. More recently, this management challenge has been exacerbated by the fact that today's federal workforce consists of a large number of employees who are eligible for retirement. Various factors affect when individuals actually retire. Some amount of retirement and other forms of attrition can be beneficial because it creates opportunities to bring fresh skills on board and allows organizations to restructure themselves in order to better meet program goals and fiscal realities. But if turnover is not strategically managed and monitored, gaps can develop in an organization's institutional knowledge and leadership as experienced employees leave. We have previously reported that the needs and missions of individual agencies should determine their approach to workforce planning. GAO-09-632T. Our prior work has shown that strategic human capital management has been a pervasive challenge facing the federal government, and has led to government-wide and agency-specific skills gaps. Our February 2011 update to our high risk list noted that federal strategic human capital management was a high risk area because current and emerging mission critical skills gaps were undermining agencies' abilities to meet their vital missions. To help close these skills gaps, we reported that actions were needed in three broad areas: planning, to identify the causes of, and solutions for, skills gaps and to identify the steps to implement those solutions; implementation, to put in place corrective actions to narrow skills gaps through talent management and other strategies; and measurement and evaluation, to assess the performance of initiatives to close skills gaps. Since our February 2011 update, OPM, individual agencies, and Congress have taken a number of steps to close mission critical skills gaps, but as we noted in our 2013 High Risk update, additional actions were needed, as our work found that skills gaps were continuing in such areas as cybersecurity, acquisition management, and aviation safety, among others. These actions included reviewing the extent to which new capabilities were needed, in order to give OPM and other agencies greater visibility over government-wide skills gaps so that agencies could take a more coordinated approach to remediating them. OPM agreed that these were important areas for consideration. Since our 2011 High Risk update, OPM's efforts to address mission critical skill gaps have included establishing the Chief Human Capital Officers Council Working Group in order to identify and mitigate critical skills gaps for both government-wide and agency-specific occupations and competencies. Moreover, the Working Group's efforts were designated a cross-agency priority goal within the administration's fiscal year 2013 federal budget; OPM is partnering with the Chief Human Capital Officer's Council to create a government-wide Human Resources Information Technology strategy that can provide greater visibility to OPM and agencies regarding current and emerging skills gaps. From 2004 to 2012, the non-postal civilian workforce grew from 1.88 million to 2.13 million, an increase of 14 percent, or 258,882 individuals. Most of the total increase (94 percent) was from 2007 through 2012. The number of permanent career executive branch employees grew by 256,718, from about 1.7 million in 2004 to 1.96 million in 2012 (an increase of 15 percent). Of the 24 CFO Act agencies, 13 had more permanent career employees in 2012 than they did in 2004, 10 had fewer, and one agency was unchanged. Three agencies (DOD, DHS, and VA) accounted for 94 percent of the growth between 2004 and 2012. These three agencies employed 62 percent of all executive branch permanent career employees in 2012. A number of factors contributed to the overall growth of the civilian workforce: For example, at DOD, according to agency officials, converting certain positions from military to civilian, as well as the growth of the agency's acquisition and cybersecurity workforce contributed to this overall increase. At VA, according to agency officials, approximately 80 percent of employees hired from 2004 through 2012 were hired by the Veterans Health Administration (VHA), primarily to meet increased demand for medical and health-related services for military veterans. At DHS, the increase in civilian permanent career employment was due to increased staffing to secure the nation's borders. Employees in professional or administrative positions account for most of the overall increase in federal civilian employment. For example, the number of employees working in professional positions increased by 97,328 (from 394,981 in 2004 to 492,309 in 2012). This growth accounts for nearly 38 percent of the 256,718 total government-wide increase in permanent career employees during this period. In comparison, employees in administrative positions increased by 153,914 (from 582,509 in 2004 to 736,423 in 2012). This growth accounts for 60 percent of the total government-wide increase during this period. Technical, clerical, blue collar, and other white collar positions accounted for the remaining 2 percent of those full-time permanent positions added from 2004 to 2012. The retirement rate of federal civilian employees rose from 3.2 percent in 2004 to a high of 3.6 percent in 2007 when, according to data from the National Bureau of Economic Research, the recession began. During the recession, the total attrition rate dropped to a low of 2.5 percent in 2009 before rebounding to pre-recession levels in 2011 and 2012. Beginning at the end of 2007, the recession saw retirement rates decline to 3.3 percent in 2008, 2.5 percent in 2009, and 2.7 percent in 2010, before increasing again to 3.5 percent in 2012. With respect to retirement eligibility, of the 1.96 million permanent career employees on board as of September 2012, nearly 270,000 (14 percent) were eligible to retire. By September 2017, nearly 600,000 (31 percent) of on board staff will be eligible to retire. Not all agencies will be equally affected. By 2017, 20 of the 24 CFO Act agencies will have a higher percentage of staff eligible to retire than the current overall average of 31 percent. About 21 percent of DHS staff on board as of September 2012 will be eligible to retire in 2017, while over 42 percent will be eligible to retire at both the Department of Housing and Urban Development (HUD) and the Small Business Administration (SBA). Certain occupations--such as air traffic controllers and those involved in program management--will also have particularly high retirement eligibility rates by 2017. With respect to pay and benefits as measured by each full-time equivalent (FTE) position, total government-wide compensation grew by an average of 1.2 percent per year from 2004 to 2012 ($106,097 to $116,828--about a 10 percent overall increase). Much of this growth was driven by increased cost of personnel benefits, which rose at a rate of 1.9 percent per year (a 16.3 percent increase overall). According to OMB, the government's contribution to the Federal Employee Health Benefits (FEHB) program rose, on average, 5.2 percent from 2004 to 2011 and 4.7 percent from 2011 to 2012. One study showed that employer contributions for premiums for family insurance coverage nationwide grew by about 58 percent from 2004 through 2012, for an average annual increase of around 5 percent.spending rose at an average annual rate of 1 percent per year (a 7.9 percent increase overall). While government-wide spending on pay and benefits rose slightly, some agencies had significant increases in their spending on compensation per FTE. For example, the Department of State's spending on pay and benefits per FTE increased by 4.5 percent per year, on average, from 2004 through 2012. In total, government-wide spending on pay and benefits increased by $51 billion, from $193.2 billion to $244.3 billion (an average annual increase of 3 percent and an overall increase of 26.4 percent) from 2004 to 2012. In terms of employee pay per FTE, Spending on pay and benefits as a proportion of the federal discretionary budget remained relatively constant (at about 14 percent) from 2004 to 2010, with slight increases in 2011 and 2012. Specifically, the proportion spent on pay increased by 0.6 percent and the proportion spent on benefits increased by 0.5 percent from 2004 to 2012. According to OMB, a portion of this increase can be attributed to an increase in the growth in federal civilian employment at certain agencies, locality pay adjustments, across-the-board pay increases, and (as previously stated) increases in the government's share of FEHB program premiums. Government-wide, while the proportion of the discretionary budget spent on compensation remained constant, certain agencies had increases from 2004 to 2012. Three agencies--DOD, DHS, and VA--accounted for 77 percent of the total government-wide increase in compensation from 2004 to 2012, largely due to increased hiring. DOD increased its spending on compensation by $19.9 billion (about 39 percent of the total increase), VA increased its spending by $10.5 billion (about 21 percent of the total increase), and DHS increased its spending by $8.8 billion (about 17 percent of the total increase). With respect to occupational categories,increase in spending on pay from 2004 to 2012 was due to more employees working in professional or administrative positions, which often require specialized knowledge and advanced skills and degrees, and thus, higher pay. Specifically, the percentage of those employees grew from 56 percent of the federal civilian workforce in 2004 to 62 percent in 2012. Even if there had been no change in pay for the occupations, the changing composition of the federal workforce alone would have caused average federal pay to increase from $70,775 in 2004 to $73,229 in 2012, as opposed to the actual 2012 average of $75,947. 48 percent of the overall Appendix I provides more detail on each of our objectives and related findings. While the size of the civilian federal workforce grew moderately during the period of our study, most of this growth was concentrated in a few large agencies and reflects some of our nation's pressing priorities. The cost of compensating the civilian workforce has remained relatively constant as a percentage of the discretionary budget during the past decade; however, nearly half of the increased pay and benefits costs can be attributed to a shift toward more employees serving in professional and administrative capacities, in jobs that require specialized knowledge and higher levels of education. Although employment levels have grown, large numbers of retirement-eligible employees may be cause for concern among agencies, decision-makers, and other stakeholders, because they could produce mission critical skills gaps if turnover is not strategically managed and monitored. Replacing retiring workers, both in terms of training and hiring costs, and in terms of the largely unquantifiable costs of losing experienced, high- level employees, could be problematic given the era of flat or declining budgets that the government is experiencing. At the same time, retirement-eligible employees present an opportunity for agencies to align their workforces with current and future mission needs. Indeed, as the federal government faces an array of current and future challenges, agencies will be confronted with going beyond simply replacing retiring individuals by engaging in broad, integrated planning and management efforts that will bolster their ability to meet both current and evolving mission requirements. Combined, these challenges underscore the importance of strategic workforce planning and early preparation to help ensure agencies maintain their capacity to carry out their vital functions. Thus, as we have reported in our prior work, agencies should (1) take such key steps as determining the critical skills and competencies that will be needed to achieve current and future programmatic results; (2) develop appropriate talent management strategies to address any gaps in the number, deployment, and alignment of skills; and (3) monitor and evaluate their progress toward their human capital goals. In short, understanding the dynamics of the federal workforce and the drivers of agencies' compensation costs will help guide decision-making on workforce composition and budgeting. We provided a draft of this report to the Director of OMB and the Director of OPM for their review and comment. In addition, we provided sections of this report to DOD, DHS, and VA. GAO received technical comments on a draft of this report from OMB, OPM, DOD, DHS, and VA, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to OMB, OPM, DOD, DHS, VA, 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) 512-2757 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. To analyze workforce and turnover trends, we used OPM's Enterprise Human Resources Integration Statistical Data Mart (EHRI-SDM), which contains personnel action and on board data for most federal civilian employees. We analyzed agency-level EHRI data for the 24 Chief Financial Officers (CFO) Act agencies, which represent the major departments (such as the Department of Defense) and most of the executive branch workforce. We analyzed EHRI data starting with fiscal year 2004 because personnel data for DHS (which was formed in 2003 with a mix of new hires and transfers from other agencies) had stabilized by 2004. We selected 2012 as the endpoint because it was the most recent, complete fiscal year of data available during most of our review. We analyzed on board trends for most of the executive branch workforce, including temporary and term limited employees. However, we focused on career permanent employees in our analysis of separation trends, retirement eligibility, and changes in occupational categories and education levels because these employees comprise most of the federal workforce and become eligible to retire with a pension, for which temporary and term limited employees are ineligible. To calculate the number of federal civilian employees, we included all on board staff, regardless of their pay status. In addition, we excluded foreign service workers at the State Department since those employees were not included in OPM data for the years after 2004. We examined on board, attrition, and retirement eligibility trends by agency, occupation, and education level. Occupational categories include Professional, Administrative, Technical, Clerical, Blue Collar, and Other white-collar (PATCO) groupings and are defined by the educational requirements of the occupation and the subject matter and level of difficulty or responsibility of the work assigned. Occupations within each category are defined by OPM and education levels are defined by OPM as the extent of an employee's educational attainment from an accredited institution. We grouped education levels to reflect categories of degree attainment, such as a bachelor's or advanced degree. To calculate attrition rates, we added the number of career permanent employees with personnel actions indicating they had separated from federal service (for example, resignations, retirements, terminations, and deaths) and divided that by the 2-year on board average. To calculate retirement eligibility for the next 5 years, we computed the date at which the employee would be eligible for voluntary retirement at an unreduced annuity, using age at hire, years of service, birth date, and retirement plan coverage. We assessed the reliability of the EHRI data through electronic testing to identify missing data, out of range values, and logical inconsistencies. We also reviewed our prior work assessing the reliability of these data and interviewed OPM officials knowledgeable about the data to discuss the data's accuracy and the steps OPM takes to ensure reliability. On the basis of this assessment, we believe the EHRI data we used are sufficiently reliable for the purpose of this report. To assess the extent to which federal civilian employee compensation has changed as a percentage of total discretionary spending from fiscal year 2004 through 2012, we analyzed discretionary outlays from OMB's MAX Information System , which captures compensation costs as gross obligations, hereafter referred to as "spending." We analyzed spending on employee compensation as a ratio of federal discretionary spending (as opposed to other baseline measures, such as total federal spending or gross domestic product) because discretionary spending--that is, spending that is decided upon by Congress each fiscal year through annual appropriations acts--includes personnel costs as well as other operational and program expenses (such as equipment and contracts) that agencies incur to carry out their mission. As a result, the ratio of compensation to discretionary spending enabled us to compare personnel costs to other agency spending. Moreover, using discretionary spending as a baseline allowed us to present this information for both the entire federal government as well as for an individual agency. Obligations data are reported in object classes, which are categories that present obligations by the type of expenditure. We analyzed the object class, "personnel compensation and benefits," for executive branch agencies in our analysis.and discretionary spending categories when reporting on budget obligations, we used outlays as a proxy for pay and benefits obligations. According to a senior OMB official, this approach is appropriate for pay and benefits spending categories because most (or all) of the budget authority for these categories is obligated in the same year that it is authorized, resulting in similar numbers between outlays and obligations. Because OMB does not distinguish between mandatory We analyzed pay and benefits per full time equivalent (FTE) based on the MAX database designation for FTEs. To assess the reliability of the MAX data, we performed electronic testing and cross-checked it against the numbers reported in the President's Budget. In addition, we interviewed OMB officials to understand any discrepancies in the data. For example, we met with OMB officials and provided them our initial results to determine whether we were accurately representing spending on pay and benefits. Based on these discussions, we made adjustments to our scope and methodology, as appropriate. Based on our assessment, we believe these data are sufficiently reliable for the purpose of this report. To determine the factors contributing to workforce, turnover, and compensation trends in the civilian workforce from 2004 to 2012, we interviewed officials at the Office of Personnel Management (OPM), Office of Management and Budget (OMB), Department of Defense (DOD), Veterans Administration (VA), and the Department of Homeland Security (DHS). We conducted this performance audit from June 2012 to January 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Robert Goldenkoff, (202) 512-2757 or [email protected]. Robert Goldenkoff (Director), Trina Lewis (Assistant Director), and Chelsa Gurkin (Assistant Director) managed this assignment. Jeffrey Schmerling (Analyst-in-Charge) and Wesley Sholtes (Analyst) made key contributions to all aspects of the work. Ben Bolitzer, Sara Daleski, and John Mingus provided assistance with data analysis. Karin Fangman and Sabrina Streagle provided legal support; Robert Gebhart provided key assistance with message development and writing. Robert Robinson provided key assistance with graphics and Rebecca Shea provided methodological assistance.

Skilled federal workers are critical to the successful operation of government. At the same time, personnel costs for current and former federal civilian employees represented about 26 percent of total discretionary spending in 2012; these personnel costs are outlays from budget authority authorized by appropriations acts. Given the need to control agencies' personnel costs while also maintaining agencies' high performance, a thorough understanding of employment and compensation trends is a critical component of strategic workforce planning. GAO was asked to provide data on federal employment and compensation trends. This report examines (1) employment trends of federal civilian personnel from 2004 to 2012 and some factors that affect these trends, and (2) the extent to which federal civilian employee compensation has changed (as a percentage of total discretionary spending) and some reasons for this change. For this report, GAO analyzed government-wide executive branch civilian personnel data from 2004 to 2012. GAO also interviewed Office of Personnel Management (OPM), Office of Management and Budget (OMB), and other selected agency officials. GAO also reviewed relevant literature, such as studies on attrition. GAO is not making any recommendations in this report. GAO received technical comments on a draft of this report from OMB, OPM, and the Departments of Defense, Homeland Security, and Veterans Affairs; comments were incorporated as appropriate. From 2004 to 2012, the federal non-postal civilian workforce grew by 258,882 employees, from 1.88 million to 2.13 million (14 percent). Permanent career employees accounted for most of the growth, increasing by 256,718 employees, from 1.7 million in 2004 to 1.96 million in 2012 (15 percent). Three agencies--the Departments of Defense (DOD), Homeland Security (DHS), and Veterans Affairs (VA)--accounted for about 94 percent of this increase. At DOD, officials said that converting certain positions from military to civilian, as well as the growth of the agency's acquisition and cybersecurity workforce, contributed to this overall increase. At VA, officials said the increased demand for medical and health-related services for military veterans drove most of the growth in personnel levels. DHS officials said the increase in employment was due in large part to the nation's border security requirements. (In contrast, ten agencies had fewer career permanent employees in 2012 than they did in 2004). Government-wide, most of the increase in employment from 2004 to 2012 occurred within occupational categories that require higher skill and educational levels. These categories include professional occupations (e.g., doctors and scientists), and administrative occupations (e.g., financial and program managers), as opposed to clerical, technical, and blue collar occupations (which remained stable). In terms of turnover, retirement rates remained relatively flat (at around 3.5 percent) from 2004 until the start of the recession in December 2007. Retirement rates fell to a low of around 2.5 percent during the recession in 2009, and then increased to pre-recession rates in 2011 and 2012. With respect to retirement eligibility, of the 1.96 million permanent career employees on board as of September 2012, nearly 270,000 (14 percent) were eligible to retire. By September 2017, nearly 600,000 (around 31 percent) will be eligible to retire, government-wide. Spending on total government-wide compensation for each full-time equivalent (FTE) position grew by an average of 1.2 percent per year, from $106,097 in 2004 to $116,828 in 2012. Much of this growth was driven by increased personnel benefits costs, which rose at a rate of 1.9 percent per year. Other factors included locality pay adjustments, as well as a change in the composition of the federal workforce (with a larger share of employees working in professional or administrative positions, requiring advanced skills and degrees). In terms of employee pay per FTE, spending rose at an average annual rate of 1 percent per year (a 7.9 percent increase overall). However, as a proportion of governmentwide federal discretionary spending, spending on compensation remained constant from 2004 to 2010 (at 14 percent), with slight increases in 2011 and 2012. While the federal civilian workforce grew in size from 2004 to 2012, most of the growth was concentrated in three federal agencies and was driven by the need to address some of the nation's pressing priorities. At the same time--as GAO reported in February 2013--large numbers of retirement-eligible employees in the years ahead may be cause for concern: Their retirement could produce mission critical skills gaps if left unaddressed. As GAO reported in its February 2013 High Risk update, strategic human capital planning that is integrated with broader organizational strategic planning will be essential for ensuring that-- going forward--agenices have the talent, skill, and experience mix they need to cost-effectively execute their mission and program goals.

From May 2003 through June 2004, the CPA, led by the United States and the United Kingdom, was the UN-recognized coalition authority responsible for the temporary governance of Iraq and for overseeing, directing, and coordinating the reconstruction effort. In May 2003, the CPA dissolved the military organizations of the former regime and began the process of creating or reestablishing new Iraqi security forces, including the police and a new Iraqi army. Over time, multinational force commanders assumed responsibility for recruiting and training some Iraqi defense and police forces in their areas of responsibility. In May 2004, the President issued a National Security Presidential Directive, which stated that, after the transition of power to the Iraqi government, the Department of State (State), through its ambassador to Iraq, would be responsible for all U.S. activities in Iraq except for security and military operations. U.S. activities relating to security and military operations would be the responsibility of the Department of Defense (DOD). The Presidential Directive required the U.S. Central Command (CENTCOM) to direct all U.S. government efforts to organize, equip, and train Iraqi security forces. The Multi-National Security Transition Command-Iraq, which operates under Multi-National Force-Iraq (MNF-I), now leads coalition efforts to train, equip, and organize Iraqi security forces. Other U.S. government agencies also play significant roles in the reconstruction effort. The U.S. Agency for International Development (USAID) is responsible for projects to restore Iraq's infrastructure, support healthcare and education initiatives, expand economic opportunities for Iraqis, and foster improved governance. The U.S. Army Corps of Engineers provides engineering and technical services to USAID, State, and military forces in Iraq. In December 2005, the responsibilities of the Project Contracting Office (PCO), a temporary organization responsible for program, project, asset, and financial management of construction and nonconstruction activities, were merged with those of the U.S. Army Corps of Engineers Gulf Region Division. On June 28, 2004, the CPA transferred power to an interim sovereign Iraqi government, the CPA was officially dissolved, and Iraq's transitional period began. Under Iraq's transitional law, the transitional period included the completion of a draft constitution in October 2005 and two subsequent elections--a referendum on the constitution and an election for a permanent government. The Iraqi people approved the constitution on October 15, 2005, and voted for representatives to the Iraq Council of Representatives on December 15, 2005. As of February 3, 2006, the Independent Electoral Commission of Iraq had not certified the election results for representatives. Once certified, the representatives are to form a permanent government. According to U.S. officials and Iraqi constitutional experts, the new Iraqi government is likely to confront the same issues it confronted prior to the referendum--the power of the central government, control of Iraq's natural resources, and the application of Islamic law. According to U.S. officials, once the Iraqi legislature commences work, it will form a committee that has 4 months to recommend amendments to the constitution. To take effect, these proposed amendments must be approved by the Iraqi legislature and then Iraqi citizens must vote on them in a referendum within 2 months. The United States faces three key challenges in stabilizing and rebuilding Iraq. First, the unstable security environment and the continuing strength of the insurgency have made it difficult for the United States to transfer security responsibilities to Iraqi forces and to engage in rebuilding efforts. Second, inadequate performance data and measures make it difficult to determine the overall progress and impact of U.S. reconstruction efforts. Third, the U.S. reconstruction program has encountered difficulties with Iraq's inability to sustain new and rehabilitated infrastructure projects and to address maintenance needs in the water, sanitation, and electricity sectors. U.S. agencies are working to develop better performance data and plans for sustaining rehabilitated infrastructure. Over the past 2 1/2 years, significant increases in attacks against the coalition and coalition partners have made it difficult to transfer security responsibilities to Iraqi forces and to engage in rebuilding efforts in Iraq. The insurgency in Iraq intensified through October 2005 and has remained strong since then. Poor security conditions have delayed the transfer of security responsibilities to Iraqi forces and the drawdown of U.S. forces in Iraq. The unstable security environment has also affected the cost and schedule of rebuilding efforts and has led, in part, to project delays and increased costs for security services. Recently, the administration has taken actions to integrate military and civilian rebuilding and stabilization efforts. The insurgency intensified through October 2005 and has remained strong since then. As we reported in March 2005, the insurgency in Iraq-- particularly the Sunni insurgency--grew in complexity, intensity, and lethality from June 2003 through early 2005. According to a February 2006 testimony by the Director of National Intelligence, insurgents are using increasingly lethal improvised explosive devices and continue to adapt to coalition countermeasures. As shown in figure 1, enemy-initiated attacks against the coalition, its Iraqi partners, and infrastructure increased in number over time. The highest peak occurred during October 2005, around the time of Ramadan and the October referendum on Iraq's constitution. This followed earlier peaks in August and November 2004 and January 2005. According to a senior U.S. military officer, attack levels ebb and flow as the various insurgent groups--almost all of which are an intrinsic part of Iraq's population-- rearm and attack again. As the administration has reported, insurgents share the goal of expelling the coalition from Iraq and destabilizing the Iraqi government to pursue their individual and, at times, conflicting goals. Iraqi Sunnis make up the largest portion of the insurgency and present the most significant threat to stability in Iraq. In February 2006, the Director of National Intelligence reported that the Iraqi Sunnis' disaffection is likely to remain high in 2006, even if a broad, inclusive national government emerges. These insurgents continue to demonstrate the ability to recruit, supply, and attack coalition and Iraqi security forces. Their leaders continue to exploit Islamic themes, nationalism, and personal grievances to fuel opposition to the government and recruit more fighters. According to the Director, the most extreme Sunni jihadists, such as al-Qaeda in Iraq, will remain unreconciled and continue to attack Iraqi and coalition forces. The remainder of the insurgency consists of radical Shia groups, some of whom are supported by Iran, violent extremists, criminals, and, to a lesser degree, foreign fighters. According to the Director of National Intelligence, Iran provides guidance and training to select Iraqi Shia political groups and weapons and training to Shia militant groups to enable anticoalition attacks. Iran also has contributed to the increasing lethality of anticoalition attacks by enabling Shia militants to build improvised explosive devices with explosively formed projectiles, similar to those developed by Iran and Lebanese Hizballah. The continuing strength of the insurgency has made it difficult for the multinational force to develop effective and loyal Iraqi security forces, transfer security responsibilities to them, and progressively draw down U.S. forces in Iraq. The Secretary of Defense and MNF-I recently reported progress in developing Iraqi security forces, saying that these forces continue to grow in number, take on more responsibilities, and increase their lead in counterinsurgency operations in some parts of Iraq. For example, in December 2005 and January 2006, MNF-I reported that Iraqi army battalions and brigades had assumed control of battle space in parts of Ninewa, Qadisiyah, Babil, and Wasit provinces. According to the Director for National Intelligence, Iraqi security forces are taking on more- demanding missions, making incremental progress toward operational independence, and becoming more capable of providing security. In the meantime, coalition forces continue to support and assist the majority of Iraqi security forces as they develop the capability to operate independently. However, recent reports have recognized limitations in the effectiveness of Iraqi security forces. For example, DOD's October 2005 report notes that Iraqi forces will not be able to operate independently for some time because they need logistical capabilities, ministry capacity, and command and control and intelligence structures. In the November 2005 National Strategy for Victory in Iraq, the administration cited a number of challenges to developing effective Iraqi security forces, including the need to guard against infiltration by elements whose first loyalties are to institutions other than the Iraqi government and to address the militias and armed groups that are outside the formal security sector and government control. Moreover, according to the Director of National Intelligence's February 2006 report, Iraqi security forces are experiencing difficulty in managing ethnic and sectarian divisions among their units and personnel. GAO's classified report on Iraq's security situation provided further information and analysis on the challenges to developing Iraqi security forces and the conditions for the phased drawdown of U.S. and other coalition forces. The security situation in Iraq has affected the cost and schedule of reconstruction efforts. Security conditions have, in part, led to project delays and increased costs for security services. Although it is difficult to quantify the costs and delays resulting from poor security conditions, both agency and contractor officials acknowledged that security costs have diverted a considerable amount of reconstruction resources and have led to canceling or reducing the scope of some reconstruction projects. For example, in March 2005, USAID cancelled two task orders related to power generation that totaled nearly $15 million to help pay for the increased security costs incurred at another power generation project in southern Baghdad. In another example, work was suspended at a sewer repair project in central Iraq for 4 months in 2004 due to security concerns. In January 2006, State reported that direct and indirect security costs represent 16 to 22 percent of the overall cost of major infrastructure reconstruction projects. In addition, the security environment in Iraq has led to severe restrictions on the movement of civilian staff around the country and reductions of a U.S. presence at reconstruction sites, according to U.S. agency officials and contractors. For example, the Project Contracting Office reported in February 2006, the number of attacks on convoys and casualties had increased from 20 convoys attacked and 11 casualties in October 2005 to 33 convoys attacked and 34 casualties in January 2006. In another example, work at a wastewater plant in central Iraq was halted for approximately 2 months in early 2005 because insurgent threats drove away subcontractors and made the work too hazardous to perform. In the assistance provided to support the electoral process, U.S.-funded grantees and contractors also faced security restrictions that hampered their movements and limited the scope of their work. For example, IFES was not able to send its advisors to most of the governorate-level elections administration offices, which hampered training and operations at those facilities leading up to Iraq's Election Day on January 30, 2005. While poor security conditions have slowed reconstruction and increased costs, a variety of management challenges also have adversely affected the implementation of the U.S. reconstruction program. In September 2005, we reported that management challenges such as low initial cost estimates and delays in funding and awarding task orders have led to the reduced scope of the water and sanitation program and delays in starting projects. In addition, U.S. agency and contractor officials have cited difficulties in initially defining project scope, schedule, and cost, as well as concerns with project execution, as further impeding progress and increasing program costs. These difficulties include lack of agreement among U.S. agencies, contractors, and Iraqi authorities; high staff turnover; an inflationary environment that makes it difficult to submit accurate pricing; unanticipated project site conditions; and uncertain ownership of project sites. Our ongoing work on Iraq's energy sectors and the management of design- build contracts will provide additional information on the issues that have affected the pace and costs of reconstruction. The Administration has taken steps to develop a more comprehensive, integrated approach to combating the insurgency and stabilizing Iraq. The National Strategy for Victory in Iraq lays out an integrated political, military, and economic strategy that goes beyond offensive military operations and the development of Iraqi security forces in combating the insurgency. Specifically, it calls for cooperation with and support for local governmental institutions, the prompt dispersal of aid for quick and visible reconstruction, and central government authorities who pay attention to local needs. Toward that end, U.S. agencies are developing tools for integrating political, economic, and security activities in the field. For example, USAID is developing the Focused Stabilization Strategic City Initiative that will fund social and economic stabilization activities in communities within 10 strategic cities. The program is intended to jump-start the development of effective local government service delivery by directing local energies from insurgency activities toward productive economic and social opportunities. The U.S. embassy in Baghdad and MNF-I are also developing provincial assistance teams as a component of an integrated counterinsurgency strategy. These teams would consist of coalition military and civilian personnel who would assist Iraq's provincial governments with (1) developing a transparent and sustained capability to govern; (2) promoting increased security, rule of law, and political and economic development; and (3) providing the provincial administration necessary to meet the basic needs of the population. It is unclear whether these two efforts will become fully operational, as program documents have noted problems in providing funding and security for them. State has set broad goals for providing essential services, and the U.S. program has undertaken many rebuilding activities in Iraq. The U.S. program has made some progress in accomplishing rebuilding activities, such as rehabilitating some oil facilities to restart Iraq's oil production, increasing electrical generation capacity, restoring some water treatment plants, and building Iraqi health clinics. However, limited performance data and measures make it difficult to determine and report on the progress and impact of U.S. reconstruction. Although information is difficult to obtain in an unstable security environment, State reported that it is currently finalizing a set of metrics to track the impact of reconstruction efforts. In the water and sanitation sector, the Department of State has primarily reported on the numbers of projects completed and the expected capacity of reconstructed treatment plants. However, we found that the data are incomplete and do not provide information on the scope and cost of individual projects nor do they indicate how much clean water is reaching intended users as a result of these projects. Moreover, reporting only the number of projects completed or under way provides little information on how U.S. efforts are improving the amount and quality of water reaching Iraqi households or their access to sanitation services. Information on access to water and its quality is difficult to obtain without adequate security or water-metering facilities. Limitations in health sector measurements also make it difficult to relate the progress of U.S. activities to its overall effort to improve the quality and access of health care in Iraq. Department of State measurements of progress in the health sector primarily track the number of completed facilities, an indicator of increased access to health care. However, the data available do not indicate the adequacy of equipment levels, staffing levels, or quality of care provided to the Iraqi population. Monitoring the staffing, training, and equipment levels at health facilities may help gauge the effectiveness of the U.S. reconstruction program and its impact on the Iraqi people. In the electricity sector, U.S. agencies have primarily reported on generation measures such as levels of added or restored generation capacity and daily power generation of electricity; numbers of projects completed; and average daily hours of power. However, these data do not show whether (1) the power generated is uninterrupted for the period specified (e.g., average number of hours per day); (2) there are regional or geographic differences in the quantity of power generated; and (3) how much power is reaching intended users. Information on the distribution and access of electricity is difficult to obtain without adequate security or accurate metering capabilities. Opinion surveys and additional outcome measures have the potential to gauge the impact of the U.S. reconstruction efforts on the lives of Iraqi people and their satisfaction with these sectors. A USAID survey in 2005 found that the Iraqi people were generally unhappy with the quality of their water supply, waste disposal, and electricity services but approved of the primary health care services they received. In September 2005, we recommended that the Secretary of State address this issue of measuring progress and impact in the water and sanitation sector. State agreed with our recommendation and stated in January 2006 that it is currently finalizing a set of standard methodologies and metrics for water and other sectors that could be used to track the impact of U.S. reconstruction efforts. The U.S. reconstruction program has encountered difficulties with Iraq's ability to sustain the new and rehabilitated infrastructure and address maintenance needs. In the water, sanitation, and electricity sectors, in particular, some projects have been completed but have sustained damage or become inoperable due to Iraq's problems in maintaining or properly operating them. State reported in January 2006 that several efforts were under way to improve Iraq's ability to sustain the infrastructure rebuilt by the United States. In the water and sanitation sector, U.S. agencies have identified limitations in Iraq's capacity to maintain and operate reconstructed facilities, including problems with staffing, unreliable power to run treatment plants, insufficient spare parts, and poor operations and maintenance procedures. The U.S. embassy in Baghdad stated that it was moving from the previous model of building and turning over projects to Iraqi management toward a "build-train-turnover" system to protect the U.S. investment. However, these efforts are just beginning, and it is unclear whether the Iraqis will be able to maintain and operate completed projects and the more than $1 billion in additional large-scale water and sanitation projects expected to be completed through 2008. In September 2005, we recommended that the Secretary of State address the issue of sustainability in the water and sanitation sector. State agreed with our recommendation and stated that it is currently working with the Iraqi government to assess the additional resources needed to operate and maintain water and sanitation facilities that have been constructed or repaired by the United States. In the electricity sector, the Iraqis' capacity to operate and maintain the power plant infrastructure and equipment provided by the United States remains a challenge at both the plant and ministry levels. As a result, the infrastructure and equipment remain at risk of damage following their transfer to the Iraqis. In our interviews with Iraqi power plant officials from 13 locations throughout Iraq, the officials stated that their training did not adequately prepare them to operate and maintain the new U.S.- provided gas turbine engines. Due to limited access to natural gas, some Iraqi power plants are using low-grade oil to fuel their natural gas combustion engines. The use of oil-based fuels, without adequate equipment modification and fuel treatment, decreases the power output of the turbines by up to 50 percent, requires three times more maintenance, and could result in equipment failure and damage that significantly reduces the life of the equipment, according to U.S. and Iraqi power plant officials. U.S. officials have acknowledged that more needs to be done to train plant operators and ensure that advisory services are provided after the turnover date. In January 2006, State reported that it has developed a strategy with the Ministry of Electricity to focus on rehabilitation and sustainment of electricity assets. Although agencies have incorporated some training programs and the development of operations and maintenance capacity into individual projects, problems with the turnover of completed projects, such as those in the water and sanitation and electricity sectors, have led to a greater interagency focus on improving project sustainability and building ministry capacity. In May 2005, an interagency working group including State, USAID, PCO, and the Army Corps of Engineers was formed to identify ways to address Iraq's capacity-development needs. The working group reported that a number of critical infrastructure facilities constructed or rehabilitated under U.S. funding have failed, will fail, or will operate in suboptimized conditions following handover to the Iraqis. To mitigate the potential for project failures, the working group recommended increasing the period of operational support for constructed facilities from 90 days to up to 1 year. In January 2006, State reported that it has several efforts under way focused on improving Iraq's ability to operate and maintain facilities over time. As part of our ongoing review of Iraq's energy sector, we will be assessing the extent to which the administration is providing funds to sustain the infrastructure facilities constructed or rehabilitated by the United States. As the new Iraqi government forms, it must plan to secure the financial resources it will need to continue the reconstruction and stabilization efforts begun by the United States and international community. Initial assessments in 2003 identified $56 billion in reconstruction needs across a variety of sectors in Iraq. However, Iraq's needs are greater than originally anticipated due to severely degraded infrastructure, post-conflict looting and sabotage, and additional security costs. The United States has borne the primary financial responsibility for rebuilding and stabilizing Iraq; however, its commitments are largely obligated and remaining commitments and future contributions are not finalized. Further, U.S. appropriations were never intended to meet all Iraqi needs. International donors have provided a lesser amount of funding for reconstruction and development activities; however, most of the pledged amount is in the form of loans that Iraq has just begun to access. Finally, Iraq's ability to contribute financially to its additional rebuilding and stabilization needs is dependent upon the new government's efforts to increase revenues obtained from crude oil exports, reduce energy and food subsidies, control government operating expenses, provide for a growing security force, and repay external debt and war reparations. Initial assessments of Iraq's needs through 2007 by the U.N., World Bank, and the CPA estimated that the reconstruction of Iraq would require about $56 billion. The October 2003 joint UN/World Bank assessment identified $36 billion, from 2004 through 2007, in immediate and medium-term needs in 14 priority sectors, including education, health, electricity, transportation, agriculture, and cross-cutting areas such as human rights and the environment. For example, the assessment estimated that Iraq would need about $12 billion for rehabilitation and reconstruction, new investment, technical assistance, and security in the electricity sector. In addition, the assessment noted that the CPA estimated an additional $20 billion would be needed from 2004 through 2007 to rebuild other critical sectors such as security and oil. Iraq may need more funding than currently available to meet the demands of the country. The state of some Iraqi infrastructure was more severely degraded than U.S. officials originally anticipated or initial assessments indicated. The condition of the infrastructure was further exacerbated by post-2003 conflict looting and sabotage. For example, some electrical facilities and transmission lines were damaged, and equipment and materials needed to operate treatment and sewerage facilities were destroyed by the looting that followed the 2003 conflict. In addition, insurgents continue to target electrical transmission lines and towers as well as oil pipelines that provide needed fuel for electrical generation. In the oil sector, a June 2003 U.S. government assessment found that more than $900 million would be needed to replace looted equipment at Iraqi oil facilities. These initial assessments assumed reconstruction would take place in a peace-time environment and did not include additional security costs. Further, these initial assessments assumed that Iraqi government revenues and private sector financing would increasingly cover long-term reconstruction requirements. This was based on the assumption that the rate of growth in oil production and total Iraqi revenues would increase over the next several years. However, private sector financing and government revenues may not yet meet these needs. According to a January 2006 International Monetary Fund (IMF) report, private sector investment will account for 8 percent of total projected investment for 2006, down from 12 percent in 2005. In the oil sector alone, Iraq will likely need an estimated $30 billion over the next several years to reach and sustain an oil production capacity of 5 million barrels per day, according to industry experts and U.S. officials. For the electricity sector, Iraq projects that it will need $20 billion through 2010 to boost electrical capacity, according to the Department of Energy's Energy Information Administration. The United States is the primary contributor to rebuilding and stabilization efforts in Iraq. Since 2003, the United States has made available about $30 billion for activities that have largely focused on infrastructure repair and training of Iraqi security forces. As priorities changed, the United States reallocated about $5 billion of the $18.4 billion fiscal year 2004 emergency supplemental among the various sectors, over time increasing security and justice funds while decreasing resources for the water and electricity sectors. As of January 2006, of the $30 billion appropriated, about $23 billion had been obligated and about $16 billion had been disbursed for activities that included infrastructure repair, training, and equipping of the security and law enforcement sector; infrastructure repair of the electricity, oil, and water and sanitation sectors; and CPA and U.S. administrative expenses. These appropriations were not intended to meet all of Iraq's needs. The United States has obligated nearly 80 percent of its available funds. Although remaining commitments and future contributions have not been finalized, they are likely to target activities for building ministerial capacity, sustaining existing infrastructure investments, and training and equipping the Iraqi security forces, based on agency reporting. For example, in January 2006, State reported a new initiative to address Iraqi ministerial capacity development at 12 national ministries. According to State, Embassy Baghdad plans to undertake a comprehensive approach to provide training in modern techniques of civil service policies, requirements-based budget processes, information technology standards, and logistics management systems to Iraqi officials in key ministries. International donors have provided a lesser amount of funding for reconstruction and development activities. According to State, donors have provided about $2.7 billion in multilateral and bilateral grants--of the pledged $13.6 billion--as of December 2005. About $1.3 billion has been deposited by donors into the two trust funds of the International Reconstruction Fund Facility for Iraq (IRFFI), of which about $900 million had been obligated and about $400 million disbursed to individual projects, as of December 2005. Donors also have provided bilateral assistance for Iraq reconstruction activities; however, complete information on this assistance is not readily available. Most of the pledged amount is in the form of loans that the Iraqis have recently begun to access. About $10 billion, or 70 percent, of the $13.6 billion pledged in support of Iraq reconstruction is in the form of loans, primarily from the World Bank, the IMF, and Japan. In September 2004, the IMF provided a $436 million emergency post-conflict assistance loan to facilitate Iraqi debt relief, and in December 2005, Iraq secured a $685 million Stand-By Arrangement (SBA) with the IMF. On November 29, 2005, the World Bank approved a $100 million loan within a $500 million program for concessional international development assistance. Iraq's fiscal ability to contribute to its own rebuilding is constrained by the amount of revenues obtained from crude oil exports, continuing subsidies for food and energy, growing costs for government salaries and pensions, increased demands for an expanding security force, and war reparations and external debt. Crude oil exports account for nearly 90 percent of the Iraqi government revenues in 2006, according to the IMF. Largely supporting Iraq's government operations and subsidies, crude oil export revenues are dependent upon export levels and market price. The Iraqi 2006 budget has projected that Iraq's crude oil export revenues will grow at an annual growth rate of 17 percent per year (based on an average production level of 2 million bpd in 2005 to 3.6 million bpd in 2010), estimating an average market price of about $46 per barrel. Oil exports are projected to increase from 1.4 million bpd in 2005 to 1.7 million bpd in 2006, according to the IMF. Iraq's current crude oil export capacity is theoretically as high as 2.5 million bpd, according to the Energy Information Administration at the Department of Energy. However, Iraq's crude oil export levels have averaged 1.4 million bpd as of December 2005, in part due to attacks on the energy infrastructure and pipelines. In January 2006, crude oil export levels fell to an average of about 1.1 million bpd. Further, a combination of insurgent attacks on crude oil and product pipelines, dilapidated infrastructure, and poor operations and maintenance have hindered domestic refining and have required Iraq to import significant portions of liquefied petroleum gas, gasoline, kerosene, and diesel. According to State, the Iraqi Oil Ministry estimates that the current average import cost of fuels is roughly $500 million each month. Current government subsidies constrain opportunities for growth and investment and have kept prices for food, oil, and electricity low. Before the war, at least 60 percent of Iraqis depended on monthly rations--known as the public distribution system (PDS)--provided by the UN Oil for Food program to meet household needs. The PDS continues to provide food subsidies to Iraqis. In addition, Iraqis pay below-market prices for refined fuels and, in the absence of effective meters, for electricity and water. Low prices have encouraged over-consumption and have fueled smuggling to neighboring countries. Food and energy subsidies account for about 18 percent of Iraq's projected gross domestic product (GDP) for 2006. As part of its Stand-By Arrangement with the IMF, Iraq plans to reduce the government subsidy of petroleum products, which would free up oil revenues to fund additional needs and reduce smuggling. According to the IMF, by the end of 2006, the Iraqi government plans to complete a series of adjustments to bring fuel prices closer to those of other Gulf countries. However, it is unclear whether the Iraqi government will have the political commitment to continue to raise fuel prices. Generous wage and pension benefits have added to budgetary pressures. Partly due to increases in these benefits, the Iraqi government's operating expenditures are projected to increase by over 24 percent from 2005 to 2006, according to the IMF. As a result, wages and pensions constitute about 21 percent of projected GDP for 2006. The IMF noted that it is important for the government to keep non-defense wages and pensions under firm control to contain the growth of civil service wages. As a first step, the Iraqi government plans to complete a census of all public service employees by June 2006. Iraq plans to spend more resources on its own defense. Iraq's security- related spending is currently projected to be about $5.3 billion in 2006, growing from 7 to about 13 percent of projected GDP. The amount reflects rising costs of security and the transfer of security responsibilities from the United States to Iraq. The Iraqi government also owes over $84 billion to victims of its invasion of Kuwait and international creditors. As of December 2005, Iraq owed about $33 billion in unpaid awards resulting from its invasion and occupation of Kuwait. As directed by the UN, Iraq currently deposits 5 percent of its oil proceeds into a UN compensation fund. Final payment of these awards could extend through 2020 depending on the growth of Iraq's oil proceeds. In addition, the IMF estimated that Iraq's external debt was about $51 billion at the end of 2005. For the past 2 1/2 years, the United States has provided $30 billion with the intent of developing capable Iraqi security forces, rebuilding a looted and worn infrastructure, and supporting democratic elections. However, the United States has confronted a lethal insurgency that has taken many lives and made rebuilding Iraq a costly and challenging endeavor. It is unclear when Iraqi security forces will be able to operate independently, thereby enabling the United States to reduce its military presence. Similarly, it is unclear how U.S. efforts are helping Iraq obtain clean water, reliable electricity, or competent health care. Measuring the outcomes of U.S. efforts is important to ensure that the U.S. dollars spent are making a difference in the daily lives of the Iraqi people. In addition, the United States must ensure that the billions of dollars it has already invested in Iraq's infrastructure are not wasted. The Iraqis need additional training and preparation to operate and maintain the power plants, water and sewage treatment facilities, and health care centers the United States has rebuilt or restored. In response to our reports, State has begun to develop metrics for measuring progress and plans for sustaining the U.S.-built infrastructure. The administration's next budget will reveal its level of commitment to these challenges. But the challenges are not exclusively those of the United States. The Iraqis face the challenge of forming a government that has the support of all ethnic and religious groups. They also face the challenge of addressing those constitutional issues left unresolved from the October referendum-- power of the central government, control of Iraq's natural resources, and the application of Islamic law. The new government also faces the equally difficult challenges of reducing subsidies, controlling public salaries and pensions, and sustaining the growing number of security forces. This will not be easy, but it is necessary for the Iraqi government to begin to contribute to its own rebuilding and stabilization efforts and to encourage investment by the international community and private sector. We continue to review U.S. efforts to train and equip Iraqi security forces, develop the oil and electricity sectors, reduce corruption, and enhance the capacity of Iraqi ministries. Specifically, we will examine efforts to stabilize Iraq and develop its security forces, including the challenge of ensuring that Iraq can independently fund, sustain, and support its new security forces; assess issues related to the development of Iraq's energy sector, including the sectors' needs as well as challenges such as corruption; and examine capacity-building efforts in the Iraqi ministries. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or the other Committee members may have. For further information, please contact Joseph A. Christoff on (202) 512- 8979. Individuals who made key contributions to this testimony were Monica Brym, Lynn Cothern, Bruce Kutnick, Steve Lord, Sarah Lynch, Judy McCloskey, Micah McMillan, Tet Miyabara, Jose Pena III, Audrey Solis, and Alper Tunca. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The United States, along with coalition partners and various international organizations, has undertaken a challenging and costly effort to stabilize and rebuild Iraq following multiple wars and decades of neglect by the former regime. This enormous effort is taking place in an unstable security environment, concurrent with Iraqi efforts to transition to its first permanent government. The United States' goal is to help the Iraqi government develop a democratic, stable, and prosperous country, at peace with itself and its neighbors, a partner in the war against terrorism, enjoying the benefits of a free society and a market economy. In this testimony, GAO discusses the challenges (1) that the United States faces in its rebuilding and stabilization efforts and (2) that the Iraqi government faces in financing future requirements. This statement is based on four reports GAO has issued to the Congress since July 2005 and recent trips to Iraq. Since July 2005, we have issued reports on (1) the status of funding and reconstruction efforts in Iraq, focusing on the progress achieved and challenges faced in rebuilding Iraq's infrastructure; (2) U.S. reconstruction efforts in the water and sanitation sector; (3) U.S. assistance for the January 2005 Iraqi elections; and (4) U.S. efforts to stabilize the security situation in Iraq (a classified report). The United States faces three key challenges in rebuilding and stabilizing Iraq. First, the security environment and the continuing strength of the insurgency have made it difficult for the United States to transfer security responsibilities to Iraqi forces and progressively draw down U.S. forces. The security situation in Iraq has deteriorated since June 2003, with significant increases in attacks against Iraqi and coalition forces. In addition, the security situation has affected the cost and schedule of rebuilding efforts. The State Department has reported that security costs represent 16 to 22 percent of the overall costs of major infrastructure projects. Second, inadequate performance data and measures make it difficult to determine the overall progress and impact of U.S. reconstruction efforts. The United States has set broad goals for providing essential services in Iraq, but limited performance measures present challenges in determining the overall impact of U.S. projects. Third, the U.S. reconstruction program has encountered difficulties with Iraq's inability to sustain new and rehabilitated infrastructure projects and to address basic maintenance needs in the water, sanitation, and electricity sectors. U.S. agencies are working to develop better performance data and plans for sustaining rehabilitated infrastructure. As the new Iraqi government forms, it must plan to secure the financial resources it will need to continue the reconstruction and stabilization efforts begun by the United States and international community. Iraq will likely need more than the $56 billion that the World Bank, United Nations, and CPA estimated it would require for reconstruction and stabilization efforts from 2004 to 2007. More severely degraded infrastructure, post-2003 conflict looting and sabotage, and additional security costs have added to the country's basic reconstruction needs. However, it is unclear how Iraq will finance these additional requirements. While the United States has borne the primary financial responsibility for rebuilding and stabilizing Iraq, its commitments are largely obligated and future commitments are not finalized. Further, U.S. appropriations were never intended to meet all Iraqi needs. In addition, international donors have mostly committed loans that the government of Iraq is just beginning to tap. Iraq's ability to financially contribute to its own rebuilding and stabilization efforts will depend on the new government's efforts to increase revenues obtained from crude oil exports, reduce energy and food subsidies, control government operating expenses, provide for a growing security force, and repay $84 billion in external debt and war reparations.

To enable the Department of Defense (DOD) to close unneeded bases and realign others, Congress enacted base realignment and closure legislation that instituted base closure rounds in 1988, 1991, 1993, and 1995. In some cases, DOD retained some of the property and created military enclaves on closed installations. Generally, as part of the base closure process, DOD prefers to change the jurisdiction of the property that it has retained from exclusive federal to proprietary jurisdiction. Under exclusive federal jurisdiction, the federal government is responsible for providing all municipal services and enforcing federal laws. The state and local governments do not have any authority or obligation to provide municipal services under this type of jurisdiction, except under mutual support agreements. Under proprietary jurisdiction, the federal government has rights--similar to a private landowner--but also maintains its authorities and responsibilities as the federal government. Under this type of jurisdiction, the local government is the principal municipal police and fire authority. Following the decision to close the installations in 1991, the Naval Shipyard and the Naval Station in Philadelphia were officially closed in September 1995 and January 1996, respectively. In March 2000, the Navy transferred 1,180 acres of the property to the Philadelphia Authority for Industrial Development, the local redevelopment authority. The Navy retained exclusive federal jurisdiction over about 270 acres as a military enclave. As a result, the Navy is responsible for providing all municipal services, including fire protection, in this enclave. Similarly, the City of Philadelphia and the Commonwealth of Pennsylvania maintain jurisdiction over the 1,180 acres that were transferred. The federal government has no jurisdiction over this land. Together, the Navy-retained and Navy-transferred property is called the Philadelphia Naval Business Center. The Navy's 270-acre enclave in Philadelphia is made up of several distinct noncontiguous areas separated by the transferred acreage. (See app. I for a map and an aerial photograph of the enclave.) The Navy retained 67 buildings that house more than 2,300 civilian, contractor, and military employees. The majority of the Navy's employees--about 1,800--work in about 47 office buildings. The remaining 500 Navy employees work at industrial or maintenance activities, including the Naval Foundry and Propeller Shop; a hull, mechanical, and electrical systems test facility; and a public works center. The enclave also includes a reserve basin that is used as a docking area for about 38 Navy inactive ships. In contrast, the non-Navy part of the business center includes about 45 private firms with approximately 2,500 employees. This part is being developed by the Philadelphia Industrial Development Corporation, the City of Philadelphia's private economic development corporation. The corporation is authorized by the local redevelopment authority to attract private business to the Philadelphia Naval Business Center, a business and industrial park that is undergoing redevelopment utilizing the 1,180 transferred acres. The Navy facilities are protected by a federal fire service consisting of 26 personnel and 2 fire engines located on the enclave. The Navy estimated that the cost was $2.5 million to operate the federal fire department at the enclave during fiscal year 2001. The City of Philadelphia is responsible for providing fire protection services to private development on non-Navy property at the business center. It is also responsible for providing additional fire protection to the Navy facilities according to a March 2000 Mutual Aid Assistance Agreement. The agreement was signed by both Navy and City of Philadelphia officials, and it is intended to provide additional fire equipment and firefighters to respond to fires and other emergencies on each other's property at the business center. (See app. II for a copy of the agreement.) Although not specified in the agreement, enclave command officials and Navy and city fire department officials told us that in practice, the Navy firefighters are first responders to all fire alarms at the business center--on both Navy and non-Navy property. The city fire department automatically responds to fire calls on non-Navy property at the business center; it responds to a fire on Navy property if it is called by the Navy fire department. The DOD Fire and Emergency Services Program provides policy that governs fire protection at military installations. The policy states that the first arriving fire apparatus shall meet a travel time of 5 minutes for 90 percent of all alarms and that the remaining apparatus shall meet a travel time of 10 minutes for all alarms. The policy also states that the initial response to a fire will be two engine companies and one ladder company but that another engine company may replace the ladder company. The number of full-time fire and emergency service personnel and equipment needed to meet these standards at any installation may depend on the extent to which equivalent forces are available from outside sources. The DOD policy encourages installations to enter into reciprocal agreements with local fire departments for mutual fire and emergency services to meet these standards. Navy policy mirrors that of DOD. The Navy considers a number of factors, including the strategic importance, the criticality to the overall Navy mission, the degree of fire and life safety hazards, the value of facilities and equipment, and the availability of outside support, in determining fire protection requirements at each installation. Using these criteria, the federal enclave at the business center is required to have a fully staffed on-site federal fire-fighting force; however, some of the fire-fighting force may be satisfied by city assets based on a mutual aid agreement. Today, according to military service base realignment and closure officials, federal firefighters operate at only 3 of the 27 federal enclaves that were created at closed Navy, Army, and Air Force installations (see table 1). The enclave at the former Philadelphia Naval Shipyard and Naval Station is the only Navy enclave where a federal fire protection presence remains. According to Navy officials, federal fire protection was retained because the Commonwealth of Pennsylvania did not respond to the Navy's request in 1999 to change the jurisdictional status of the property from exclusive federal to proprietary jurisdiction in anticipation of the Navy transferring the ownership of excess land. In its April 1999 letter to the governor of Pennsylvania requesting the change, the Navy stated that such a change would provide uniform jurisdiction over the business center and the Navy's enclave there. In addition, Navy officials told us that the change would mean that the City of Philadelphia would have been responsible for providing all municipal services such as fire and police protection. The Navy's two other enclaves--the former Charleston, South Carolina, and Long Beach, California, shipyards--receive fire protection services from the local communities. A Navy official told us that the land at the former Charleston and Long Beach shipyards had already been designated as concurrent jurisdiction before they were closed, so the Navy did not have to request a change in designation. In addition, local governments agreed to provide fire protection to the federal enclaves at both former shipyards. Like the Navy, the Army retained federal firefighters at only one of its federal enclaves. The remaining 13 Army enclaves are protected by local community firefighters. According to an official in the Army's Base Realignment and Closure Office, a federal fire-fighting force was retained at the enclave created when Fort Ord, California, was closed in order to provide fire protection for a 1,600-unit housing complex and other community support facilities, such as a military exchange and commissary. Before Fort Ord closed, the installation was under exclusive federal jurisdiction, but now the enclave is under concurrent jurisdiction. According to an Army base realignment and closure official, most of the other 13 Army installations changed from exclusive federal to proprietary jurisdiction. The Air Force also retained federal firefighters at only one of its enclaves while local firefighters provide fire protection at nine other Air Force enclaves. According to the Air Force's Fire Protection Program Manager, a federal firefighter force was maintained at the enclave created when Grissom Air Force Base, Indiana, was closed to support the substantial flying mission that remained. Before the installation was closed, most of the land at Grissom, which is now an Air Reserve Base, was under exclusive federal jurisdiction, while a smaller portion was under proprietary jurisdiction; currently, all of the property at Grissom is under proprietary jurisdiction. The other nine Air Force enclaves are also under proprietary jurisdiction, although five had exclusive federal jurisdiction and two had a mix of exclusive and proprietary jurisdiction before the installations were closed. The level of fire protection at the business center is similar to that available elsewhere in the City of Philadelphia, but the arrangements for providing that protection are different. When a fire occurs on non-Navy property within the business center, both the City of Philadelphia Fire Department and the firefighters from the Navy's enclave automatically respond to the call. When a fire occurs at the Navy's enclave at the business center, only the Navy firefighters automatically respond to the alarm. If they need additional fire-fighting help, they must first call the city fire department, which will then send assistance. This mutual assistance is part of the agreement between the Navy and the City of Philadelphia, which Navy officials state enables them to meet DOD's and Navy's fire response requirements. Senior Philadelphia city fire department officials told us that they respond to alarms in the city or within the city-owned parts of the business center with a minimum of 2 engines, 2 ladders, and 19 firefighters. They noted that none of their 61 fire stations have the full complement of equipment and firefighters needed for the minimum response but that they rely on support from other fire stations throughout the city. Similarly, the Navy's fire department at the federal enclave in the business center does not have--on its own--the full complement of equipment and firefighters needed for a minimum response as specified in DOD and Navy policy. However, the Navy's fire department is able to meet DOD's and Navy's standards through its agreement with the City of Philadelphia. According to the Philadelphia Fire Commissioner, when the city responds to a request for assistance from the Navy, the city fire department would not necessarily respond with a ladder truck but with enough equipment and firefighters to bring the responding assets up to the city's minimum standards. This is especially true when the call involves an emergency other than a fire. A Philadelphia Deputy Fire Commissioner estimated that the response time for an engine company from the nearest Philadelphia city fire station to the main gate of the business center would be just under 7 minutes and that the response time from the nearest ladder company would be less than 11 minutes. He also said that it would take additional time to get from the main gate to various parts of the Navy's enclave. According to a study performed by the International Association of Firefighters, the first Philadelphia Fire Department ladder truck would arrive at the main gate of the business center in about 5 minutes and 55 seconds. Navy officials said that the Philadelphia Fire Department's response times meet the current DOD and Navy response criteria--10 minutes for subsequent arriving vehicles--assuming the city fire department is arriving after Navy firefighters have already responded to the alarm. The Navy's fire department has responded to more than 300 calls each year during the last 2 full years, and it is on track for responding to more than 300 calls in 2002. These calls included fire emergencies, emergency medical service (EMS) requests, rescues, natural gas leaks, hazardous materials incidents, standby fueling operations, and alarms with no fire. During this same period, Navy data indicate the enclave's firefighters have responded to a total of 41 fires, 16 of which were on the enclave. From the time that the agreement was signed in March 2000 to September 2002, 29 months later, City of Philadelphia firefighters responded to one fire call on the Navy's enclave as part of the agreement. They also responded to 39 EMS calls and 4 other calls at the enclave during the same period. Table 2 shows the number of fire, EMS, and other responses that the Navy and the City of Philadelphia conducted under their mutual aid agreement. On the other hand, during the same period, the Navy fire department responded to 25 mutual aid fire calls on non-Navy property at the business center. It also responded to 150 EMS and 54 other calls on non-Navy property. Both Navy and Philadelphia city fire department officials told us that they have found the agreement mutually beneficial and that they expect to renew the agreement in March 2003. According to city fire department officials, future economic development at the business center is expected to require a reassessment of fire protection services provided by the City of Philadelphia. Currently, about 45 private tenants with about 2,500 employees are housed in 47 buildings located on non-Navy property. However, the development corporation plans to add additional office space at the business center over the next several years. For example, a 43,000-square foot building directly across from the Navy command building is under renovation; when it is completed in early 2003, it will provide office space for about 150 people. In addition, the development corporation plans to provide an additional 800,000 square feet of office space over the next 8 years. According to the Philadelphia Fire Department Commissioner, as development in the business center continues to expand, his office is expected to reevaluate the location of fire stations located near the business center. This reevaluation could provide an opportunity for the Commonwealth of Pennsylvania, the City of Philadelphia, and the Navy to reassess jurisdictional issues and the need for a separate fire department to service the Navy's enclave. A recent development underscored the possibility of change in fire protection at the business center. In August 2002, the development corporation announced that a developer plans to build 230 private homes on land outside the main gate of the business center. A Philadelphia Deputy Fire Commissioner stated that the city would need to reconsider fire protection for this area once the planned development was completed. At the time of the transfer of excess land at the former Philadelphia Naval Shipyard and Naval Station to the redevelopment authority, the Navy tried unsuccessfully to change the jurisdiction of the 270-acre enclave it retained from exclusive federal to proprietary. This jurisdictional change would have been similar to what occurred at most other military enclaves created during the base closure and realignment process. According to Navy officials, such a change would have provided uniform jurisdiction over both the non-Navy property and the Navy-owned enclave at the business center. This change would have given the City of Philadelphia responsibility for providing all municipal services, including fire protection, at the business center. Instead, the jurisdiction at the Navy-owned enclave remains exclusively federal, and the Navy spends about $2.5 million annually to retain its fire department there. As private development at the business center and in its immediate vicinity continues to grow over the next few years, the business center's fire protection arrangements may have to be reevaluated. Philadelphia Fire Department officials told us they recognize they will need to reevaluate the way fire protection is provided at the business center. This reevaluation could provide the Commonwealth of Pennsylvania, the City of Philadelphia, and the Navy with an opportunity to reconsider the jurisdictional issues and reassess the need for a separate Navy fire department to service the Navy's enclave at the business center. In commenting on a draft of this report, the Deputy Under Secretary of Defense (Installations and Environment) concurred with the report. DOD's comments are included in this report as appendix III. We conducted our work at the Office of the Director Navy Fire and Emergency Services and Base Closure Office, the Naval Facilities Engineering Command in Washington, D.C., the Ship Systems Engineering Station and the Fire Department, the Philadelphia Naval Business Center, the Philadelphia Fire Department, and Philadelphia Industrial Development Corporation. We also did work at the Army's Base Realignment and Closure office, the office of the Assistant Chief of Staff for Installation Management, and the Air Force Base Conversion Agency. To determine how fire protection services at the business center compared with those at other federal enclaves created under base closure, we reviewed the 1988, 1991, 1993, and 1995 base realignment and closure reports and identified where DOD retained property on closed installations. We analyzed information from the Army and Navy base closure offices and the Air Force Base Conversion Agency on how fire protection was provided at the retained federal property on closed installations and on the jurisdiction at the installations prior to and after closure. We reviewed DOD and Navy guidance regarding the staffing and equipping of fire departments. To determine how fire responses at the business center compared with those elsewhere in the City of Philadelphia, we interviewed the Commissioner and two Deputy Commissioners in the Philadelphia Fire Department to obtain information on how city firefighters respond to fire alarms in the City of Philadelphia and on the business center. In addition, we interviewed the Chief and the Assistant Chiefs of the Navy fire department to determine how Navy firefighters respond to fire alarms on Navy and non-Navy properties within the business center and we analyzed Navy fire department workload data. We also analyzed response time information provided by the Navy and the Philadelphia fire departments. Finally, we reviewed the agreement between the Navy and the City of Philadelphia regarding fire protection at the business center. To determine how future development of the business center would affect how fire protection is provided, we interviewed the Commissioner and two Deputy Commissioners in the Philadelphia Fire Department. To obtain information on future development at the business center, we interviewed officials from the Philadelphia Industrial Development Corporation. We conducted our review from July through September 2002 in accordance with generally accepted government auditing standards. We are sending copies of this report to interested congressional committees; the Secretaries of Defense, the Army, the Navy, and the Air Force; and the Director, Office of Management and Budget. We will also provide copies to others upon request. 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) 512-8412 if you or your staff have any questions regarding this report. Key contributors to this report were Michael Kennedy, Richard Meeks, Aaron Loudon, Ken Patton, and Nancy Benco.

When the Department of Defense closed military installations as a part of the base realignment and closure process and transferred properties to public and private ownership, it in some cases retained a portion of an installation as a military enclave. During this process, legal jurisdiction over an enclave may be transferred from the federal government to the local government. Such a transfer may incorporate provisions for fire protection and other services by local and state governments. A federal fire-fighting service provides fire protection services at the Navy's enclave located at the Philadelphia Naval Business Center. This is one of the three military enclaves, formed during the base closure and realignment process, which is still protected by federal firefighters. Twenty-four other military enclaves were converted from federal to local fire protection during the base closure process. The Navy retained a federal fire-fighting force at its enclave at the Philadelphia Naval Business Center because of Commonwealth of Pennsylvania did not respond to the Navy's request to change the jurisdiction of the Navy-retained land. The level of fire protection at the Philadelphia Naval Business Center is similar to that available elsewhere in the City of Philadelphia, but the arrangements for providing that protection differ. If a fire occurs on non-Navy property within the business center, both the Navy and the Philadelphia fire departments will automatically respond to the call, with the Navy as the first responder. However, if the fire is located on Navy-owned property at the business center, only Navy firefighters will automatically respond to the alarm. As private development at the Philadelphia Naval Business Center continues, the fire protection arrangements are expected to be reassessed. The Commissioner of the Philadelphia Fire Department stated that, as development at the business center continues to increase, his office will need to reevaluate the location of city-owned fire stations in the area around the business center.

About 374,000 single, active-duty enlisted servicemembers are housed in the United States. Of this number, about 212,000 are permanently assigned to installations and live in barracks, about 96,000 receive a housing allowance and live off base in civilian communities near military installations, about 36,000 live on Navy ships, and about 30,000 live in barracks while in recruit or other short-term training. Most permanently assigned junior members living in barracks share a sleeping room and bath with one or two others. In many older barracks, everyone living on a hall or floor shares a communal bathroom, or central latrine. The Secretary of Defense is required to establish uniform barracks construction standards that define size limitations for newly constructed permanent barracks. Over the years, barracks construction standards have changed to provide for increased space and privacy. Prior to the 1970s, most permanent party barracks consisted of large, open-bay rooms with central latrines shared by many members. To meet the needs of the all-volunteer force, DOD adopted a new barracks standard in 1972. This standard provided a 270-square-foot room for three junior members that also shared a bath. Citing the need to provide more space for all pay grades, DOD adopted a new construction standard in 1983. This standard, known as the 2+2 design, consisted of a module with two, 180-net-square-foot sleeping rooms and a shared bath. With this design, two junior enlisted members normally would occupy each sleeping room, and four members would share a bath. The current 1+1 design standard provides a barracks module consisting of two private sleeping rooms, each with 118 net square feet, a bath, and a kitchenette. Two junior enlisted members in pay grades E-1 through E-4 are assigned to each module with each member having a private sleeping room. Normally, enlisted members in pay grades E-5 and above are assigned the entire module, using one sleeping room as a living room.Citing concerns over unit cohesion and team building, the Marine Corps obtained a permanent waiver from the Secretary of the Navy from using the 1+1 design standard in its new barracks construction. The Marine Corps prefers to use a barracks standard known as the 2+0 design, which provides a 180-net-square-foot room with a bath. Normally, either two junior Marines in pay grades E-1 through E-3 or one Marine in pay grade E-4 or E-5 are assigned to each room. Because the design standards apply to the construction of new barracks, adequacy of the existing barracks for housing members may not necessarily change. DOD separately establishes minimum standards of acceptable space and privacy for members assigned to existing barracks. For example, the current minimum assignment standard for permanent party personnel in pay grades E-1 through E-4 is 90 square feet of net living area per person, not more than four persons to a room, and a central latrine. When this assignment standard cannot be met or when space is not available, installation commanders can authorize single members to live off base and receive a housing allowance. Regardless of the availability of adequate barracks space, senior personnel in pay grades E-7 through E-9 may elect to live off base and receive a housing allowance. With the exception of the Marine Corps, the services have embraced the 1+1 design standard and began building new and renovating older barracks in accordance with the standard in fiscal year 1996. As shown in table 1, through fiscal year 1999, about $1.5 billion in funding was approved for 124 barracks projects designed to provide over 29,000 barracks spaces meeting the 1+1 design standard. Except for the Marine Corps, each service has adopted a plan for improving its barracks and implementing the 1+1 standard. According to service officials, the plans generally call for (1) eliminating barracks with central latrines primarily through construction of new 1+1 barracks, (2) providing members with increased privacy and approximating the 1+1 standard in existing barracks by assigning one member to rooms originally designed for two members or two persons to rooms originally designed for three persons, (3) constructing new 1+1 barracks to meet existing barracks shortages and to regain capacity lost when fewer members are assigned to existing rooms, and (4) replacing existing barracks at the end of their economic life with new 1+1 barracks. The services, as discussed below, estimated that an additional $7.4 billion would be required to implement their plans and approximate the 1+1 standard. The Marine Corps' plan is similar to the other services' plans except that it calls for implementation of the 2+0 barracks design standard in lieu of the 1+1 design. In its plan, the Army estimated that about $3 billion would be required through fiscal year 2008 to approximate the 1+1 standard for about 84,000 servicemembers in the United States in pay grades E-1 through E-6. When the Army meets this goal, about 38 percent of the Army's barracks spaces will meet all requirements of the 1+1 standard. The balance of the spaces will consist of existing (1) private sleeping rooms that do not meet all requirements of the 1+1 standard and (2) multiperson rooms that have been downloaded. The Army's barracks strategy also provides for improving the entire barracks community. As such, many Army barracks construction projects include construction of new company operations buildings, battalion and brigade headquarters buildings, soldier community buildings, and dining facilities. The Army is also developing a barracks master plan that will include an installation-by-installation assessment of barracks conditions and detailed plans for replacement or renovation to meet requirements of the 1+1 design standard. The master plan is to be completed by September 1999. The Army has approved no waivers to the 1+1 standard for barracks projects in the United States. In 1997, the Air Force completed a comprehensive barracks master plan that defines the Air Force's long-range barracks investment strategy and lays out a road map for implementing the 1+1 standard. The Air Force's strategy calls for providing private sleeping rooms for permanent party servicemembers in pay grades E-1 through E-4 by downloading existing 2+2 rooms and constructing new 1+1 rooms to regain the lost capacity. The strategy also calls for paying housing allowances for single members in pay grades E-5 and above to live off base. The Air Force estimated that about $750 million would be required through fiscal year 2009 to approximate the 1+1 standard for about 48,000 members in the United States in pay grades E-1 through E-4. The Air Force has approved no waivers to the 1+1 standard for barracks projects in the United States. The Navy estimated that about $2.9 billion would be required through fiscal year 2013 to approximate the 1+1 design standard worldwide. The Navy's strategy calls for (1) providing barracks space for about 36,000 permanent party, shore-based single servicemembers in pay grades E-1 through E-4 in the United States; (2) paying housing allowances to most members in pay grades E-5 and above to live off base; and (3) continuing to house about 36,000 single members in pay grades E-1 through E-4 assigned to large ships, on the ships, rather than in barracks, even when the ships are in their homeports. The Navy is developing a barracks master plan that will include an installation-by-installation assessment of barracks conditions and detailed plans for barracks replacement or renovation to meet requirements of the 1+1 design standard. The master plan is scheduled to be completed by April 1999. The Navy has approved waivers from using the 1+1 design standard for four projects in the United States, and one additional waiver request was pending. The waivers were granted because these installations could improve barracks conditions more quickly and for more members by building the projects using a lower and less costly standard. In addition, two of the projects were for barracks designed for Navy personnel assigned to Marine Corps installations. In these cases, the waiver justifications also stated that the barracks should use the Marine Corps 2+0 design standard to be compatible with other barracks at the installations. In July 1998, the Secretary of the Navy approved the Marine Corps' request for a permanent waiver to allow the use of the 2+0 barracks design standard in lieu of the 1+1 design standard. The waiver request stated that Marine Corps junior members in pay grades E-1 through E-3 would live in two-person rooms and that private rooms would be provided for members in pay grades E-4 and above. Through fiscal year 1999, about $205 million was approved for 16 Marine Corps 2+0 barracks projects that will provide about 5,900 barracks spaces. The Marine Corps' strategy calls for providing barracks space for permanent party single servicemembers in pay grades E-1 through E-5 and paying housing allowances for most members in pay grades E-6 and above to live off base. The Marine Corps estimated that about $725 million would be required through fiscal year 2022 to approximate the 2+0 standard worldwide. A Marine Corps official stated that a barracks master plan similar to the other services plans is under development. DOD primarily justified the adoption of the 1+1 barracks design standard in 1995 as an investment in quality of life aimed at improving readiness, retention, and motivation of a professional, all-volunteer armed force. In a December 1995 report to the House and Senate Committees on Appropriations, DOD stated that "savings in recruiting, training, and productivity will offset the quality-of-life investment. To what degree is impossible to say, but focusing only on the barracks cost would risk missing those savings." DOD further stated that the new standard addressed the results of a 1992 triservice survey of barracks occupants at 12 installations. The survey showed that servicemembers were dissatisfied with the privacy and living space offered with the previous design standard and wanted larger rooms, private rooms, private baths, and more storage space. Hence, DOD concluded that continuing to build more of the same type of barracks would have been unwise. According to DOD officials, adoption of the 1+1 standard also reflected an attempt to treat single servicemembers in a more equitable manner compared to married servicemembers who normally live in multiroom houses. More equitable treatment of single members in housing was a matter of concern expressed by the House Armed Services Committee in 1993. To illustrate, married members in pay grades E-1 through E-4 living on base normally are assigned to a house with at least 950 square feet, two bedrooms, a full kitchen, a family room, and one or one and a half baths. If available, housing with a separate bedroom for each dependent child is provided. In comparison, single members in pay grades E-1 through E-4 living on base in barracks designed under the standard in place prior to 1995 would live in a 180-square-foot room shared with another member and would share a bath with three other members. We agree with DOD that the 1+1 design standard reduces the differences in housing for married and single members. We also agree that improved barracks enhance individual quality of life. However, to what extent is unknown because quality of life is inherently difficult to quantify. Quality of life is a complex issue reflected in a delicate mix of variables such as balancing personal life and the demands of military service, adequate pay and benefits, and many other factors. DOD officials stated that no quantitative measures directly link a single quality-of-life element, such as barracks quality, with readiness or retention. Without such data, there is little evidence to support DOD's assumption that improved barracks will result in improved readiness and higher enlisted retention rates. Even with existing barracks conditions, the services have met most retention goals over the past 3 fiscal years. In particular, according to service officials, the large majority of barracks occupants are serving in their first term of enlistment, and except in one instance, the services have achieved their first-term retention goals for fiscal years 1996-98. In the one instance, the Air Force missed its first-term retention goal by 1 percentage point in fiscal year 1998. Further, information collected from members that do not reenlist has shown that factors other than housing, such as pay and promotion opportunities, are usually cited as the reasons members leave the military. We also noted that the 1992 triservice barracks survey, cited as part of the justification for the 1+1 standard, was somewhat limited in scope. The survey began in October 1991 when the Air Force collected information from four installations and was expanded in March and April 1992 to include three Army, three Navy, and two Marine Corps installations. Although the survey showed that about 2,200 Army, Navy, and Marine Corps barracks occupants participated in the voluntary survey, documentation was not clear on how many Air Force members participated or how the survey participants were selected. The survey included 96 questions, and participants were asked to respond to many questions on a scale of "very satisfied" to "very dissatisfied" or "very important" to "not at all important." The survey also included some interesting results that DOD has not usually cited. For example, 84 percent of the participants reported that they preferred to receive a housing allowance and live off base rather than live in the barracks. The preference to live off base could continue regardless of the type or quality of barracks provided and thereby result in members' continued dissatisfaction with the barracks. Also, when participants were asked, how satisfied or dissatisfied they were with their barracks or dormitory room, 53 percent responded that they were dissatisfied (34 percent) or very dissatisfied (19 percent). At the same time, only 46 percent responded to a similar question that they were dissatisfied or very dissatisfied with living on the installation. Although these numbers show that about half of the respondents were dissatisfied with the barracks, the other half reported that they were not dissatisfied with their housing. Finally, when asked, what one improvement in the barracks or dormitory would most increase retention of enlisted personnel, the most mentioned improvement, cited by 35 percent of the respondents, was fewer rules and restrictions for barracks occupants and freedom from command inspections. A private room was the second most mentioned improvement, cited by 24 percent of the respondents. We compared the costs of constructing barracks using the 1+1 design standard to the costs of constructing barracks using other design standards, specifically the 2+0 design used by the Marine Corps and the 2+2 design that was the previous barracks design standard. The comparison showed significant cost differences among the designs. For example, the estimated cost to construct a single barracks space using the 1+1 design standard for a member in pay grades E-1 through E-4 was about $63,000. The comparable construction costs using the 2+0 design standard was about $41,000. Using the 2+2 design standard, the comparable cost was about $38,000 for each barracks space. The designs have different costs primarily because of differences in each design's maximum building area per occupant. For example, the maximum gross building area for each junior member occupant is 355, 229, and 213 square feet for the 1+1, 2+0, and 2+2 designs, respectively. Table 2 shows the cost per occupant for each of the designs. Costs are higher for members in pay grades E-5 and above because barracks assignment policies normally provide these members with double the space provided to junior members. We also estimated the total additional cost for the services to fully implement each of the three design standards. Specifically, using the cost estimates for each design and the services' estimates of barracks requirements and configuration after the completion of projects funded through fiscal year 1999, we estimated the additional funds required to provide all planned barracks occupants with spaces that comply with each of the standards. Table 3 summarizes our estimates. We included the Marine Corps in our calculations, even though its current plan is to implement the 2+0 standard in lieu of the 1+1 standard. The total additional cost to fully implement the 1+1 standard in the Army, the Navy, and the Air Force and the 2+0 standard in the Marine Corps, as currently planned, is about $10.9 billion. In comparison, if all services used the 2+0 design standard, they would need about $3.1 billion to fully implement the standard--or about $7.8 billion less than the current plan; and if all services used the 2+2 standard, they would need about $1.7 billion to fully implement the standard--or about $9.2 billion less than the current plan. Although DOD officials agreed that costs associated with the 1+1 design are significantly higher, they stated that the less costly designs do not relieve their concerns for improving quality of life. Army, Navy, and Air Force officials stated that the reasons for initially adopting the 1+1 design--to improve quality of life and provide more equity in housing for single and married members--continue to be valid. In addition, they noted that a considerable investment, about $1.5 billion, has already been made in implementing the 1+1 standard and that changing the standard would result in inequities in the barracks inventory. Further, the officials expressed concern that abandoning the 1+1 design and its improvements could be perceived by members as a promise not kept and consequently have an adverse impact on morale. Marine Corps officials stated that the higher cost of the 1+1 design was a concern to them. For 2 years, the Marine Corps obtained a waiver allowing use of the 2+0 design on the basis that they could improve barracks conditions faster by using the less costly design. The Marine Corps also sees an additional drawback to the 1+1 standard. Specifically, because of the increased isolation provided in private sleeping rooms, the Marine Corps believes that the 1+1 standard does not allow for the unit cohesion and team building needed to reinforce Corps values and develop a stronger bond among junior Marines. It was for this reason that the Marine Corps obtained a permanent waiver from using the 1+1 design for Marines in pay grades E-1 through E-3. Army, Navy, and Air Force officials stated that they do not see any negative aspects to the 1+1 standard from an individual isolation or team-building perspective. They stated that the standard is used only for permanent party personnel, not for recruits or initial trainees; whenever possible, members of the same unit are assigned to the same barracks or area so that unit integrity is maintained; and barracks occupants continue to have adequate interaction with other occupants. These officials also noted that the Marine Corps' first-term retention goals are significantly lower than the goals of the other services. As a result, they believed that the potential benefits from improved quality of life provided by private sleeping rooms outweighed any potential drawbacks from increased isolation in private rooms. Although the 1+1 barracks standard improves the quality of life for single servicemembers and to some degree addresses housing differences between single and married members, DOD has no quantifiable evidence that barracks improvements result in improved readiness and retention. Implementing the 2+0 or 2+2 design standard in lieu of the 1+1 standard would be significantly less costly to the military; however, the less costly designs do not alleviate DOD's concerns about improving servicemembers' quality of life. Whether the 1+1 standard has drawbacks from an individual isolation or team-building standpoint appears to be a matter of military judgment that varies depending on each service's culture, mission, and goals. Ultimately, the barracks design standard decision is a qualitative policy decision. In written comments on a draft of this report, DOD affirmed its commitment to providing quality housing for single members stating that improved quality of life is a critical component to attracting and retaining high quality personnel. While recognizing our assessment that measuring the impact of improved barracks on individual quality of life, retention, and readiness is inherently difficult, DOD maintained that providing more privacy and amenities in the barracks is important in order to address concerns raised by single servicemembers. DOD stated it has no precise measures linking barracks improvements to retention and readiness because (1) few 1+1 barracks have been completed, which limits the availability of data for analysis, and (2) the quality of home life is just one of many factors affecting individuals' quality of life, and individuals' quality of life is just one of many factors affecting readiness. DOD commented that in discussing the reasons that DOD adopted the 1+1 standard, we should have mentioned a May 1995 Air Force quality-of-life survey. This survey reported that barracks occupants cited privacy as their number one concern. We have added to our report a reference to the Air Force survey. We had considered this survey during our review but did not originally mention it because (1) its key barracks-related finding of privacy was the same as the key finding from the 1992 triservice survey, which we do discuss, and (2) DOD officials more frequently cited the 1992 triservice survey results as documentation of servicemembers' dissatisfaction with their barracks. DOD commented that although the 1992 triservice survey found that the majority of the survey participants preferred to live off base, on base housing is needed to maintain good order and discipline. Our point, as stated in the report, is that the preference to live off base may continue regardless of the type or quality of barracks that are provided. Unfortunately, reliable, quantitative data is not available to show what impact improved barracks will have on members' perceptions of their quality of life and ultimately on members' decisions to stay in the military. DOD questioned our analysis of costs that would be incurred if the Marine Corps' 2+0 barracks standard were adopted by all services. DOD stated that we failed to consider the costs of additional baths that would be required if existing 2+2 barracks were converted to 2+0 use. DOD's contentions are not accurate. In our analysis, we assumed that existing 2+2 barracks would be downloaded by assigning only one member to each of the two bedrooms that share a bath. With this configuration, more net square footage would be provided to each member than required under the 2+0 standard and no additional baths would be required. DOD commented that some of our cost estimates were misleading because we did not consider the cost of modernizing and renovating existing barracks if a barracks standard other than the 1+1 standard were adopted. We disagree. Regardless of which barracks design standard is used, barracks wear out and eventually require repair, modernization, and renovation. For this reason, our analysis considered only costs to fully implement the three barracks design standards. Finally, DOD commented that our analysis of costs for full implementation of the 1+1 barracks design is not based on any DOD or service plan. As such, DOD stated that our analysis failed to consider that the services plan to replace existing barracks only after they reach the end of their useful life. In describing the services' plans, our report notes that new barracks will be constructed, when required, to replace barracks at the end of their economic life. We did not intend to suggest that existing barracks should be abandoned and new 1+1 barracks should be immediately constructed. Rather, our analysis is intended to estimate the costs for the Army, the Air Force, and the Navy to fully implement the 1+1 standard over time, which represents the current plans of these services. DOD also provided some technical comments, which we have incorporated as appropriate. We are sending copies of this report to Senator Robert C. Byrd, Senator Carl Levin, Senator Ted Stevens, Senator John W. Warner, and to Representative David R. Obey, Representative Ike Skelton, Representative Floyd D. Spence, and Representative C.W. Bill Young, in their capacities as Chair or Ranking Minority Member of Senate and House Committees. We are also sending copies of this report to the Honorable William Cohen, Secretary of Defense; the Honorable Louis Caldera, Secretary of the Army; the Honorable Richard Danzig, Secretary of the Navy; the Commandant of the Marine Corps, General Charles C. Krulak; and the Honorable F.W. Peters, Acting Secretary of the Air Force. 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 on this report. Major contributors to this report are listed in appendix IV. Module with 2 Private Sleeping Rooms, 2 Closets, 1 Bath, 1 Kitchenette Total building area maximum per module (sq ft): Total building area maximum per room (sq ft): Total net living area in sleeping room (sq ft): Net living area in sleeping room per member (sq ft): E1-E4 (E1-E3 Marines): 1 member per sleeping room, 2 members share bath. E5-E6 (E4-E5 Marines): 1 member per module (2 sleeping rooms). Module with 2 Sleeping Rooms, 2 Baths, Normally No Kitchenette Each room has 2 closets and 1 bath. Total building area maximum per module (sq ft): Total building area maximum per room (sq ft): Total net living area in sleeping room (sq ft): Net living area in sleeping room per member (sq ft): E1-E4 (E1-E3 Marines): 2 members per sleeping room, 2 members share bath. E5-E6 (E4-E5 Marines): 1 member per sleeping room. As requested, we reviewed the Department of Defense's (DOD) barracks program in the United States to (1) determine the status of the services' implementation of the 1+1 barracks design standard; (2) document DOD's rationale for adopting the standard; (3) determine the costs of alternatives to the 1+1 standard; and (4) obtain service views of the impact of the standard from a team-building, individual isolation, or similar perspective. Our review focused on military barracks used to house permanent party enlisted personnel in the United States. We performed our work at the Office of the Secretary of Defense and the headquarters of each military service. We interviewed responsible agency personnel and reviewed applicable policies, procedures, and documents. We also visited one installation of each service to observe barracks designs and conditions and to talk with barracks managers and occupants. We visited the following installations, as recommended by the respective service headquarters: Fort Lewis, Washington; Cheatham Annex Fleet Industrial Supply Center, Virginia; Edwards Air Force Base, California; and Marine Corps Air Station, Beaufort, South Carolina. To determine the status of each service's barracks program, we obtained and reviewed information on barracks policies, requirements, inventory, and condition of the inventory. We also reviewed each service's plans and cost estimates for improving the barracks, including plans for implementing the 1+1 design standard. We reviewed the status of military construction barracks projects for fiscal years 1996-99, and for all 1+1 projects, we summarized the costs incurred and number of barracks spaces provided. To document DOD's rationale for adopting the 1+1 barracks design standard, we reviewed (1) changes to barracks design standards since 1970, (2) DOD and service documentation describing the process that resulted in adoption of the 1+1 design standard, (3) previous DOD reports discussing the rationale for the 1+1 design, and (4) the results from the 1992 triservice survey of barracks occupants. We also obtained and reviewed available information on servicemembers' quality of life and reviewed retention statistics since fiscal year 1996. To determine the costs of alternatives to the 1+1 standard, we analyzed the services' cost information on constructing military barracks using the 1+1, 2+0, and 2+2 design standards. We used this information to develop estimates of the cost to construct a barracks space in accordance with each of these standards. Using these cost estimates, data on the existing barracks inventory and approved barracks construction projects, and service estimates of barracks requirements, we also estimated and compared the costs for each service to fully implement each of the three design standards. In addition, we obtained the views of service representatives on the use of barracks designs other than the 1+1 design. To obtain service views of the impact of the standard from an individual isolation, team-building, or similar perspective, we (1) reviewed documentation describing the process resulting in adoption of the 1+1 standard to determine whether any negative aspects of the design had been identified and evaluated, (2) reviewed the justifications supporting all service requests for waivers from using the 1+1 design standard, and (3) obtained opinions on the matter from service representatives. We conducted our review between July 1998 and January 1999 in accordance with generally accepted government auditing standards. Gary Phillips, Evaluator in Charge James Ellis, Senior Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. 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Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) barracks program in the United States, focusing on: (1) the status of the services' implementation of the 1 plus 1 barracks design standard, which calls for more space and increased privacy in new barracks; (2) DOD's rationale for adopting the standard; (3) the costs of alternatives for the 1 plus 1 standard; and (4) service views of the impact of the standard from a team-building, individual isolation, or similar perspective. GAO noted that: (1) except for the Marine Corps, the services embraced the 1 plus 1 barracks design standard and in fiscal year (FY) 1996 began building new and renovating older barracks to conform to the new standard; (2) in fiscal years 1996-99, about $1.5 billion in funding was approved for 124 military construction projects designed to provide over 29,000 barracks spaces meeting the 1 plus 1 design standard; (3) also, to provide increased privacy in existing barracks over a phased time period, the Army, the Navy, and the Air Force plan to assign one member to existing rooms designed for two members and two members to existing rooms designed for three members; (4) when required, the barracks capacity lost through this practice will be regained through construction of new 1 plus 1 barracks; (5) in lieu of the 1 plus 1 design, the Marine Corps is building new barracks with two-person sleeping rooms for junior Marines; (6) DOD justified the adoption of the 1 plus 1 standard primarily as an investment in quality of life aimed at improving military readiness and retention; (7) although barracks improvements do enhance individuals' quality of life, to what degree is unknown because quality of life is inherently difficult to quantify; (8) DOD has not developed any direct, quantitative evidence showing that barracks improvements, as distinct from other factors, result in improved readiness and retention; (9) even with existing barracks conditions, the services have achieved their first-term retention goals for the past 3 fiscal years with only one exception; (10) in FY 1998, the Air Force missed its first-term retention goal by one percentage point; (11) information collected from members that do not reenlist has shown that many factors other than housing, such as pay and promotion opportunities, are usually cited as the reasons for leaving the military; (12) GAO's comparison of barracks construction costs associated with alternative design standards showed significant differences in the amount of funds that would be required over and above what has already been funded; (13) because of the isolation provided in private rooms, the Marine Corps believes the 1 plus 1 standard does not allow for the unit cohesion and team building needed to reinforce Marine Corps values and develop a stronger bond among Junior Marines; and (14) the other services believe that the 1 plus 1 standard does not include these negative aspects because the standard applies only to permanent party personnel, not to recruits or initial trainees.

A federal grant is an award of financial assistance from a federal agency to an organization to carry out an agreed-upon public purpose. A Direct Payment for Specified Use (direct assistance) is an award of financial assistance from the federal government to individuals, private firms, and other private institutions to encourage or subsidize a particular activity by conditioning the receipt of the assistance on a particular performance by the recipient. As such, federal grants and direct assistance programs do not include solicited contracts for the procurement of goods and services for the federal government. Based on our analysis of fiscal years 2004 and 2005 data from the Federal Assistance Award Data System (FAADS), federal agencies collectively awarded grants and direct assistance of approximately $300 billion annually. Further analysis of the FAADS data indicates that approximately 80 percent of federal grants and direct assistance consist of federal funds provided to state and local governments, which, in turn, disburse funds to the ultimate recipients. Consequently, only about 20 percent of awarded funds are provided directly from the federal government to the organization that ultimately spends the money. Governmentwide policies affecting the award and administration of grants to nongovernmental entities are covered in OMB Circular No. A-110, Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations. OMB Circular No. A-102, Grants and Cooperative Agreements with State and Local Governments, provides governmentwide guidance for administering grants provided to state and local governments and prescribes similar procedures as those included in Circular No. A-110. Direct assistance programs are not subject to the same governmentwide policies as grants; procedures governing the application and award processes for direct assistance are prescribed in guidance and regulations promulgated by the cognizant federal agency responsible for administering the program. Most grant applicants that apply directly to the federal government are required to complete an Application for Federal Assistance, Standard Form (SF) 424. The SF 424 provides federal agencies with entity information, such as name, employer identification number, address, and a descriptive title of the project for which the grant will be used. The applicant is required to certify that the information provided on the SF 424 is true and correct and whether the applicant is currently delinquent on any federal debt. While most federal grant and direct assistance recipients pay their federal taxes, we identified tens of thousands of grant and direct assistance recipients that collectively owed about $790 million in federal taxes as of September 2006. These tax debts were owed by entities who received federal payments directly from federal payment systems during fiscal years 2005 and 2006 and individuals who participated in HUD's Section 8 tenant-based housing program as landlords during fiscal years 2005 and 2006. We used IRS's September 2006 unpaid assessments file data to calculate the amount of taxes owed at or about the time the various grant recipients received their grant payments. Specifically, we found 2,000 of about 32,000 recipients (about 6 percent) who received federal grant and direct assistance benefits directly from three of the largest federal payment systems had more than $270 million of unpaid federal taxes. About $110 million of the $270 million in unpaid taxes represents unpaid payroll taxes. 37,000 of over 1 million landlords (about 4 percent) participating in the HUD Section 8 program had about $520 million of unpaid federal taxes. Most of these tax debts were unpaid individual income taxes. In our audit, we found that grant recipients had a substantial amount of unpaid payroll taxes. Employers may be subject to civil and criminal penalties if they do not remit payroll taxes to the federal government. When an employer withholds taxes from an employee's wages, the employer is deemed to have a fiduciary responsibility to hold these funds "in trust" for the federal government until the employer makes a federal tax deposit in that amount. To the extent these withheld amounts are not forwarded, the employer is liable for these amounts, as well as the employer's matching Federal Insurance Contribution Act contributions for Social Security and Medicare. Individuals employed by the employer (e.g., owners or officers) may be held personally liable for the withheld amounts not forwarded and assessed a civil monetary penalty known as a trust fund recovery penalty (TFRP). Willful failure to remit payroll taxes can also be a criminal felony offense punishable by imprisonment of up to 5 years, while the failure to properly segregate payroll tax funds can be a criminal misdemeanor offense punishable by imprisonment of up to a year. The law imposes no penalties upon an employee for the employer's failure to remit payroll taxes since the employer is responsible for submitting the amounts withheld. The Social Security and Medicare trust funds are subsidized or made whole for unpaid payroll taxes by the federal government's general fund. Thus, personal income taxes, corporate income taxes, and other government revenues are used to pay for these shortfalls to the Social Security and Medicare trust funds. Although grant and direct assistance recipients had about $790 million in unpaid federal taxes as of September 30, 2006, this amount likely understates the full extent of unpaid taxes for these or other organizations and individuals. For example, except for our case study involving HUD's Section 8 tenant-based housing program, our estimate of grant and direct assistance recipients was limited to data from three of the largest government payment systems and thus did not include all federal grant and direct assistance disbursements. Further, our analysis of the three payment systems did not include recipients of payments who received their payments through state and local government entities. Based on our analysis of data from the FAADS, we estimated that payments paid by the federal government to final recipients account for only about 20 percent of the total grant and direct assistance funds awarded by the federal government. The remaining 80 percent of grant and direct assistance funds are provided to states and local governments, which, in turn, disburse them to the ultimate recipient. Further, to avoid overestimating the amount owed, we limited our scope to tax debts that were affirmed by either the taxable entity or a tax court for tax periods prior to 2006. We did not include the most current tax year because recently assessed tax debts that appear as unpaid taxes may involve matters that are routinely resolved between the taxpayer and IRS, with the taxes paid, abated, or both within a short period. We eliminated these types of debt by focusing on unpaid taxes for tax periods prior to calendar year 2006 and eliminating tax debt of $100 or less. The IRS tax database reflects only the amount of unpaid taxes either reported by the individual or organization on a tax return or assessed by IRS through its various enforcement programs. The IRS database does not reflect amounts owed by organizations and individuals that have not filed tax returns and for which IRS has not assessed tax amounts due. Further, our analysis did not attempt to account for organizations or individuals that purposely underreported income and were not specifically identified by IRS as owing the additional taxes. According to IRS, underreporting of income accounted for more than 80 percent of the estimated $345 billion annual gross tax gap. Consequently, the full extent of unpaid taxes for grant and direct assistance participants is not known. For all 20 cases of grant and direct assistance recipients we investigated for examples of abusive and criminal activity related to the federal tax system based on the large amount of tax debt and number of delinquent tax periods, we found in all cases evidence that indicated the existence of such abusive and criminal activities. Of these 20 cases, 14 cases were not- for-profit organizations that received grant payments and also had unpaid payroll taxes, some dating as far back as the 1990s. For example, one educational institution failed to submit employee payroll withholding taxes several times within a 3-year period and accumulated an unpaid tax liability of almost $4 million. For the cases of payroll tax delinquencies we investigated, officials responsible for these organizations failed to fulfill their role as "trustees" of employees' payroll tax withholdings and forward this money to IRS as required by federal tax laws. Instead, these officials diverted the withholdings to fund the organizations' operations or for personal benefits, such as their own salaries or extravagant vacations. The other 6 cases involved individuals who owed individual income taxes and who also received government subsidy payments through HUD's Section 8 low-income housing program. In one of these cases, the landlord attempted to evict renters who were instructed by IRS to pay the rent directly to IRS instead of the landlord. In all 20 cases, we saw significant evidence of IRS collection activity occurring, but in only a couple of cases did we see action related to investigating these entities and individuals for criminal violations of federal tax laws. Table 1 highlights 10 cases of grant recipients we investigated with unpaid taxes. The other 10 cases are summarized in appendix II. The following provide illustrative detailed information on several of these cases: Case 4: This landlord participating in the Section 8 tenant-based housing program was involved in a fraudulent real estate transaction in addition to owing over $3 million in delinquent income taxes. The landlord was indicted on mortgage fraud and racketeering for attempting to sell real estate at an inflated price using false appraisals. Previously, the landlord's family member was convicted of conspiracy to commit mail fraud, wire fraud, and money laundering in a scheme to sell fraudulent vacation club memberships. In addition, the landlord was charged with fraudulent conveyance of over $3 million worth of property to defraud creditors. Case 7: This grant recipient organization, which provides medical care to low-income families, has experienced financial problems throughout most of the 2000s and has several hundred thousand dollars in delinquent payroll taxes. During these years, while failing to properly fund its employee pension plan, the grant recipient paid hundreds of thousands of dollars in consulting fees to a former employee. Grant recipient could not document to other auditors over a million dollars in expenses relating to grants. Grant recipient has not made required contributions totaling tens of thousands of dollars to its pension plan. In addition, IRS assessed a TFRP against key grant recipient officials. Case 9: This not-for-profit grant recipient has been in operation since the 1980s to provide social services to disadvantaged individuals and families and has another closely related not-for-profit entity that also received federal grants. The recipient has over $1 million in unpaid payroll taxes dating back to the early 2000s, and IRS has placed several tax liens against the grantee's property. The grant recipient has had recurring financial problems and an independent audit report raised concerns about the entity's ability to continue operating. The recipient has also been cited for commingling funds among related grant recipients and for not having a functioning Board of Directors as represented to the granting agency. The recipient has been recommended for disbarment. Case 10: This not-for-profit grant recipient stopped making payroll tax deposits for several years beginning mid-2000s, accumulating unpaid payroll taxes totaling several hundreds of thousands of dollars. IRS filed liens against grantee assets and assessed the exempt organization with payroll tax violation penalties and interest totaling tens of thousands of dollars. A key grant recipient officer had a prior conviction for tax evasion and was again investigated for improperly using grant funds to purchase expensive clothing, a luxury vehicle, and lavish vacations and to pay taxes assessed from a prior tax evasion conviction. A key grantee officer had numerous individual income tax delinquencies. Neither federal law nor current governmentwide policies for administering federal grants or direct assistance prohibit applicants with unpaid federal taxes from receiving grants and direct assistance from the federal government. Even if such requirements did exist, absent consent from the taxpayer, federal law generally prohibits IRS from disclosing taxpayer data and, consequently, federal agencies have no access to tax data directly from IRS. Moreover, federal agencies we reviewed do not prevent organizations and individuals with unpaid federal taxes from receiving grants or direct assistance for the specific programs they administer. With regard to administering federal grants, federal law and current governmentwide policies, as reflected in OMB Circulars, do not prohibit individuals and organizations with unpaid taxes from receiving grants. OMB Circulars provide only general guidance with regard to considering existing federal debt in awarding grants. Specifically, the Circulars state that if an applicant has a history of financial instability, or other special conditions, the federal agency may impose additional award requirements to protect the government's interests. However, the Circulars do not specifically require federal agencies to take into account an applicant's delinquent federal debt, including federal tax debt, when assessing applications. While they require grant applicants to self-certify in their standard government application (SF 424) whether they are currently delinquent on any federal debt, including federal taxes, the Circulars contain no provision instructing the agencies to verify such certifications or describing how such verification should be done. No assessment of tax debt is required by OMB on a sampling or risk-based assessment. Although current governmentwide policies do not require it, federal agencies, such as HHS and Department of Education, have policies against awarding grants to applicants that owe federal debts. These policies state that a grant may not be awarded until the debt is satisfied or arrangements are made with the agency to which the debt is owed. However, awarding agencies rely extensively on applicants' self-certifications that they are not delinquent on any federal debt, including tax debt. Certain agencies, such as HHS, stated that they check credit reports to see if the grant applicant has any outstanding tax liens prior to award of the contract. While it is difficult to validate the agencies' assertions, none of these agencies could provide us examples where grant officials denied a grant based on self- disclosed tax delinquencies or required applicants to make repayment arrangements with the agency to which debt was owed. Even if requirements to verify applicants' disclosures did exist, federal law poses a significant challenge to federal granting agencies in determining the accuracy of representations made by organizations applying for grants. Specifically, the law does not permit IRS to disclose taxpayer information, including tax debts, to federal agency officials unless the taxpayer consents. Thus, unless an applicant provides consent requesting that IRS provide taxpayer information to federal agencies, certain tax debt information generally can only be discovered from public records when IRS files a tax lien against the property of a tax debtor. Further, representatives of one federal agency that has attempted to develop an approved consent form discovered that IRS may not accept certain signed consent forms because a requirement for an applicant to sign a consent form as a precondition to the agency's acceptance of the application may be considered a form of duress and thus raise a disclosure issue. Notwithstanding, while information on filed tax liens is generally publicly available, IRS does not file tax liens on all tax debtors nor does IRS have a central repository of tax liens to which grant-awarding agencies have access. Further, available information on tax liens may not be current or accurate because other studies have shown that IRS has not always released tax liens from property when the tax debt has been satisfied. Of the 20 organizations and individuals that we selected for additional investigation of abuse and criminal activity, 14 were grant recipients that were required to submit an application in order to be awarded a grant. In our review of the grant applications for the 14 grant cases, we found that 11 applicants certified in their applications that they were not currently delinquent in any federal debt, even though IRS had current tax assessments on file for these entities at the time the applications were filed. As a result, these 11 cases appear to have violated the False Statements Act because they did not declare their existing tax debt in their applications even though they were required to do so. Direct assistance programs are generally not subject to the same governmentwide guidance for grants. Instead, the cognizant federal agencies implement the necessary regulations for administering the program. With regard to our HUD's Section 8 tenant-based program case study, HUD regulations do not require local housing authorities to identify whether landlords who participate in HUD's housing assistance program and receive housing subsidies have outstanding federal tax delinquencies or prohibit payments if such delinquencies are identified. HUD regulations do permit local housing authorities to deny program participation if a landlord has not paid state or local real estate taxes, fines, or assessments. HUD regulations, however, do not require local housing authorities to deny the landlord from participating in the HUD program if the landlord owes any delinquent federal debts, including federal taxes. Because about 80 percent of all federal grants and direct assistance are administered and disbursed through state and local governments, the extent to which all final recipients of these federal payments owe taxes is not known. However, our limited audit has demonstrated that tens of thousands of grant and direct assistance recipients have taken advantage of the opportunity to avoid paying $790 million in federal taxes. At the same time they failed to pay their federal taxes, these individuals and organizations benefited by receiving billions of dollars of federal grants or direct assistance benefits. With regard to grants, allowing individuals and organizations to receive federal grants while not paying their federal taxes is not fair to the vast majority of grant applicants that pay their fair share of taxes. This practice causes a disincentive to individuals and organizations to pay their fair share of taxes and could lead to further erosion in compliance with the nation's tax system. We recommend that the Director, Office of Management and Budget, assess the need to issue guidance requiring federal agencies that award certain grants and other direct assistance, where appropriate in relation to the potential adverse effect on potential applications, to take the following two actions: Conduct actions that would help determine if applicants had unpaid federal tax debt, including obtaining applicant consent to inquire as to tax debt status from IRS; this could be achieved through sampling or other risk-based assessments. Consider the result of those inquiries in the award determinations. We also recommend that the Acting Commissioner of Internal Revenue evaluate the 20 referred cases detailed in this report for appropriate additional collection action or criminal investigation as warranted. We received written comment from IRS and oral comments from OMB on the draft of this report. Both IRS and OMB agreed with the draft report's recommendations. OMB also provided technical comments on the draft report, which we incorporated as appropriate. We have reprinted IRS's written comments in their entirety in Appendix III. As agreed with your offices, unless you publicly release its contents earlier we plan no further distribution of this report until 30 days from its date. At that time, we will send copies of this report to the Acting Commissioner of Internal Revenue, the Director of the Office of Management and Budget, interested congressional committees, and other interested parties. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-6722 or [email protected] if you have any questions concerning this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. To address our first objective to describe the magnitude of tax debt owed, we obtained and analyzed federal payment databases from the Department of the Treasury's Automated Standard Application Payment System (ASAP), the Department of Education's Grant Administration and Payment System (GAPS), and the Department of Health and Human Services' (HHS) Payment Management System (PMS) for fiscal years 2005 and 2006. These three agencies process grant and other assistance program payments on behalf of many federal agencies and, in fiscal years 2005 and 2006, processed over $460 billion in grant and direct assistance payments, excluding Medicare and Medicaid. Our analysis of data, however, was limited because approximately 80 percent of federal grant and direct assistance payments are paid to state and local governments, which then disburse funds to final recipients. Because identifying information on the final recipients of payments provided at the state and local level is not available at the federal level, our analysis was limited to those payments provided directly by the federal government to final recipients. We estimated these direct payments to final recipients represented about 20 percent of total federal grant and direct assistance payments. Because identifying information for final recipients of payments provided at the state and local levels was not available at the federal level and not practical for us to obtain, we selected one major federal program that disburses funds at the local level for a case study analysis. For this case study, we selected the Department of Housing and Urban Development's (HUD) Section 8 tenant-based low-income housing program, a program classified as a direct assistance program, which provides rental assistance to low-income families by providing supplemental rental payments directly to landlords participating in the rental assistance program. We obtained and analyzed an extract from HUD's Public Housing Information Center (PIC) database, which HUD represented to be the most complete data source available on low-income assisted households in HUD's public housing or voucher programs, that contained identifying information on landlords who participated in HUD's program during fiscal years 2005 and 2006. 2006, unpaid assessments files and electronically matched these files with the various grant and direct assistance recipients identified in the above databases using the taxpayer identification number. To avoid overstating the amount of unpaid taxes owed by grant recipients and to capture only significant tax debt, we excluded tax debts meeting specific criteria. The criteria we used to exclude tax debts are as follows: tax debts IRS classified as compliance assessments or memo accounts for financial reporting, tax debts from calendar year 2006 tax periods, and grant recipients with total unpaid taxes of $100 or less. The criteria above were used to exclude tax debts that might be under dispute or generally duplicative or invalid and tax debts that are incurred after the dates the entities received grant payments. Compliance assessments or memo accounts were excluded because these taxes have neither been agreed to by the taxpayers nor affirmed by the court, or these taxes could be invalid or duplicative of other taxes already reported. We excluded tax debts from calendar year 2006 tax periods to eliminate tax debt that may involve matters that are routinely resolved between the taxpayers and IRS, with the taxes paid or abated within a short period. We also excluded tax debts of $100 or less because they are insignificant for the purpose of determining the extent of taxes owed by grant recipients. personal bank data, entities established to hide assets, etc.) that the recipient individuals or entities, including key officials, own or receive. To determine actions federal agencies take to prevent individuals and organizations with significant unpaid federal taxes from either being approved for or receiving grant or direct assistance payments, we reviewed governmentwide and agency-specific policies and procedures for awarding grants and benefits from the respective programs. We also interviewed officials from the Office of Management and Budget and the Departments of Agriculture, Education, Homeland Security, HHS, and HUD on whether tax debts are considered in their decisions to approve award applications. In addition, to test whether grant applicants properly disclosed their current tax delinquencies when submitting applications, we requested and reviewed the grant applications for our 14 cases that applied for grants. We conducted our audit work from January 2007 through August 2007 in accordance with U.S. generally accepted government auditing standards, and we performed our investigative work in accordance with standards prescribed by the President's Council on Integrity and Efficiency. For IRS unpaid assessments data, we relied on the work we performed during our annual audits of IRS's financial statements. While our financial statement audits have identified some data reliability problems associated with the coding of some of the fields in IRS's tax records, including errors and delays in recording taxpayer information and payments, we determined that the data were sufficiently reliable to address our report's objectives. Our financial audit procedures, including the reconciliation of the value of unpaid taxes recorded in IRS's master file to IRS's general ledger, identified no material differences. information for reporting on program performance under the Government Performance and Results Act. We held discussions with HUD's database administrators on input controls used to maintain data integrity for the data elements we used for our analysis and with HUD programmers to discuss the programming code HUD used to extract the data we used. We also performed electronic testing of the data elements we used and performed limited verification tests. Based on our discussions with agency officials, our review of agency documents, and our own testing, we concluded that the data elements used for this report were sufficiently reliable for our purposes. Table 1 provides data on 10 detailed case studies. Table 2 below provides details of the remaining 10 organizations and individuals we selected as case studies. As with the 10 cases discussed in the body of this report, we found evidence of abusive and potential criminal activity related to the federal tax system during our audit and investigations of these 10 case studies. In addition to the individual named above, Erika Axelson, James Berry, Ray Bush, Bill Cordrey, Kenneth Hill, Aaron Holling, Wil Holloway, Mitchell Karpman, John Kelly, Rick Kusman, Tram Le, John Ledford, Barbara Lewis, Andrew McIntosh, Eduvina Rodriguez, John Ryan, Steve Sebastian, Robert Sharpe, Barry Shillito, Pat Tobo, and Matthew Valenta made key contributions to this report. Tax Compliance: Thousands of Organizations Exempt from Federal Income Tax Owe Nearly $1 Billion in Payroll and Other Taxes. GAO-07- 1090T. Washington, D.C.: July 24, 2007. Tax Compliance: Thousands of Organizations Exempt from Federal Income Tax Owe Nearly $1 Billion in Payroll and Other Taxes. GAO-07- 563. Washington, D.C.: June 29, 2007. Tax Compliance: Thousands of Federal Contractors Abuse the Federal Tax System. GAO-07-742T. Washington, D.C.: April 19, 2007. Medicare: Thousands of Medicare Part B Providers Abuse the Federal Tax System. GAO-07-587T. Washington, D.C.: March 20, 2007. Internal Revenue Service: Procedural Changes Could Enhance Tax Collections. GAO-07-26. Washington, D.C.: November 15, 2006. Tax Debt: Some Combined Federal Campaign Charities Owe Payroll and Other Federal Taxes. GAO-06-887. Washington, D.C.: July 28, 2006. Tax Debt: Some Combined Federal Campaign Charities Owe Payroll and Other Federal Taxes. GAO-06-755T. Washington, D.C.: May 25, 2006. Financial Management: Thousands of GSA Contractors Abuse the Federal Tax System. GAO-06-492T. Washington, D.C.: March 14, 2006. Financial Management: Thousands of Civilian Agency Contractors Abuse the Federal Tax System with Little Consequence. GAO-05-683T. Washington, D.C.: June 16, 2005. Financial Management: Thousands of Civilian Agency Contractors Abuse the Federal Tax System with Little Consequence. GAO-05-637. Washington, D.C.: June 16, 2005. Financial Management: Some DOD Contractors Abuse the Federal Tax System with Little Consequence. GAO-04-414T. Washington, D.C.: February 12, 2004. Financial Management: Some DOD Contractors Abuse the Federal Tax System with Little Consequence. GAO-04-95. Washington, D.C.: February 12, 2004.

Since February 2004, GAO has reported that weaknesses in the federal programs and controls that allowed thousands of federal contractors, tax exempt entities, and Medicare providers to receive government money while owing taxes. GAO was asked to determine if these problems exist for entities who receive federal grants or direct assistance and (1) describe the magnitude of taxes owed, (2) provide examples of grant recipients involved in abusive and potentially criminal activity, and (3) assess efforts to prevent delinquent taxpayers from participating in such programs. To perform this work, GAO analyzed data from the Internal Revenue Service (IRS), three of the largest grant and direct assistance payment systems, representing over $460 billion in payments in fiscal years 2005 and 2006, and the Housing and Urban Development (HUD) Section 8 tenant-based housing program. GAO investigated 20 cases to provide examples of grant recipients involved in abusive activity. While most recipients of payments federal grant and direct assistance programs pay their federal taxes, tens of thousands of recipients collectively owed $790 million in federal taxes as of September 30, 2006. This included over 2,000 individuals and organizations that received $124 billion of payments directly from the federal government and who owed more than $270 million of unpaid taxes (almost 6 percent of such recipients) and about 37,000 landlords participating in HUD's Section 8 tenant-based housing program who owed an estimated $520 million of unpaid taxes (almost 4 percent of such landlords). The $790 million estimate is likely substantially understated because GAO's analysis excluded the 80 percent of federal grants that are directly given to state and local governments which, in turn, disburse the grants to the ultimate recipients. GAO selected 20 grant and direct assistance recipients with high tax debt for a more in-depth investigation of the extent and nature of abuse and criminal activity. For all 20 cases GAO found abusive and potential criminal activity related to the federal tax system, including failure to remit individual income taxes and/or payroll taxes to IRS. Rather than fulfill their role as ''trustees'' of payroll tax money and forward it to IRS, these grant recipients diverted the money for other purposes. Willful failure to remit payroll taxes is a felony under U.S. law. Individuals associated with some of these recipients diverted the payroll tax money for their own benefit or to help fund their businesses. GAO referred these 20 cases to IRS for additional collection and investigation action, as appropriate. Federal law and current governmentwide policies do not prohibit individuals and organizations with unpaid taxes from receiving grants or direct assistance. Several federal agencies established policies against awarding grants to tax delinquent applicants; however, federal agencies do not verify applicants' certification that they do not owe taxes. Further, federal law generally prohibits the disclosure of taxpayer data to federal agencies. Eleven grant recipients that GAO investigated appeared to have made false statements by not disclosing their tax debt as required. Further, agencies that award grants are not required to inquire as to recipients' tax debt status prior to providing direct assistance payments.

Energy commodities are bought and sold on both the physical and financial markets. The physical market includes the spot market where products such as crude oil or gasoline are bought and sold for immediate or near-term delivery by producers, wholesalers, and retailers. Spot transactions take place between commercial participants for a particular energy product for immediate delivery at a specific location. For example, the U.S. spot market for West Texas Intermediate crude oil is the pipeline hub near Cushing, Oklahoma, while a major spot market for natural gas operates at the Henry Hub near Erath, Louisiana. The prices set in the specific spot markets provide a reference point that buyers and sellers use to set the price for other types of the commodity traded at other locations. In addition to the spot markets, derivatives based on energy commodities are traded in financial markets. The value of the derivative contract depends on the performance of the underlying asset--for example, crude oil or natural gas. Derivatives include futures, options, and swaps. Energy futures include standardized exchange-traded contracts for future delivery of a specific crude oil, heating oil, natural gas, or gasoline product at a particular spot market location. An exchange designated by CFTC as a contract market standardizes the contracts. The owner of an energy futures contract is obligated to buy or sell the commodity at a specified price and future date. However, the contractual obligation may be removed at any time before the contract expiration date if the owner sells or purchases other contracts with terms that offset the original contract. In practice, most futures contracts on NYMEX are liquidated via offset, so that physical delivery of the underlying commodity is relatively rare. Market participants use futures markets to offset the risk caused by changes in prices, to discover commodity prices, and to speculate on price changes. Some buyers and sellers of energy commodities in the physical markets trade in futures contracts to offset or "hedge" the risks they face from price changes in the physical market. Exempt commercial markets and OTC derivatives are also used to hedge this risk. The ability to reduce their price risk is an important concern for buyers and sellers of energy commodities, because wide fluctuations in cash market prices introduce uncertainty for producers, distributors, and consumers of commodities and make investment planning, budgeting, and forecasting more difficult. To manage price risk, market participants may shift it to others more willing to assume the risk or to those having different risk situations. For example, if a petroleum refiner wants to lower its risk of losing money because of price volatility, it could lock in a price by selling futures contracts to deliver the gasoline in 6 months at a guaranteed price. Without futures contracts to manage risk, producers, refiners, and others would likely face greater uncertainty. By establishing prices for future delivery, the futures market also helps buyers and sellers determine or "discover" the price of commodities in the physical markets, thus linking the two markets together. Markets are best able to perform price discovery when (1) participants have current information about the fundamental market forces of supply and demand, (2) large numbers of participants are active in the market, and (3) the market is transparent. Market participants monitor and analyze a myriad of information on the factors that currently affect and that they expect to affect the supply of and demand for energy commodities. With that information, participants buy or sell an energy commodity contract at the price they believe the commodity will sell for on the delivery date. The futures market, in effect, distills the diverse views of market participants into a single price. In turn, buyers and sellers of physical commodities may consider those predictions about future prices, among other factors, when setting prices on the spot and retail markets. Other participants, such as investment banks and hedge funds, which do not have a commercial interest in the underlying commodities, generally use the futures market for profit. These speculators provide liquidity to the market but also take on risks that other participants, such as hedgers, seek to avoid. In addition, arbitrageurs attempt to make a profit by simultaneously entering into several transactions in multiple markets in an effort to benefit from price discrepancies across these markets. The physical markets for energy commodities underwent change and turmoil from 2002 through 2006, which affected prices in the spot and futures markets. We reported that numerous changes in both the physical and futures markets may have affected energy prices. However, because these changes occurred simultaneously, identifying the specific effect of any one of these changes on energy prices is difficult. The physical energy markets have undergone substantial change and turmoil during this period, which can affect spot and futures markets. Like many others, we found that a number of fundamental supply and demand conditions can affect prices. According to the Energy Information Administration (EIA), world oil demand has grown since 1983 from a low of about 59 million barrels per day in 1983 to more than 85 million barrels per day in 2006 (fig. 1). While the United States accounts for about a quarter of this demand, rapid economic growth in Asia also has stimulated a strong demand for energy commodities. For example, EIA data show that during this time frame, China's average daily demand for crude oil increased almost fourfold. The growth in demand does not, by itself, lead to higher prices for crude oil or any other energy commodity. For example, if the growth in demand were exceeded by a growth in supply, prices would fall, other things remaining constant. However, according to EIA, the growth in demand outpaced the growth in supply, even with spare production capacity included in supply. Spare production capacity is surplus oil that can be produced and brought to the market relatively quickly to rebalance the market if there is a supply disruption anywhere in the world oil market. As shown in figure 2, EIA estimates that global spare production capacity in 2006 was about 1.3 million barrels per day, compared with spare capability of about 10 million barrels per day in the mid-1980s and about 5.6 million barrels a day as recently as 2002. Major weather and political events also can lead to supply disruptions and higher prices. In its analysis, EIA has cited the following examples: Hurricanes Katrina and Rita removed about 450,000 barrels per day from the world oil market from June 2005 to June 2006. Instability in major oil-producing countries of the Organization of Petroleum Exporting Countries (OPEC), such as Iran, Iraq, and Nigeria, have lowered production in some cases and increased the risk of future production shortfalls in others. Oil production in Russia, a major driver of non-OPEC supply growth during the early 2000s, was adversely affected by a worsened investment climate as the government raised export and extraction taxes. The supply of crude oil affects the supply of gasoline and heating oil, and just as production capacity affects the supply of crude oil, refining capacity affects the supply of those products distilled from crude oil. As we have reported, refining capacity in the United States has not expanded at the same pace as the demand for gasoline. Inventory, another factor affecting supplies and therefore prices, is particularly crucial to the supply and demand balance, because it can provide a cushion against price spikes if, for example, production is temporarily disrupted by a refinery outage or other event. Trends toward lower levels of inventory may reduce the costs of producing gasoline, but such trends also may cause prices to be more volatile. That is, when a supply disruption occurs or there is an increase in demand, there are fewer stocks of readily available gasoline to draw on, putting upward pressure on prices. Another consideration is that the value of the U.S. dollar on open currency markets could affect crude oil prices. For example, because crude oil is typically denominated in U.S. dollars, the payments that oil-producing countries receive for their oil also are denominated in U.S. dollars. As a result, a weak U.S. dollar decreases the value of the oil sold at a given price, and oil-producing countries may wish to increase prices for their crude oil in order to maintain the purchasing power in the face of a weakening U.S. dollar to the extent they can. As you can see, conditions in the physical markets have undergone changes that can help explain at least some of the increases in both physical and derivatives commodity prices. As we have previously reported, futures prices typically reflect the effects of world events on the price of the underlying commodity such as crude oil. For example, political instability and terrorist acts in countries that supply oil create uncertainties about future supplies, which are reflected in futures prices. Conversely, news about a new oil discovery that would increase world oil supply could result in lower futures prices. In other words, changes in the physical markets influence futures prices. At the same time that physical markets were undergoing changes, we found that financial markets also were amidst change and evolution. For example, the annual historical volatilities between 2000 and 2006-- measured using the relative change in daily prices of energy futures-- generally were above or near their long-term averages, although crude oil and heating oil declined below the average and gasoline declined slightly at the end of that period. We also found that the annual volatility of natural gas fluctuated more widely than that of the other three commodities and increased in 2006 even though prices largely declined from the levels reached in 2005. Although higher volatility is often equated with higher prices, this pattern illustrates that an increase in volatility does not necessarily mean that price levels will increase. In other words, price volatility measures the variability of prices rather than the direction of the price changes. Elsewhere in the futures market, we found an increase in the number of noncommercial traders such as managed money traders. Attracted in part by the trends in prices and volatility, a growing number of traders sought opportunities to hedge against those changes or profit from them. Using CFTC's large trader data, we found that from July 2003 to December 2006, crude oil futures and options contracts experienced the most dramatic increase, with the average number of noncommercial traders more than doubling from about 125 to about 286. As shown in figure 3, while the growth was less dramatic in the other commodities, the average number of noncommercial traders also showed an upward trend for unleaded gasoline, heating oil, and natural gas. Not surprisingly, our work also revealed that as the number of traders increased, so did the trading volume on NYMEX for all energy futures contracts, particularly crude oil and natural gas. Average daily contract volume for crude oil increased by 90 percent from 2001 through 2006, and natural gas increased by just over 90 percent. Unleaded gasoline and heating oil experienced less dramatic growth in their trading volumes over this period. While much harder to quantify, another notable trend was the significant increase in the amount of energy derivatives traded outside exchanges. Trading in these markets is much less transparent, and comprehensive data are not available because these energy markets are not regulated. However, using the Bank for International Settlements data as a rough proxy for trends in the trading volume of OTC energy derivatives, the face value or notional amounts outstanding of OTC commodity derivatives excluding precious metals, such as gold, grew from December 2001 to December 2005 by more than 850 percent to over $3.2 trillion. Further, while some market observers believe that managed money traders were exerting upward pressure on prices by predominantly buying futures contracts, CFTC data we analyzed revealed that from the middle of 2003 through the end of 2006, the trading activity of managed money participants became increasingly balanced between buying (those that expect prices to go up) and selling (those that expect prices to go down). Using CFTC large trader reporting data, we found that from July 2003 through December 2006, managed money traders' ratio of buying (long) to selling (short) open interest positions was 2.5:1 indicating that on the whole, this category of participants was 2.5 times as likely to expect prices to rise as opposed to fall throughout that period, which they did. However, as figure 4 illustrates, by 2006, this ratio fell to 1.2:1, suggesting that managed money traders as a whole were more evenly divided in their expectations about future prices. As you can see, managed money trading in unleaded gasoline, heating oil, and natural gas showed similar trends. Overall, we found that views were mixed about whether these trends put any upward pressure on prices. Some market participants and observers have concluded that large purchases of oil futures contracts by speculators could have created an additional demand for oil that could lead to higher prices. Conversely, some federal agencies and other market observers took the position that speculative trading activity did not have a significant impact on prices. For example, an April 2005 CFTC study of the markets concluded that increased trading by speculative traders, including hedge funds, did not lead to higher energy prices or volatility. This study also argued that hedge funds provided increased liquidity to the market and dampened volatility. Still others told us that while speculative trading in the futures market could contribute to short-term price movements in the physical markets, they did not believe it was possible to sustain a speculative "bubble" over time, because the two markets were linked and both responded to information about changes in supply and demand caused by such factors as the weather or geographical events. In the view of these observers and market participants, speculation could not lead to artificially high or low prices over a long period. Under CEA, CFTC's authority for protecting market users from fraudulent, manipulative, and abusive practices in energy derivatives trading is primarily focused on the operations of traditional futures exchanges, such as NYMEX, where energy futures are traded. Off exchange markets, which are available only to eligible traders of certain commodities under specified conditions, are not regulated, although CFTC may enforce antimanipulation and antfraud provisions of the CEA with respect to trading in those markets. The growth in trading off exchange has raised questions about the sufficiency of CFTC's limited authority over these markets. These changes and innovations also have brought into question the methods CFTC uses to categorize published data about futures trading by participants in the off exchange markets and whether information about their activities in off exchange markets would be useful to the public. CFTC is taking steps to better understand these issues. Most importantly, it is currently examining the relationship between trading in the regulated and exempt energy markets and the role this trading plays in the price discovery process. It is also examining the sufficiency of the scope of its authority over these markets--an issue that will warrant further examination as part of the CFTC reauthorization process. To help provide transparency in the markets, CFTC provides the public information on open interest in exchange-traded futures and options by commercial and noncommercial traders for various commodities in its weekly Commitment of Traders (COT) reports. As we reported, CFTC observed that the exchange-traded derivatives markets, as well as trading patterns and practices, have evolved. In 2006, CFTC initiated a comprehensive review of the COT reporting program out of concern that the reports in their present form might not accurately reflect the commercial or noncommercial nature of positions held by nontraditional hedgers, such as swaps dealers. A disconnect between the classifications and evolving trading activity could distort the accuracy and relevance of reported information to users and the public, thereby limiting its usefulness for both. In December 2006, CFTC announced a 2-year pilot program for publishing a supplemental COT report that includes positions of commodity index traders in a separate category. However, the pilot does not include any energy commodities. Although commodity index traders are active in energy markets, according to CFTC officials, currently available data would not permit an accurate breakout of index trading in these markets. For example, some traders, such as commodity index pools, use the futures markets to hedge commodity index positions they hold in the OTC market. However, these traders also may have positions in the physical markets, which means the reports that CTFC receives on market activities, which do not include such off-exchange transactions, may not present an accurate picture of all positions in the market place for the commodity. In response to our recommendation to reexamine the COT classifications for energy markets, CFTC agreed to explore whether the classifications should be refined to improve their accuracy and relevance. Now let me address some of the larger policy issues associated with CFTC's oversight of these markets. Under CEA, CFTC's authority for protecting market users from fraudulent, manipulative, and abusive practices in energy derivatives trading is primarily focused on the operations of traditional futures exchanges, such as NYMEX, where energy futures are traded. Currently, CFTC receives limited information on derivatives trading on exempt commercial markets--for example, records of allegations or complaints of suspected fraud or manipulation, and price, quantity, and other data on contracts that average five or more trades a day. The agency may receive limited information, such as trading records, from OTC participants to help CFTC enforce the CEA's antifraud or antimanipulation provisions. The scope of CFTC's oversight authority has raised concerns among some members of Congress and others that activities on these markets are largely unregulated, and that additional CFTC oversight is needed. While some observers have called for more oversight of OTC derivatives, most notably for CFTC to be given greater oversight authority of this market, others oppose any such action. Supporters of more CFTC oversight authority believe that regulation of OTC derivatives markets is necessary to protect the regulated markets and consumers from potential abuse and possible manipulation. One of their concerns is that, due to the lack of complete information on the size of this market or the terms of the contracts, CFTC may not be assured that trading on the OTC market is not adversely affecting the regulated markets and, ultimately, consumers. However others, including the President's Working Group, have concluded that OTC derivatives generally are not subject to manipulation because contracts are settled in cash on the basis of a rate or price determined in a separate, highly liquid market that does not serve a significant price discovery function. The Working Group also noted that if electronic markets were to develop and serve a price discovery function, then consideration should be given to enacting a limited regulatory regime aimed at enhancing market transparency and efficiency through CFTC, as the regulator of exchange-traded derivatives. However, the lack of reported data about this market makes addressing concerns about its function and effect on regulated markets and entities challenging. In a June 2007 Federal Register release clarifying its large trader reporting authority, CFTC noted that having data about the off- exchange positions of traders with large positions on regulated futures exchanges could enhance the commission's ability to deter and prevent price manipulation or other disruptions to the integrity of the regulated futures markets. According to CFTC officials, the commission has proposed amendments to clarify its authority under the CEA to collect information and bring fraud actions in principal-to-principal transactions in these markets, enhancing CFTC's ability to enforce antifraud provisions of the CEA. Also, in September 2007, CFTC conducted a hearing to begin examining trading on regulated exchanges and exempt commercial markets more closely. The hearing focused on a number of issues, including the current tiered regulatory approach established by the Commodity Futures Modernization Act, which amended the CEA, and whether this model is beneficial; the similarities and differences between exempt commercial markets and regulated exchanges, and the associated regulatory risks of each market; and the types of regulatory or legislative changes that might be appropriate to address any identified risks. Given ongoing questions about the similarity of products traded on the markets and how and whether exempt markets play a role in the price discovery process and whether existing reporting requirements are sufficient, we recommend that Congress take up this issue during the CFTC reauthorization process to begin to answer some of these questions and the implications for the current regulatory structure in light of the changes that have occurred in this market. CFTC provides oversight for commodity futures markets by analyzing large trader reporting data, conducting routine surveillance, and investigating and taking enforcement actions against market participants and others. The commission uses information gathered from surveillance activities to identify unusual trading activity and possible market abuse. In particular, CFTC's large trader reporting system (LTRS) provides essential information on the majority of all trading activity on futures exchanges. CFTC staff said they routinely investigate traders with large open positions, but do not routinely maintain information about such inquiries, thereby making it difficult to determine the usefulness and extent of these activities. According to recent data provided by CFTC, about 10 percent of the enforcement actions involved energy-related commodities. However, as with programs operating in regulatory environments where performance is not easily measurable, evaluating the effectiveness of CFTC's enforcement activities is challenging because it lacks effective outcome-based performance measures. CFTC conducts regular market surveillance and oversight of energy trading on NYMEX and other futures exchanges, focusing on detecting and preventing disruptive practices before they occur and keeping the CFTC commissioners informed of possible manipulation or abuse. According to CFTC staff, when a potential market problem has been identified, surveillance staff generally contact the exchange or traders for more information. To confirm positions and determine intent, staff may question exchange employees, brokers, or traders. According to the staff, CFTC's Division of Market Oversight may issue a warning letter or make a referral to the Division of Enforcement to conduct a nonpublic investigation into the trading activity. Markets where surveillance problems have not been resolved may be included in reports presented to the commission at weekly surveillance meetings. According to CFTC staff, they routinely make inquiries about traders with large open positions approaching expiration, but formal records of their findings are only kept in cases with evidence of improper trading. If LTRS data revealed that a trader had a large open market position that could disrupt markets if it were not closed before expiration, CFTC staff would contact the trader to determine why the trader had the position and what plans the trader had to close the position before expiration or ensure that the trader was able to take delivery. If the trader provided a reasonable explanation for the position and a reasonable delivery or liquidation strategy, staff said no further action would be required. CFTC staff said they would document such contacts on the basis of their importance in either informal notes, e-mails to supervisors, or informal memorandums. According to one CFTC official, no formal record would be made unless some signal indicated improper trading activity. However, without such data, CFTC's measures of the effectiveness of its actions to combat fraud and manipulation in the markets would not reflect all surveillance activity, and CFTC management might miss opportunities to identify trends in activities or markets and better target its limited resources. In response to our recommendation, CFTC agreed to improve its documentation of its surveillance activities. CFTC's Division of Enforcement is charged with enforcing the antimanipulation sections of the CEA. The enforcement actions CFTC has taken in its energy-related cases generally have involved false public reporting as a method of attempting to manipulate prices on both the NYMEX futures market and the off-exchange markets. CFTC officials said that from October 2000 to September 2005, the agency initiated 287 enforcement cases and more than 30 of these cases involved energy trading. In the past several months, CFTC has taken a series of actions involving energy commodities, including allegations of false reporting, attempted manipulation of NYMEX natural gas futures prices, and attempted manipulation of physical natural gas prices. Although CFTC has undertaken enforcement actions and levied fines, measuring the effectiveness of these activities is an ongoing challenge. For example, the Office of Management and Budget's most recent 2004 Program Assessment Rating Tool (PART) assessment of the CFTC enforcement program identified a number of limitations of CFTC's performance measures. As is the case with most enforcement programs, identifying outcome-oriented performance measures can be particularly challenging. However, as we point out in the report, there are a number of other ways to evaluate program effectiveness, such as using expert panel reviews, customer service surveys, and process and outcome evaluations. We have found with other programs that the form of the evaluations reflects differences in program structure and anticipated outcomes, and that the evaluations are designed around the programs and what they aim to achieve. Without utilizing these or other methods to evaluate program effectiveness, CFTC is unable to demonstrate whether its enforcement program is meeting its overall objectives. CFTC has agreed that this is a matter that should be examined and has included development of measures to evaluate its effectiveness in its strategic plan and has requested funding to study the feasibility of developing more meaningful measures. In closing, I would like to reemphasize the difficulty in attributing increased energy prices to any one of the numerous changes in the physical or derivatives markets. As I have mentioned, our research shows that the physical and derivatives markets have both undergone substantial change and evolution, and market participant and regulatory views were mixed about the extent to which these developments exerted upward pressure on prices. Because of the importance of understanding the potential effects of such developments in these markets, ongoing review and analysis are warranted. As the scope of CFTC's authority is debated, additional information is needed to understand what may need to be done to best protect investors from fraudulent, manipulative, and abusive practices. Such information includes how different or similar are the characteristics and uses of exchange and off-exchange products being traded and do these continue to justify different regulatory treatment; to what extent does trading in off-exchange financial derivatives affect price discovery and what are the regulatory and policy implications; how large of an effect are nontraditional market participants, such as commodity index funds, having in these markets; and are the changes in the energy markets unique or are such concerns also worth reviewing for other commodity markets. By answering questions such as these, CFTC and the Congress will be better positioned to determine what changes, if any, may be needed to oversee these markets. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or other members of the subcommittee might have. For further information about this testimony, please contact Orice M. Williams on (202) 512-8678 or at [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 include Cody Goebel (Assistant Director), John Forrester, Barbara Roesmann, and Paul Thompson. 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.

Energy prices for crude oil, heating oil, unleaded gasoline, and natural gas have risen substantially since 2002, generating questions about the role derivatives markets have played and the scope of the Commodity Futures Trading Commission's (CFTC) authority. This testimony focuses on (1) trends and patterns in the futures and physical energy markets and their effects on energy prices, (2) the scope of CFTC's regulatory authority, and (3) the effectiveness of CFTC's monitoring and detection of abuses in energy markets. The testimony is based on the GAO report, Commodity Futures Trading Commission: Trends in Energy Derivatives Markets Raise Questions about CFTC's Oversight ( GAO-08-25 , October 19, 2007). For this work, GAO analyzed futures and large trader data and interviewed market participants, experts, and officials at six federal agencies. Various trends in both the physical and futures markets have affected energy prices. Specifically, tight supply and rising demand in the physical markets contributed to higher prices as global demand for oil has risen rapidly while spare production capacity has fallen since 2002. Moreover, increased political instability in some of the major oil-producing countries has threatened the supply of oil. During this period, increasing numbers of noncommercial participants became active in the futures markets (including hedge funds) and the volume of energy futures contracts traded also increased. Simultaneously, the volume of energy derivatives traded outside of traditional futures exchanges increased significantly. Because these developments took place concurrently, the effect of any individual trend or factor on energy prices is unclear. Under the authority granted by the Commodity Exchange Act (CEA), CFTC focuses its oversight primarily on the operations of traditional futures exchanges, such as the New York Mercantile Exchange, Inc. (NYMEX), where energy futures are traded. Increasing amounts of energy derivatives trading also occur on markets that are largely exempt from CFTC oversight. For example, exempt commercial markets conduct trading on electronic facilities between large, sophisticated participants. In addition, considerable trading occurs in over-the-counter (OTC) markets in which eligible parties enter into contracts directly, without using an exchange. While CFTC can act to enforce the CEA's antimanipulation and antifraud provisions for activities that occur in exempt commercial and OTC markets, some market observers question whether CFTC needs broader authority to more routinely oversee these markets. CFTC is currently examining the effects of trading in the regulated and exempt energy markets on price discovery and the scope of its authority over these markets--an issue that will warrant further examination as part of the CFTC reauthorization process. CFTC conducts daily surveillance of trading on NYMEX that is designed to detect and deter fraudulent or abusive trading practices involving energy futures contracts. To detect abusive practices, such as potential manipulation, CFTC uses various information sources and relies heavily on trading activity data for large market participants. Using this information, CFTC staff may pursue alleged abuse or manipulation. However, because the agency does not maintain complete records of all such allegations, determining the usefulness and extent of these activities is difficult. In addition, CFTC's performance measures for its enforcement program do not fully reflect the program's goals and purposes, which could be addressed by developing additional outcome-based performance measures that more fully reflect progress in meeting the program's overall goals. Because of changes and innovations in the market, the reports that CFTC receives on market activities may no longer be accurate because they use categories that do not adequately separate trading being done for different reasons by various market participants.

The national information and communications networks consist of a collection of mostly privately owned networks that are critical to the nation's security, economy, and public safety. The communications sector operates these networks and is comprised of public- and private-sector entities that have a role in, among other things, the use, protection, or regulation of the communications networks and associated services (including Internet routing). For example, private companies, such as AT&T and Verizon, function as service providers, offering a variety of services to individual and enterprise end users or customers. The Internet is a vast network of interconnected networks. It is used by governments, businesses, research institutions, and individuals around the world to communicate, engage in commerce, do research, educate, and entertain. customers that are positioned at the ends of the network, or the "last mile," as referred to by industry. The core networks transport a high volume of aggregated traffic substantial distances or between different service providers or "carriers." These networks connect regions within the United States as well as all continents except Antarctica, and use submarine fiber optic cable systems, land-based fiber and copper networks, and satellites. In order to transmit data, service providers manage and control core infrastructure elements with numerous components, including signaling systems, databases, switches, routers, and operations centers. Multiple service providers, such as AT&T and Verizon, operate distinct core networks traversing the nation that interconnect with each other at several points. End users generally do not connect directly with the core networks. Access networks are primarily local portions of the network that connect end users to the core networks or directly to each other and enable them to use services such as local and long distance phone calling, video conferencing, text messaging, e-mail, and various Internet-based services. These services are provided by various technologies such as satellites, including fixed and portable systems; wireless, including cellular base stations; cable, including video, data, and voice systems, and cable system end offices; and wireline, including voice and data systems and end offices. Communications traffic between two locations may originate and terminate within an access network without connecting to core networks (e.g., local phone calling within the wireline network). Communications traffic between different types of access networks (e.g., between the wireline and wireless networks) may use core networks to facilitate the transmission of traffic. Individual and enterprise users connect to access networks through various devices (e.g., wired phones, cell phones, and computers). Figure 1 depicts the interconnection of user devices and services, access networks, and core networks. Figure 2 depicts the path that a single communication can take to its final destination. Aggregate traffic is normally the multimedia (voice, data, video) traffic combined from different service providers, or carriers, to be transported over high-speed through the core networks. Roll over each below to view more information. The nation's communications infrastructure also provides the networks that support the Internet. In order for data to move freely across communications networks, the Internet network operators employ voluntary, self-enforcing rules called protocols. Two sets of protocols-- the Domain Name System (DNS) and the Border Gateway Protocol (BGP)--are essential for ensuring the uniqueness of each e-mail and website address and for facilitating the routing of data packets between autonomous systems, respectively. DNS provides a globally distributed hierarchical database for mapping unique names to network addresses. It links e-mail and website addresses with the underlying numerical addresses that computers use to communicate with each other. It translates names, such as http://www.house.gov, into numerical addresses, such as 208.47.254.18, that computers and other devices use to identify each other on the network and back again in a process invisible to the end user. This process relies on a hierarchical system of servers, called domain name servers, which store data linking address names with address numbers. These servers are owned and operated by many public and private sector organizations throughout the world. Each of these servers stores a limited set of names and numbers. They are linked by a series of root servers that coordinate the data and allow users' computers to find the server that identifies the sites they want to reach. Domain name servers are organized into a hierarchy that parallels the organization of the domain names (such as ".gov", ".com", and ".org"). Figure 3 below provides an example of how a DNS query is turned into a number. BGP is used by routers located at network nodes to direct traffic across the Internet. Typically, routers that use this protocol maintain a routing table that lists all feasible paths to a particular network. They also determine metrics associated with each path (such as cost, stability, and speed) and follow a set of constraints (e.g., business relationships) to choose the best available path for forwarding data. This protocol is important because it binds together many autonomous networks that comprise the Internet (see fig. 4). Like those affecting other cyber-reliant critical infrastructure, threats to the communications infrastructure can come from a wide array of sources. These sources include corrupt employees, criminal groups, hackers, and foreign nations engaged in espionage and information warfare. These threat sources vary in terms of the capabilities of the actors, their willingness to act, and their motives, which can include monetary gain or political advantage, among others. Table 1 describes the sources in more detail. These sources may make use of various cyber techniques, or exploits, to adversely affect communications networks, such as denial-of-service attacks, phishing, passive wiretapping, Trojan horses, viruses, worms, and attacks on the information technology supply chains that support the communications networks. Table 2 provides descriptions of these cyber exploits. In addition to cyber-based threats, the nation's communications networks also face threats from physical sources. Examples of these threats include natural events (e.g., hurricanes or flooding) and man-made disasters (e.g., terrorist attacks), as well as unintentional man-made outages (e.g., a backhoe cutting a communication line). While the private sector owns and operates the nation's communications networks and is primarily responsible for protecting these assets, federal law and policy establish regulatory and support roles for the federal government in regard to the communications networks. In this regard, federal law and policy call for critical infrastructure protection activities that are intended to enhance the cyber and physical security of both the public and private infrastructures that are essential to national security, national economic security, and public health and safety. The federal role is generally limited to sharing information, providing assistance when asked by private-sector entities, and exercising regulatory authority when applicable. As part of their efforts in support of the security of communications networks, FCC, DHS, DOD, and Commerce have taken a variety of actions, including ones related to developing cyber policy and standards, securing Internet infrastructure, sharing information, supporting national security and emergency preparedness (NS/EP), and promoting sector protection efforts. FCC is a U.S. government agency that regulates interstate and international communications by radio, television, wire, satellite, and cable throughout the United States.for certain communications providers to report on the reliability and security of communications infrastructures. These include disruption- reporting requirements for outages that are defined as a significant degradation in the ability of an end user to establish and maintain a Its regulations include requirements channel of communications as a result of failure or degradation in the performance of a communications provider's network. The Commission's Public Safety and Homeland Security Bureau has primary responsibility for assisting providers in ensuring the security and availability of the communications networks. The bureau also serves as a clearinghouse for public safety communications information and emergency response issues. In addition, its officials serve as Designated Federal Officers on the Communications Security, Reliability, and Interoperability Council. The Communications Security, Reliability, and Interoperability Council is a federal advisory committee whose mission is to provide recommendations to FCC to help ensure, among other things, secure and reliable communications systems, including telecommunications, media, and public safety systems. The council has provided recommendations in the form of voluntary best practices that provide companies with guidance aimed at improving the overall reliability, interoperability, and security of networks. Specifically, it is composed of 11 working groups that consist of experts from industry and other federal agencies. The working groups focus on various related topics, including those related to network security management, as well the security of the Border Gateway Protocol and the Domain Name System. The working groups develop recommendations through industry cooperation and voluntary agreements. For example, in March 2012, the commission announced the voluntary commitments by the nation's largest Internet service providers, including AT&T and Verizon, to adopt the council's recommendations aimed at better securing their communications networks. The recommendations covered a variety of security practices, including those related to the security of the Domain Name System and BGP. The key FCC and council efforts related to the security of the communications sector are detailed in table 3 below. DHS is the principal federal agency to lead, integrate, and coordinate the implementation of efforts to protect cyber-critical infrastructures. DHS's role in critical infrastructure protection is established by law and policy. The Homeland Security Act of 2002, Homeland Security Presidential Directive 7, and the National Infrastructure Protection Plan establish a cyber protection approach for the nation's critical infrastructure sectors-- including communications--that focuses on the development of public- private partnerships and establishment of a risk management framework. These policies establish critical infrastructure sectors, including the communications sector; assign agencies to each sector (sector-specific agencies), including DHS as the sector lead for the communications and information technology sectors; and encourage private sector involvement through the development of sector coordinating councils, such as the Communications Sector Coordinating Council, and information-sharing mechanisms, such as the Communications Information Sharing and Analysis Center. Additionally, DHS has a role, along with agencies such as DOD, in regard to national security and emergency preparedness (NS/EP) communications that are intended to increase the likelihood that essential government and private-sector individuals can complete critical phone calls and organizations can quickly restore service during periods of disruption and congestion resulting from natural or man-made disasters. In particular, Executive Order No.13618 established an NS/EP Communications Executive Committee to serve as an interagency forum to address such communications matters for the nation. Among other things, the committee is to advise and make policy recommendations to the President on enhancing the survivability, resilience, and future architecture for NS/EP communications. The Executive Committee is composed of Assistant Secretary-level or equivalent representatives designated by the heads of the Departments of State, Defense, Justice, Commerce, and Homeland Security, the Office of the Director of National Intelligence, the General Services Administration, and the Federal Communications Commission, as well as such additional agencies as the Executive Committee may designate. The committee is chaired by the DHS Assistant Secretary for the Office of Cybersecurity and Communications and the DOD Chief Information Officer, with administrative support for the committee provided by DHS. To fulfill DHS's cyber-critical infrastructure protection and NS/EP-related missions, the Office of Cybersecurity and Communications within the National Protection and Programs Directorate is responsible for, among other things, ensuring the security, resiliency, and reliability of the nation's cyber and communications infrastructure, implementing a cyber-risk management program for protection of critical infrastructure, and planning for and providing national security and emergency preparedness communications to the federal government. The office is made up of the following five subcomponents that have various responsibilities related to DHS's overarching cybersecurity mission: Stakeholder Engagement and Cyber Infrastructure Resilience division, among other things, is responsible for managing the agency's role as the sector-specific agency for the communications sector. Office of Emergency Communications is responsible for leading NS/EP and emergency communications in coordination and cooperation with other DHS organizations. National Cybersecurity and Communications Integration Center is the national 24-hours-a-day, 7-days-a-week operations center that is to provide situational awareness, multiagency incident response, and strategic analysis for issues related to cybersecurity and NS/EP communications. The center is comprised of numerous co-located, integrated elements including the National Coordinating Center for Telecommunications, the U.S. Computer Emergency Readiness Team (US-CERT), and the Industrial Control Systems Cyber Emergency Response Team. Federal Network Resilience division is responsible for collaborating with departments and agencies across the federal government to strengthen the operational security of the ".gov" networks. As part of those efforts, the division leads the DHS initiative related to DNSSEC. Network Security Deployment division is responsible for designing, developing, acquiring, deploying, sustaining, and providing customer support for the National Cybersecurity Protection System. Four of these subcomponents have taken specific actions with respect to the communications networks, which are detailed in table 4 below. Under the National Infrastructure Protection Plan, DHS's Office of Cybersecurity and Communications, as the sector-specific agency for the communications and information technology sectors, is responsible for leading federal efforts to support sector protection efforts. As part of the risk management process for protecting the nation's critical infrastructure, including the protection of the cyber information infrastructure, the National Infrastructure Protection Plan recommends that outcome- oriented metrics be established that are specific and clear as to what they are measuring, practical or feasible in that needed data are available, built on objectively measureable data, and align to sector priorities. These metrics are to be used to determine the health and effectiveness of sector efforts and help drive future investment and resource decisions. DHS and its partners have previously identified the development of outcome-oriented metrics as part of the process to be used to manage risks to the nation's critical communications infrastructure. For example, in 2010, DHS and its communications sector partners identified preserving the overall health of the core network as the sector's first priority at the national level. They also defined a process for developing outcome-oriented sector metrics that would map to their identified goals and would yield quantifiable information (when available). Additionally, DHS and its information technology sector partners stated that they would measure their cyber protection efforts related to DNS and BGP in terms of activities identified in 2009 to assist sector partners in mitigating risks to key sector services, such as providing DNS functionality and Internet routing services. In 2010, they noted that implementation plans would be developed for each of the activities and outcome-based metrics would be used to monitor the status and effectiveness of the activities. However, DHS and its partners have not yet developed outcome-based metrics related to the cyber-protection activities for the core and access networks, DNS functionality, and Internet routing services. For the communications sector, DHS officials stated that the sector had recently completed the first part of a multiphased risk assessment process that included identification of cyber risks. The officials further stated that efforts are under way to prioritize the identified risks and potentially develop actions to mitigate them. However, DHS officials stated that outcome-oriented metrics had not yet been established and acknowledged that time frames for developing such metrics had not been agreed to with their private sector partners. For the information technology sector, DHS officials noted that the information technology sector's private sector partners had decided to focus on progress-related metrics (which report the status of mitigation development activities as well as implementation decisions and progress) to measure the effectiveness of sector activities to reduce risk across the entire sector and periodically re-examine their initial risk evaluation based on perceived threats facing the sector. While these progress-related metrics are part of the information technology sector's planned measurement activities, the sector's plans acknowledge that outcome-based metrics are preferable to demonstrate effectiveness of efforts. Until metrics related to efforts to protect core and access networks, DNS, and BGP are fully developed, implemented, and tracked by DHS, federal decision makers will have less insight into the effectiveness of sector protection efforts. Within DOD, the Office of the Chief Information Officer (CIO) has been assigned the responsibility for implementing Executive Order 13618 requirements related to NS/EP communication functions. As previously described, the CIO (along with the Assistant Secretary for Cybersecurity and Communications in DHS) co-chairs the NS/EP Communications Executive Committee established in Executive Order 13618. The CIO directs, manages, and provides policy guidance and oversight for DOD's information and the information enterprise, including matters related to information technology, network defense, network operations, and cybersecurity. Table 5 describes the department's efforts in relation to this executive order. Federal law and policy also establish a role for the Department of Commerce (Commerce) related to the protection of the nation's communications networks. For example, Commerce conducts industry studies assessing the capabilities of the nation's industrial base to support the national defense. In addition, the department's National Telecommunications and Information Administration (NTIA) was established as the principal presidential adviser on telecommunications and information policies. Further, Commerce's National Institute of Standards and Technology (NIST) is to, among other things, cooperate with other federal agencies, industry, and other private organizations in establishing standard practices, codes, specifications, and voluntary consensus standards. Commerce also has a role in ensuring the security and stability of DNS. Prompted by concerns regarding who has authority over DNS, along with the stability of the Internet as more commercial interests began to rely on it, the Clinton administration issued an electronic commerce report in July 1997 that identified the department as the lead agency to support private efforts to address Internet governance. In June 1998, NTIA issued a policy statement (known as the White Paper) that stated it would enter into an agreement with a not-for-profit corporation formed by private sector Internet stakeholders for the technical coordination of DNS. In addition, Commerce created the Internet Policy Task Force in August 2011 to, among other things, develop and maintain department-wide policy proposals on a range of global issues that affect the Internet, including cybersecurity. While NIST has been identified as the Commerce lead bureau for cybersecurity, the task force is to leverage the expertise of other Commerce bureaus, such as the Bureau of Industry and Security and NTIA. Commerce components also carry out functions related to the security of the nation's communications networks. The Bureau of Industry and Security conducted an industrial study to examine the operational and security practices employed by network operators in the nation's communications infrastructure. In addition, NTIA manages agreements with the Internet Corporation for Assigned Names and Numbers (ICANN) and VeriSign, Inc., through which changes are made to the authoritative root zone file. Also, NIST participates in open, voluntary, industry-led, consensus-based, standards-setting bodies that design and develop specifications for network security technologies, including those used in the nation's communications networks (such as DNS and BGP) as well as in industry technical forums for the purpose of promulgating the deployment of such new technologies. Table 6 describes some of the key efforts of Commerce as they relate to the cybersecurity of the nation's communications networks. No cyber incidents affecting the core and access networks have been reported by communications networks owners and operators through three established reporting mechanisms from January 2010 to October 2012. To report incidents involving the core and access communications networks to the federal government, communication networks operators can use reporting mechanisms established by FCC and DHS to share information on outages and incidents: FCC's Network Outage Reporting System is a web-based filing system that communications providers use to submit detailed outage reports to FCC. In turn, FCC officials stated that the agency uses the reported outage data to develop situational awareness of commercial network performance as well as to aid the commission in influencing and developing best practices regarding incidents. DHS's Network Security Information Exchange is an information- sharing forum comprised of representatives from the communications and information technology sectors that meet bimonthly to voluntarily share communications-related incidents, among other things. DHS's National Cybersecurity and Communications Integration Center, which includes the National Coordinating Center, US-CERT, and the Industrial Control Systems Cyber Emergency Response Team, is used to share information about threats, vulnerabilities, and intrusions related to communications networks and the sector as a whole. Communications and information technology providers can voluntarily report threats, vulnerabilities, and intrusions to the center. Although these mechanisms for reporting exist, available information showed that no cyber-based incidents involving the core and access communication networks had been reported using these mechanisms to the federal government from January 2010 to October 2012. Specifically, of the over 35,000 outages reported to FCC during this time period, none were related to traditional cyber threats (e.g., botnets, spyware, viruses, and worms). FCC officials stated that there could be an increase in the presence of cyber-related outages reported in the future as the Voice- over-Internet-Protocol reporting requirements are enforced. Further, DHS Office of Cybersecurity and Communications officials stated that no cyber incidents related to the core and access networks were reported to them during January 2010 to October 2012. For example, although several incidents attributed to the communications sector were reported to DHS's Industrial Control Systems Cyber Emergency Response Team in fiscal year 2012, none of these incidents involved core and access networks. Our review of reports published by information security firms and communication network companies also indicated that no cyber incidents related to the core and access networks were publicly reported from January 2010 to October 2012. Officials within FCC and the private sector attributed the lack of incidents to the fact that the communications networks provide the medium for direct attacks on consumer, business, and government systems--and thus these networks are less likely to be targeted by a cyber attack themselves. In addition, Communications Information Sharing and Analysis Center officials expressed greater concern about physical threats (such as natural and man-made disasters, as well as unintentional man-made outages) to communications infrastructure than cyber threats. DOD, in its role as the sector-specific agency for the defense industrial base critical infrastructure sector, established two pilot programs to enhance the cybersecurity of sector companies and better protect unclassified department data residing on those company networks. The Deputy Secretary of Defense established the Cyber Security/Information Assurance program under the department's Office of the Chief Information Officer to address the risk posed by cyber attacks against sector companies. The Opt-In Pilot was designed to build upon the Cyber Security/Information Assurance Program and, according to department officials, established a voluntary information-sharing process for the department to provide classified network security indicators to Internet service providers. In August 2012, we reported on these pilot programs as part of our study to identify DOD and private sector efforts to protect the defense industrial base from cybersecurity threats. Our report described these programs in detail, including challenges to their success. For example, one challenge noted by defense industrial base company officials was that the quality of the threat indicators provided by the federal government as part of the Opt-In pilot had not met their needs. In addition, the quality of the pilot was affected by the lack of a mechanism for information sharing among government and private stakeholders. The report also made recommendations to DOD and DHS to better protect the defense industrial base from cyber threats. (The August 2012 report was designated as official use only and is not publicly available.) Using information in that report, we identified six attributes that were implemented to varying extents as part of the pilot programs (see table 7). These attributes were utilized by DOD and the defense industrial base companies to protect their sector from cyber threats and could inform the cyber protection efforts of the communications sector. Agreements: Eligible defense industrial base companies who wanted to participate in these pilots enter into an agreement with the federal government. This agreement establishes the bilateral cyber- information-sharing process that emphasizes the sensitive, nonpublic nature of the information shared which must be protected from unauthorized use. The agreement does not obligate the participating company to change its information system environment or otherwise alter its normal conduct of cyber activities. Government sharing of unclassified and classified cyber threat information: DOD provides participating defense industrial base companies with both unclassified and classified threat information, and in return, the companies acknowledge receipt of threat information products. For any intrusions reported to DOD by the participating companies under the program, the department can develop damage assessment products, such as incident-specific and trend reports, and provide them to participating companies and DOD leadership. Feedback mechanism on government services: When a participating company receives cyber threat information from DOD, it has the option of providing feedback to the department on, among other things, the quality of the products. Government cyber analysis, mitigation, and digital forensic support: A participating company can also optionally report intrusion events. When this occurs, DOD can conduct forensic cyber analysis and provide mitigation and digital forensic support. The department can also provide on-site support to the company that reported the intrusion. Government reporting of voluntarily reported incidents: In addition to providing cyber analysis, mitigation, and cyber forensic support, DOD can report the information to other federal stakeholders, law enforcement agencies, counterintelligence agencies, and the DOD program office that might have been affected. Internet service providers deploying countermeasures based on classified threat indicators for organizations: Each Cyber Security/Information Assurance program participating company can voluntarily allow its Internet service providers to deploy countermeasures on its behalf, provided the Internet service provider has been approved to receive classified network security indicators from the U.S. government. For those providers, US-CERT collects classified threat indicators from multiple sources and provides them to the companies' participating Internet service providers. If the Internet service provider identifies a cyber intrusion, it will alert the company that was the target of the intrusion. Providers can also voluntarily notify US-CERT about the incident, and US-CERT will share the information with DOD. In May 2012, DOD issued an interim final rule to expand the Cyber Security/Information Assurance program to all eligible defense industrial base sector companies. Additionally, the Defense Industrial Base Opt-In Pilot became the Defense Industrial Base Enhanced Cybersecurity Service (DECS) Program, and is now jointly managed by DHS and DOD. In addition, on February 12, 2013, the President signed Executive Order 13636, which requires the Secretary of Homeland Security to establish procedures to expand DECS (referred to as the Enhanced Cybersecurity Services program) to all critical infrastructure sectors, including the communications sector. Considering these attributes and challenges could inform DHS's efforts as it develops these new procedures. Securing the nation's networks is essential to ensuring reliable and effective communications within the United States. Within the roles prescribed for them by federal law and policy, the Federal Communications Commission and the Departments of Homeland Security, Defense, and Commerce have taken actions to support the communications and information technology sectors' efforts to secure the nation's communications networks from cyber attacks. However, until DHS and its sector partners develop appropriate outcome-oriented metrics, it will be difficult to gauge the effectiveness of efforts to protect the nation's core and access communications networks and critical support components of the Internet from cyber incidents. While no cyber incidents have been reported affecting the nation's core and access networks, communications networks operators can use reporting mechanisms established by FCC and DHS to share information on outages and incidents. The pilot programs undertaken by DOD with its defense industrial base partners exhibit several attributes that could apply to the communications sector and help private sector entities more effectively secure the communications infrastructure they own and operate. As DHS develops procedures for expanding this program, considering these attributes could inform DHS's efforts. To help assess efforts to secure communications networks and inform future investment and resource decisions, we recommend that the Secretary of Homeland Security direct the appropriate officials within DHS to collaborate with its public and private sector partners to develop, implement, and track sector outcome-oriented performance measures for cyber protection activities related to the nation's communications networks. We provided a draft of this report to the Departments of Commerce (including the Bureau of Industry and Security, NIST, and NTIA), Defense, and Homeland Security and FCC for their review and comment. DHS provided written comments on our report (see app. II), signed by DHS's Director of Departmental GAO-OIG Liaison Office. In its comments, DHS concurred with our recommendation and stated that it is working with industry to develop plans for mitigating risks that will determine the path forward in developing outcome-oriented performance measures for cyber protection activities related to the nation's core and access communications networks. Although the department did not specify an estimated completion date for developing and implementing these measures, we believe the prompt implementation of our recommendation will assist DHS in assessing efforts to secure communication networks and inform future investment and resource decisions. We also received technical comments via e-mail from officials responsible for cybersecurity efforts related to communication networks at Defense, DHS, FCC, and Commerce's Bureau of Industry and Security and NTIA. We incorporated these comments where appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 7 days from the report date. At that time, we will send copies to interested congressional committees; the Secretaries of the Departments of Commerce, Defense, and Homeland Security; the Chairman of the Federal Communications Commission; the Director of the Office of Management and Budget; and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-6244 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. Our objectives were to (1) identify the roles of and actions taken by key federal entities to help protect the communications networks from cyber- based threats, (2) assess what is known about the extent to which cyber- incidents affecting the communications networks have been reported to the Federal Communications Commission (FCC) and Department of Homeland Security (DHS), and (3) determine if the Department of Defense's (DOD) pilot programs to promote cybersecurity in the defense industrial base can be used in the communications sector. Our audit focused on the core and access networks of the communication network. These networks include wireline, wireless, cable, and satellite. We did not address broadcast access networks because they are responsible for a smaller volume of traffic than other networks. Additionally, we focused on the Internet support components that are critical for delivering services: the Border Gateway Protocol (BGP) and Domain Name System (DNS). To identify the roles of federal entities, we collected, reviewed, and analyzed relevant federal law, policy, regulation, and critical infrastructure protection-related strategies. Sources consulted include statutes such as the Communications Act of 1934, Homeland Security Act of 2002, and the Defense Production Act of 1950, as well as other public laws; the Code of Federal Regulations; National Communication System Directive 3-10; the National Infrastructure Protection Plan; the Communications Sector- Specific Plan; the Information Technology Sector-Specific Plan; the Communications Sector Risk Assessment; the Information Technology Sector Risk Assessment; Homeland Security Presidential Directives; selected executive orders; and related GAO products. Using these materials, we selected the Departments of Commerce, Defense, and Homeland Security, and FCC to review their respective roles and actions related to the security of the privately owned communications network because they were identified as having the most significant roles and organizations for addressing communications cybersecurity. To identify the actions taken by federal entities we collected, reviewed, and analyzed relevant policies, plans, reports, and related performance metrics and interviewed officials at each of the four agencies. For example, we reviewed and analyzed Department of Commerce agreements detailing the process for how changes are to be made to the authoritative root zone file and Internet Policy Task Force reports on cybersecurity innovation and the Internet. In addition, we analyzed and identified current and planned actions outlined in DOD's National Security/Emergency Preparedness Executive Committee Charter. Also, we analyzed reports issued by the Communications Security, Reliability, and Interoperability Council on a variety of issues, including the security of the Domain Name System and the Border Gateway Protocol. Further, we reviewed and analyzed the risk assessments and sector-specific plans for both the communications and information technology critical infrastructure sectors, as well DHS's plans for realignment in response to Executive Order 13618. In addition, we interviewed agency officials regarding authority, roles, policies, and actions created by their department or agency, and actions taken by their departments and agencies to encourage or enhance the protection of communications networks, BGP, and DNS, and fulfill related roles. For Commerce, we interviewed officials from the Bureau of Industry and Security, National Telecommunications and Information Administration, and the National Institute of Standards and Technology. For DOD, we interviewed officials from the Office of the Chief Information Officer, including those from the National Leadership Command Capability Management Office and the Trusted Mission Systems and Networks Office. We also interviewed officials from the Office of the Under Secretary of Defense for Policy. For DHS, we interviewed officials from the National Protection and Programs Directorate's Office of Cybersecurity and Communications. For FCC, we interviewed officials from the International, Media, Public Safety and Homeland Security, Wireless Telecommunications, and Wireline Competition Bureaus. Based on our analysis and the information gathered through interviews, we created a list of actions taken by each agency. Additionally, we reviewed documents (including the communications sector risk assessment) from and conducted interviews with officials from the Communications Information Sharing and Analysis Center to assess federal efforts to fulfill roles and responsibilities. To assess what is known about the extent to which cyber-incidents affecting the communications networks have been reported to FCC and DHS, we analyzed FCC policy and guidance related to its Network Outage Reporting System. Additionally, we conducted an analysis of outage reports submitted from January 2010 to October 2012 to determine the extent to which they were related to cybersecurity threats, such as botnets, spyware, viruses, and worms affecting the core and access networks. To assess the reliability of FCC outage reports, we (1) discussed data quality control procedures with agency officials, (2) reviewed relevant documentation, (3) performed testing for obvious problems with completeness or accuracy, and (4) reviewed related internal controls. We determined that the data were sufficiently reliable for the purposes of this report. We also interviewed officials from FCC's Public Safety and Homeland Security Bureau to understand incident reporting practices of its regulated entities, and how reported incident data were used by FCC to encourage improvement or initiate enforcement actions. Further, we interviewed officials from DHS's United States Computer Emergency Readiness Team regarding the extent to which incidents were reported to it that affected core and access communications networks. We also conducted an analysis of information security reports from nonfederal entities, to determine if cyber incidents on the core and access communications networks had been reported to nonfederal entities. Additionally, we interviewed Communications Information Sharing and Analysis Center officials to identify the mechanisms and processes used to report cyber-related incidents in the communications sector to the center and then to the federal government. To determine if DOD's pilot can be used to inform the communications sector, we reviewed our August 2012 report on DOD efforts to enhance the cybersecurity of the defense industrial base critical infrastructure sector. We then identified and summarized attributes of the program that could be publicly reported and that were potentially applicable to the communications sector. The information used to compile the attributes from the August 2012 report was determined by DOD at that time not to be considered official use only. We also interviewed officials from DHS's Office of Cybersecurity and Communications to ascertain the current status of the pilot programs and efforts to determine the applicability of the pilots to all critical infrastructures, including the communications sector. We conducted this performance audit from April 2012 to April 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. GAO staff who made significant contributions to this report include Michael W. Gilmore, Assistant Director; Thomas E. Baril, Jr; Bradley W. Becker; Cortland Bradford; Penney Harwell Caramia; Kush K. Malhotra; Lee A. McCracken; David Plocher; and Adam Vodraska.

Ensuring the effectiveness and reliability of communications networks is essential to national security, the economy, and public health and safety. The communications networks (including core and access networks) can be threatened by both natural and human-caused events, including increasingly sophisticated and prevalent cyber-based threats. GAO has identified the protection of systems supporting the nation's critical infrastructure--which includes the communications sector--as a government-wide high-risk area. GAO was asked to (1) identify the roles of and actions taken by key federal entities to help protect communications networks from cyber-based threats, (2) assess what is known about the extent to which cyber incidents affecting the communications networks have been reported to the FCC and DHS, and (3) determine if Defense's pilot programs to promote cybersecurity in the defense industrial base can be used in the communications sector. To do this, GAO focused on core and access networks that support communication services, as well as critical components supporting the Internet. GAO analyzed federal agency policies, plans, and other documents; interviewed officials; and reviewed relevant reports. While the primary responsibility for protecting the nation's communications networks belongs to private-sector owners and operators, federal agencies also play a role in support of their security, as well as that of critical components supporting the Internet. Specifically, private-sector entities are responsible for the operational security of the networks they own, but the Federal Communications Commission (FCC) and the Departments of Homeland Security (DHS), Defense, and Commerce have regulatory and support roles, as established in federal law and policy, and have taken a variety of related actions. For example, FCC has developed and maintained a system for reporting network outage information; DHS has multiple components focused on assessing risk and sharing threat information; Defense and DHS serve as co-chairs for a committee on national security and emergency preparedness for telecommunications functions; and Commerce has studied cyber risks facing the communications infrastructure and participates in standards development. However, DHS and its partners have not yet initiated the process for developing outcome-based performance measures related to the cyber protection of key parts of the communications infrastructure. Outcome-based metrics related to communications networks and critical components supporting the Internet would provide federal decision makers with additional insight into the effectiveness of sector protection efforts. No cyber-related incidents affecting core and access networks have been recently reported to FCC and DHS through established mechanisms. Specifically, both FCC and DHS have established reporting mechanisms to share information on outages and incidents, but of the outages reported to FCC between January 2010 and October 2012, none were related to common cyber threats. Officials within FCC and the private sector stated that communication networks are less likely to be targeted themselves because they provide the access and the means by which attacks on consumer, business, and government systems can be facilitated. Attributes of two pilot programs established by Defense to enhance the cybersecurity of firms in the defense industrial base (the industry associated with the production of defense capabilities) could be applied to the communications sector. The department's pilot programs involve partnering with firms to share information about cyber threats and responding accordingly. Considering these attributes can inform DHS as it develops procedures for expanding these pilot programs to all critical infrastructure sectors, including the communications sector. GAO recommends that DHS collaborate with its partners to develop outcome-oriented measures for the communications sector. DHS concurred with GAO's recommendation.

Initial joint reform efforts have, in part, aligned with key practices that we have identified for organizational transformations, 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 other important elements of a successful transformation, such as a mission statement and long-term goals with related outcome- focused performance measures to show progress, and do not identify obstacles to progress and possible remedies. In September 2002, GAO convened a forum to identify and discuss practices and lessons learned from major private and public sector organizational mergers, acquisitions, and transformations that can serve to guide federal agencies as they transform their processes in response to governance challenges. Consistent with some of these key practices, in June 2008 Executive Order 13467 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 reform goals, driving implementation, and overseeing clearance reform efforts. The Deputy Director for Management at OMB--who was confirmed in June 2009--serves as the chair of the council. The Executive Order also designated Executive Agents for Suitability and Security. 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. Membership on this council currently includes senior executive leaders from 11 federal agencies. In addition to high-level leadership, the reform effort has benefited from a dedicated implementation team--the Joint Reform Team--to manage the transformation process from the beginning. 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 addition to the key practices, the personnel security clearance joint reform reports that we reviewed collectively also have begun to address essential factors for reforming the security clearance process, which represents positive steps. GAO's prior work and IRTPA identified several factors key to reforming the clearance process. These 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. However, the Joint Reform Team's information technology strategy, which is intended to be a cross- agency collaborative initiative, does not yet define roles and responsibilities for implementing a new automated capability. GAO's prior work has stressed the importance of defining these roles and responsibilities when initiating cross-agency initiatives. Also, the joint reform 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. Therefore, we recommended that the OMB 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 that are subsequently provided 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 their 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 its 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. They also acknowledged that more work needs to be done to identify long-term funding requirements. While our work also found that DOD and OPM met timeliness requirements for personnel security clearances in fiscal year 2008, the executive branch's 2009 required report to Congress does not reflect the full range of time it takes to make all initial clearance decisions. Currently, 80 percent of initial clearance decisions are to be made within 120 days, on average, and by December 2009 a plan is to be implemented under which to the extent practical 90 percent of initial clearance decisions are to be made within 60 days, on average. Under both requirements, the executive branch can exclude the slowest percentile, and then report on an average of the remaining clearances. The most recent report stated that the average time to complete the fastest 90 percent of initial clearances for military and DOD civilians in fiscal year 2008 was 124 days, on average. However, without taking averages or excluding the slowest clearances, we analyzed 100 percent of initial clearances granted in 2008 and found that 39 percent still took more than 120 days. By limiting its reporting on timeliness to the average of the fastest 90 percent of the initial clearance decisions made in fiscal year 2008, 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 addition to limited visibility over timeliness of clearances, the executive branch's annual reports to Congress on the personnel security clearance process have provided decision makers with limited data on quality, and the executive branch has missed opportunities to make the clearance process transparent to Congress. For example, we independently estimated that 87 percent of about 3,500 investigative reports prepared by OPM that DOD adjudicators (employees who decide whether to grant a clearance to an applicant based on the investigation and other information) used to make clearance decisions, for initial top secret clearances adjudicated in July 2008, were missing required documentation. We found, however, that DOD has not issued formal guidance clarifying if and under what circumstances adjudicators can adjudicate incomplete investigative reports. For DOD adjudicative files, we estimated that 22 percent were missing required documentation of the rationale for granting clearances to applicants with security concerns. Because neither OPM nor DOD measures the completeness of their investigative reports or adjudicative files, both agencies are limited in their ability to explain the extent to which or the reasons why some documents are incomplete. Incomplete documentation may lead to increases in the time needed to complete the clearance process and in the overall costs of the process and may reduce the assurance that appropriate safeguards are in place to prevent DOD from granting clearances to untrustworthy individuals. We have stated that timeliness alone does not provide a complete picture of the clearance process and emphasized that attention to quality could increase reciprocity--accepting another federal entity's clearances--and the executive branch, though not required to include information on quality in its annual reports, has latitude to report appropriate information. We are encouraged that, while the 2009 report did not provide any data on quality, unlike previous reports it did identify quality metrics that the executive branch proposes to collect. Because the executive branch has not fully addressed quality or the full range of time to complete clearances in its reports, it has missed opportunities to provide congressional decision makers with full transparency over the clearance process. Therefore, in our recent report, we recommended that the Deputy Director for Management at OMB, as the Chair of the Performance Accountability Council, include (1) comprehensive data on the timeliness of the personnel security clearance process and (2) metrics on quality in future versions of the IRTPA-required annual report to Congress. We also recommended that DOD clarify its guidance to specify when adjudicators can use incomplete investigative reports in adjudication decisions and that OPM and DOD measure the completeness of their investigation and adjudication documentation to improve the completeness of future documentation. In commenting on a draft of our report, OMB concurred with both of our recommendations to that agency, commenting that it recognized the need for more reporting on timeliness and quality. OMB described some steps that the Performance Accountability Council is taking to address our recommendations, including developing measures to account, more comprehensively, for the time it takes to complete the end-to-end clearance process. In its written comments, DOD also concurred with both of the recommendations directed to the department, and described specific steps it expects to implement later this year to address the recommendations. Finally, in its written comments, OPM did not indicate whether it concurred with the one recommendation we made to that agency. Instead, OPM highlighted improvements it has made in reducing delays in the clearance investigations process since DOD transferred this function to OPM in 2005. In my statement, I have highlighted recommendations from the two reports we recently released that, if implemented, will help the responsible agencies continue to guide the security clearance reform effort and improve the clearance process. We are encouraged that the Joint Reform Team's efforts during the past year have included several actions to improve the process, and we recognize that OPM and DOD are currently meeting IRTPA timeliness requirements, which represents significant and noteworthy progress. At the request of your Subcommittee, we will continue to monitor ongoing joint reform efforts with a focus on reciprocity and information technology advances, as well as efforts by the responsible agencies to implement our related recommendations, and we will continue to assess the impact of those efforts on the security clearance process governmentwide. Although the high-level leadership and governance structure of the current reform effort distinguish it from previous attempts at clearance reform, it is important to note that, in June 2009 the administration confirmed a vital leadership component necessary for sustaining the momentum achieved to date. OMB's new Deputy Director for Management will play a crucial role in deciding how to implement the recommendations contained in the reports we recently released, as well as prior recommendations on this issue, and in leading the reform effort in his role as chair of the Performance Accountability Council. Madam Chairwoman, 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 Brenda S. Farrell, Director, Defense Capabilities and Management, at (202) 512-3604, or [email protected]. Key contributors to this statement include David Moser (Assistant Director), Lori Atkinson, Joseph M. Capuano, Sara Cradic, Susan Ditto, Cindy Gilbert, Shvetal Khanna, James P. Klein, Greg Marchand, Shannin O'Neil, and Sarah Veale. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Personnel Security Clearances: Progress Has Been Made to Reduce Delays But Further Actions Are Needed to Enhance Quality and Sustain Reform Efforts. GAO-09-684T. Washington, D.C.: September 15, 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. 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. 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.

This testimony discusses the key recommendations from the two reports we recently released, which include (1) the need for a fully developed strategic framework for the reform process that includes outcome-focused performance measures to show progress and (2) more transparency in annually reporting to Congress on the timeliness and quality of the clearance process. This testimony is based on our review of the Joint Reform Team's plans, as well as our work on DOD's security clearance process, which includes reviews of clearance-related files and interviews of senior officials at the Office of Management and Budget (OMB), DOD, Office of the Director of National Intelligence (ODNI), and OPM. In addition, this statement is based on key practices and implementation steps for mergers and organizational transformations. We conducted our work on both reports between March 2008 and May 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. 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 addition to limited visibility over timeliness of clearances, the executive branch's annual reports to Congress on the personnel security clearance process have provided decision makers with limited data on quality, and the executive branch has missed opportunities to make the clearance process transparent to Congress. For example, we independently estimated that 87 percent16 of about 3,500 investigative reports prepared by OPM that DOD adjudicators (employees who decide whether to grantclearance to an applicant based on the investigation and other information) used to make clearance decisions, for initial top secret clearances adjudicated in July 2008, were missing required documentation. Because neither OPM nor DOD measures the completeness of their investigative reports or adjudicative files, both agencies are limited in their ability to explain the extent to which or the reasons why some documents are incomplete. Incomplete documentation may lead to increases in the time needed to complete the clearance process and in the overall costs of the process and may reduce the assurance that appropriate safeguards are in place to prevent DOD from granting clearances to untrustworthy individuals. We have stated that timeliness alone does not provide a complete picture of the clearance process and emphasized that attention to quality could increase reciprocity--accepting another federal entity's clearances--and the executive branch, though not required to include information on quality in its annual reports, has latitude to report appropriate information. We are encouraged that, while the 2009 report did not provide any data on quality, unlike previous reports it did identify quality metrics that the executive branch proposes to collect.

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

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

For further information on this statement, please contact J. Alfredo Gomez, at (202) 512-4101 or [email protected]. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this testimony include Kim Frankena, Assistant Director; Christina Bruff; David Dayton; Leah DeWolf; Barbara El Osta; Bradley Hunt; and Erin Preston. 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 the Trade Adjustment Assistance (TAA) for Firms program, which is administered by the Department of Commerce's (Commerce) Economic Development Administration (EDA). Over the past decade U.S. imports have almost doubled, reaching $2.7 trillion in 2011. During the same period, the United States entered into free trade agreements that liberalize trade with 14 partner countries. Further trade liberalization is being pursued, including a Transpacific Partnership among 11 nations in the Asia-Pacific region. Although trade expansion can enhance the economic welfare of all trade partners, many firms and workers experience difficulties adjusting to import competition. Congress has responded to concerns about these difficulties with trade adjustment assistance programs. Established in 1962, the TAA for Firms program provides technical assistance to help trade-impacted, economically distressed firms make adjustments that may enable them to remain competitive in the global economy. In fiscal years 2009 through 2012, EDA received $15.8 million annually for the TAA for Firms program. EDA uses its appropriation for the TAA for Firms program to fund 11 TAA Centers (center), which provide assistance to U.S. manufacturing, production, and service firms in all 50 states, the District of Columbia, and the Commonwealth of Puerto Rico. Congress amended the TAA for Firms program under that part of the American Recovery and Reinvestment Act of 2009 known as the Trade and Globalization Adjustment Assistance Act (TGAAA) of 2009 and mandated that we review the operation and effectiveness of these amendments. This testimony is based on our September 2012 report that examined (1) the results of the legislative changes on program operations and participation, (2) the performance measures and data that EDA uses to evaluate the program and what these tell us about the program's effectiveness, and (3) how program funding is allocated and spent. First, we found that the four changes mandated by the 2009 legislation contributed to improvements in program operations and increased participation: (1) Creation of director and other full-time positions: The creation of a director and other full-time positions for the program resulted in reduced firm certification processing times for petitions. (2) New annual reporting on performance measures: EDA has submitted three annual reports to Congress on these performance measures as a result of the legislation. (3) Inclusion of service sector firms: According to our analysis of EDA data, the inclusion of service sector firms allowed EDA to certify 26 firms not previously eligible for assistance from fiscal years 2009 through 2011. (4) Expansion of the "look-back" period from 12 months to 12, 24, or 36 months: Our analysis of EDA data shows that 32 additional firms participated in the program from fiscal years 2009 through 2011 based on the expansion of the look-back period from 12 months to 12, 24, or 36 months. Prior to the legislative changes, firms were only allowed to compare sales and production data in the most recent 12 months to data from the immediately preceding 12-month period. Second, we found that EDA's performance measures and data collection for the TAA for Firms program provide limited information about the program's outcomes, although our economic analysis found a statistically significant association between participation in the program and an increase in firm sales. EDA collects data to report on 16 measures to gauge the program's performance, such as the number of firms that inquired about the program and the number of petitions filed, but most of these measures do not assess program outcomes. EDA is exploring better ways to assess the effect of their efforts on firms. Third, in terms of how funds are allocated and spent, we identified key weakness pertaining to EDA's funding formula. EDA has allocated funding to the 11 TAA Centers using a funding allocation formula that comprises a set of weighted factors; however, the formula does not take into account the potential number of firms in need of the program and differences in costs across the centers. According to a key standard--beneficiary equity--a funding allocation formula should distribute funds according to the needs of respective populations and should take into account the costs of providing program services, so that each service area can provide the same level of services to firms in need.

DOE laboratories have primarily used the following types of agreements to transfer technology to U.S. businesses and other organizations: CRADAs: A DOE laboratory and its nonfederal partner(s) agree that their scientists will collaborate on a research project of mutual interest and consistent with the laboratory's mission. Both parties may contribute personnel, services, and property to the CRADA project, and the partner(s) can provide funding for the laboratory's research. However, the DOE laboratory cannot provide funding to the partner(s). Intellectual property rights to technology developed under the CRADA are negotiated in advance. In general, the inventing partner retains ownership rights, while the other partner receives appropriate licensing rights. Technical assistance for small businesses: Both NNSA's and the Office of Science's laboratories used dedicated funds (provided by the Technology Partnership Program and the Laboratory Technology Research Program, respectively) to provide technical assistance to small businesses. Work-for-others agreements: A DOE laboratory agrees to conduct a defined scope of work or list of tasks that is consistent with DOE missions and which does not place the laboratory in direct competition with the private sector. The nonfederal entity pays for the entire cost of the project. While intellectual property rights are negotiable, the nonfederal entity typically retains title rights to any inventions. Technology licensing agreements: A DOE laboratory grants a business an exclusive or nonexclusive license to use its intellectual property in return for a licensing fee and/or royalties. User facility agreements: A DOE laboratory permits outside organizations to use its unique research equipment and/or facilities to conduct research. For nonproprietary research, almost all of the users are supported by federal grants, typically through the National Science Foundation or DOE. For proprietary research, the private organization pays the full cost for using research equipment or facilities and retains title rights to any intellectual property. Table 1 shows the dedicated funding that the Congress has made available for technology partnerships through the Technology Partnership Program for NNSA's laboratories and weapons production facilities and the Laboratory Technology Research Program for DOE's Office of Science laboratories. The Technology Partnership Program, which provided funding for DOE's nuclear weapons laboratories and production facilities, peaked at $214 million in fiscal year 1996 and was subsequently phased out by fiscal year 2001. The Laboratory Technology Research Program, which provided funding for DOE's Office of Science laboratories, also declined from a peak of $47 million in fiscal year 1995 to $3 million in fiscal year 2002. DOE requested $3 million for the Laboratory Technology Research Program for fiscal year 2003 and has announced that it will terminate this program once previously approved projects have been funded. In the early 1990s, DOE created the Office of Research and Development Management within the Office of the Under Secretary to promote and oversee technology transfer at DOE's laboratories and production facilities. In March 1996, at the direction of the Congress, DOE disestablished this office and eliminated all of its staff positions. Subsequently, in 1999, DOE established a Technology Transfer Working Group, composed of representatives from 25 DOE organizations, to oversee and coordinate technology transfer policies. The working group has no permanent staff positions. The 12 DOE laboratories surveyed have substantially reduced their participation in CRADAs and technical assistance to small businesses in recent years, primarily because DOE research program funding has not replaced dedicated funding for technology partnerships. On the other hand, the number of work-for-others agreements, technology licenses, and user facility agreements has increased during the past 10 years. (See tables 5 and 6 in app. I for data on each laboratory's technology transfer activities and nonfederal entities' financial support.) Finally, two laboratories have identified non-DOE sources to support their efforts to provide local small businesses with technology assistance. Table 2 shows that active CRADAs at DOE laboratories--which peaked at 1,111 in fiscal year 1996--dropped by more than 40 percent to 606 in fiscal year 2001. In particular, CRADAs that continued from the prior year dropped from 861 in fiscal year 1996 to 440 in fiscal year 2001. Much of this decline occurred in fiscal year 2000, when 360 CRADA projects ended. (See table 7 in app. I for each laboratory's newly executed and continuing CRADAs.) The initial growth and subsequent decline in CRADAs over the past 10 years mirrors the change in DOE's dedicated funding for technology partnerships through NNSA's Technology Partnership Program and the Office of Science's Laboratory Technology Research Program. Since peaking in fiscal year 1996, the drop in CRADAs has been greatest at the laboratories for which dedicated funding constituted a substantial share of partnership funding. For example, from 1996 through fiscal year 2001, the number of new CRADAs dropped from 12 to 7 and total active CRADAs dropped from 55 to 30 at the Office of Science's Lawrence Berkeley National Laboratory. The Laboratory Technology Research Program was the DOE source of funding for 68 percent of these CRADAs. The termination of Technology Partnership Program funding resulted in more than a 60-percent drop in active CRADAs at NNSA laboratories. According to technology transfer managers at the DOE laboratories we visited, their laboratories are likely to have fewer CRADAs in the future because of DOE funding constraints. For example, the number of CRADAs at Oak Ridge National Laboratory dropped from 256 in fiscal year 2000 to 79 in fiscal year 2001 primarily because of funding constraints. In addition, as a result of unanticipated cuts in fiscal year 2002 funding for the Laboratory Technology Research Program--from $10 million in fiscal year 2001 to $3 million in fiscal year 2002--the Office of Science funded only 5 of the 12 multi-year CRADA proposals previously approved for funding by its peer review process. The partners for the other seven approved CRADAs were informed that funding for their projects would not be available in fiscal year 2002. The Office of Science has announced that these 12 CRADAs will be the last ones funded by the Laboratory Technology Research Program, which will be terminated. The three laboratories that have historically relied on DOE program funds to support CRADAs have participated in at most 50 CRADAs per year each. For example, total CRADAs at the National Renewable Energy Laboratory have grown from 14 in fiscal year 1996 to 21 in fiscal year 2001, primarily because the Energy Efficiency and Renewable Energy Program, whose mission includes working with industry, has provided funding support for most of these CRADAs. CRADAs at the Idaho National Engineering and Environmental Laboratory peaked at 50 in fiscal year 1996 and subsequently fell to 32 in fiscal year 2001. Figure 1 shows that CRADA funding from all sources peaked at over $500 million in fiscal year 1995. Since then, DOE funding has declined while partners have provided a greater proportion of CRADA support through funding and in-kind contributions. These trends reflect the decline in the total number of active CRADAs and the fact that DOE's research programs generally have not provided the funding support for CRADAs that NNSA's Technology Partnership Program and the Office of Science's Laboratory Technology Research Program had previously provided. Funding from some DOE programs has increased, however. For example, the Energy Efficiency and Renewable Energy Program, which provided $16.6 million for CRADAs in fiscal year 1996, provided $40.1 million of the $81 million in total DOE funds for CRADAs in fiscal year 2001. (See tables 8 and 9 in app. I for the financial support of CRADAs by DOE research programs and partners.) With the decline in DOE funding support for CRADAs, the bulk of support for CRADAs has come from the laboratories' partners. Before fiscal year 1997, CRADA partners primarily provided in-kind contributions that covered the costs incurred by their scientists. Since then, CRADA partners have provided more funding to cover part, or all, of the DOE laboratory's costs for CRADAs. In fiscal year 2001, CRADA partners provided 76 percent of the total financial support for CRADAs through funding and in-kind contributions--specifically, partners paid all of the costs for 23 percent of active CRADAs and jointly funded the DOE laboratory's costs for 15 percent of active CRADAs. (See table 10 in app. I for the type of financial support that partners provided.) While these funds enabled the DOE laboratories to leverage their resources, technology transfer managers at several laboratories noted that many ongoing CRADAs were terminated early and potentially beneficial CRADA projects were stopped during negotiations because a business learned that it would have to pay a substantial part, or all, of the laboratory's research costs in addition to its own costs. In recent years, about 33 percent of the CRADAs were with small businesses, 50 percent were with large or intermediate businesses, and 13 percent were with universities or consortia. (See table 11 in app. I.) Table 3 shows that the DOE laboratories' other technology transfer activities funded by businesses and other nonfederal entities have grown substantially in the past 10 years--work-for-others agreements are more than four times greater and technology licenses and user facility agreements are eight times greater. Businesses and other nonfederal entities have provided more funding for work-for-others agreements than for all other types of technology transfer activities combined. Funding from nonfederal entities for work-for-others agreements increased from $31 million in fiscal year 1992 to over $188 million in fiscal year 1999. In fiscal year 2001, there were 1,527 work-for-others agreements funded at $147 million. Although the nonfederal entity is required to pay all of the project costs, many businesses use a work-for-others agreement, rather than a CRADA. The work-for-others program allows them to obtain title, in most cases, to any intellectual property developed under the agreement while the title and licensing rights to any intellectual property developed under a CRADA are subject to negotiations. (See table 12 in app. I for work-for-others agreements by laboratory.) In contrast, the research under a work-for- others agreement typically is less beneficial for the DOE laboratory than research under a CRADA because (1) it is not required to provide direct benefit to the program missions, although it must be consistent with them; (2) the laboratory's scientists typically do not collaborate on research with the nonfederal entity's scientists; and (3) the laboratory does not normally have rights to any resulting intellectual property. During the past 10 years, the laboratories' technology licensing activities significantly increased, from 189 licenses with $4.7 million in license income in fiscal year 1992 to 1,720 licenses with $19.3 million in license income in fiscal year 2001. The growth in technology licensing can be traced to the 1984 amendments to the Patent and Trademark Amendments of 1980, commonly known as the Bayh-Dole Act, which allowed DOE's laboratories operated by universities or nonprofit organizations to retain title to inventions that their scientists made. Subsequently, the National Competitiveness Technology Transfer Act of 1989 added technology transfer as a mission of the DOE laboratories. (See table 13 in app. I for technology licenses by laboratory.) User facility agreements, which provide access to unique DOE research equipment and facilities, increased from 252 in fiscal year 1992 to more than 2,000 in fiscal year 2001. In particular, Brookhaven National Laboratory had 741 agreements in fiscal year 2001 that provided nonfederal entities with access to its specialized facilities such as the National Synchrotron Light Source. Similarly, Oak Ridge National Laboratory had 604 agreements with nonfederal entities in fiscal year 2001. The 12 DOE laboratories have reduced their technical assistance to small businesses from a high of 746 agreements in fiscal year 1995 to 246 agreements in fiscal year 2001. This decline reflected the phasing out of dedicated funding for technology partnerships, which the NNSA and Office of Science laboratories could use to support technical assistance. More recently, two laboratories have used other, non-DOE sources of funding to provide technical assistance to local small businesses. Sandia National Laboratories have an agreement with the state of New Mexico that entitles Sandia to up to $1.8 million per year in tax relief for assistance provided to small businesses in the state. Similarly, Pacific Northwest National Laboratory has received funding from an economic development agency in Washington to provide technical assistance. These laboratories accounted for more than two-thirds of the DOE laboratories' technical assistance agreements in fiscal year 2001. According to DOE laboratory managers, the most important barrier to effective technology transfer was the lack of dedicated DOE funding for technology partnerships, including funding targeted at small businesses.(See table 4.) According to laboratory managers, other important barriers are closely associated with the lack of dedicated funding for technology partnerships and raise serious concerns about the future of CRADAs at their laboratories. While the laboratory managers also identified certain administrative issues that have delayed, or even stopped, potential partnerships, several of them told us that the long delays in obtaining DOE approval of CRADAs, common in the mid-1990s, have mostly been addressed. Managers at 8 of the 12 DOE laboratories we surveyed cited the lack of dedicated DOE funding for CRADAs as an important barrier that has constrained technology partnerships at their laboratories. Each of these laboratories had received dedicated funding under either the Technology Partnership Program or the Laboratory Technology Research Program. According to several laboratory and DOE officials, DOE's research managers generally have questioned whether technology partnerships would provide direct benefits to NNSA's missions of stockpile stewardship and nuclear nonproliferation and the Office of Science's mission of basic science. As a result, research managers have been reluctant to substitute limited research funds for the dedicated technology transfer funding that was phased out in recent years. Because DOE funding was not available, several laboratories had to advise many of their CRADA partners that they would either have to pay the project's full costs, including those incurred by the DOE laboratory's scientists, or the laboratory would terminate the CRADA. Sandia National Laboratories managers told us that they had terminated 18 CRADAs early in fiscal year 2000 because of such funding constraints. Three laboratories stated that the lack of dedicated DOE funding was a "show stopper" for CRADAs. For example, managers at Lawrence Berkeley National Laboratory told us that because many of the laboratory's research program budgets have been squeezed in recent years, research managers have little flexibility to support CRADAs or other types of technology partnerships. Alternatively, CRADA partners-- particularly small businesses--are unwilling or unable to fund all of the research costs. The Lawrence Berkeley managers believe that dedicated funding is important for maintaining a critical mass of CRADAs--without the likelihood of funding support, scientists will not invest the effort to develop strong funding proposals for potentially useful collaborations. Moreover, according to managers at several laboratories, previous DOE funding support for CRADAs likely led to an increase in work-for-others agreements and CRADAs funded by nonfederal partners in recent years. These managers believe that dedicated funds have provided the laboratories with an opportunity to "get their foot in the door" with companies. Once the partners are familiar with the capabilities of the national laboratories, they are more likely to want to continue working with the laboratories, according to the managers. Several managers cited the importance of dedicated funding for commercializing many of their laboratories' technological innovations because there often is a gap in the funding needed to translate the innovation into possible commercial applications, a gap that some managers referred to as the "valley of death." The Lawrence Berkeley managers told us that CRADAs have enabled technology licensees to collaborate with the laboratory's scientists to develop commercial applications. According to Lawrence Berkeley and Argonne managers, based on the number and quality of proposals that their scientists had previously submitted for Laboratory Technology Research funding, each of these laboratories could effectively use $10 million per year in dedicated funding for CRADAs. Managers at 4 of the 12 laboratories stated that the lack of dedicated DOE funding was not an important barrier for CRADAs. In particular, three of these four laboratories had not received dedicated funding. Furthermore, two of these three laboratories--the National Renewable Energy Laboratory and the National Energy Technology Laboratory--primarily conduct research for the Energy Efficiency and Renewable Energy Program and the Fossil Energy Program, respectively, which may have been more willing than some of the other DOE programs to use regular research funds to support CRADAs because their missions include working with industry. Managers at 8 of the 12 DOE laboratories cited the lack of dedicated funding for technology partnerships as an important barrier that has constrained small business participation at their laboratories. In particular, managers at two laboratories told us that the lack of dedicated funding was a "show stopper" for small businesses because a small business generally did not have the funds available to pay all, or part, of the DOE laboratory's costs--in addition to its own costs--for a CRADA research project. Managers at several of the laboratories also cited the importance of dedicated DOE funding as a basis for providing technical assistance to small businesses. Managers cited various examples of a laboratory scientist correcting a manufacturing problem or improving a product after spending a few days with a small business. Managers at 8 of the 12 laboratories told us that uncertainty about DOE's continued financial support for CRADAs was an important barrier. In particular, managers at several Office of Science laboratories told us that Laboratory Technology Research Program funding cutbacks in recent years had created ill will among CRADA partners whose funding support was cut and uncertainty among laboratory scientists and their partners about whether to pursue CRADA proposals for projects that were unlikely to get funded. Some scientists at laboratories we visited discussed their frustration at having funding disappear after they had nurtured working relationships with industry scientists to develop potential technology transfer projects and--much more time-consuming, in their perspective-- persuading the partner's key financial and management staff of the project's merit. These experiences create "legends" about the difficulties of working with DOE laboratories, according to the deputy director of the Lawrence Berkeley National Laboratory. Managers at 10 of the 12 DOE laboratories cited the lack of a high-level, effective advocate for technology partnerships in DOE headquarters as an important barrier that has constrained their technology transfer activities. Similarly, managers at 9 of the 12 laboratories told us that the lack of DOE institutional commitment to technology partnerships as a way to accomplish program missions was an important barrier. Managers stated that technology partnerships, which cut across DOE programs, need an advocate in DOE headquarters who is not tied to a specific research area and has sufficient visibility within DOE to effectively foster technology partnerships. More specifically, managers at several Office of Science laboratories cited the need for an advocate because they believe that funding technology partnerships is a low priority within the Office of Science. They noted that when the Congress reduced the fiscal year 2002 funding for the Office of Advanced Scientific Computing Research, funding for the Laboratory Technology Research Program was disproportionately cut--from the president's budget request of $6.9 million to $3 million--compared with other research programs in this office. In March 2002, the Office of Science announced that it will terminate the Laboratory Technology Research Program once its previously approved CRADAs have been funded. Both laboratory managers and DOE headquarters officials stated that DOE's lack of commitment to technology partnerships is caused, in part, by the cross-cutting nature of the research carried out through CRADAs and other technology transfer activities. They noted that technology partnerships often provide important results and fulfill DOE's broader responsibility to disseminate knowledge, but the partnerships may not always be directly tied to the specific goals of a single DOE research program. As a result, these partnerships are likely to be a lower priority for research managers responsible for meeting specific goals. Because DOE's research budgets have declined in recent years, it is even less likely that these managers will be willing to fund research activities that, while potentially valuable, extend beyond their immediate programs, according to the laboratory managers. Finally, DOE officials noted that DOE's Technology Transfer Working Group is not an internal advocacy group for technology transfer, but a virtual organization with no full-time permanent staff. The working group was established after DOE eliminated its full-time technology transfer organization in 1996 at the Congress' direction. The working group, which convenes monthly by teleconference, oversees technology transfer policy and practices, identifies issues, and coordinates the DOE headquarters response to these issues. Other than through its organizational representatives, the working group has no direct interface with Secretarial-level officials concerning matters related to resources for technology transfer and is not in a position, by itself, to serve as an advocate among top-level DOE officials for such resources. Managers at 9 of the 12 laboratories told us that DOE's requirement that the partner pay in advance for research conducted at the laboratory was an important barrier to technology partnerships at their laboratory. Generally, DOE requires an advance payment for about 90 days of work, if (1) a project is expected to cost more than $25,000 and last more than 90 days or (2) the nonfederal partner will contribute more than $25,000 for its portion of the research that DOE laboratory scientists will conduct. (For shorter or less costly projects, the partner is required to pay its entire share in advance.) Some laboratory managers told us that the advance payment requirement has presented problems in negotiating, for example, work-for-others agreements or jointly funded CRADAs with small or large businesses or with universities. While the requirement rarely stops an agreement from being signed, it has delayed negotiations, particularly when a small business cannot readily provide an upfront payment. The advance payment requirement typically is more burdensome for small businesses than large businesses because small businesses are less likely to have the funds available to prepay work, according to laboratory managers. DOE's policy permits exceptions to this requirement; for example, the contractor operating the laboratory may negotiate with DOE a smaller advance payment for a small business that is unable to meet the standard requirement. Some laboratory managers told us that the advance payment requirement had created serious problems for small businesses that sought the laboratory's assistance as a subcontractor for a project under either the Small Business Innovation Research (SBIR) program or the Small Business Technology Transfer (STTR) program. While DOE requires an advance payment for conducting research, the SBIR and STTR programs typically provide payments for completed work, leaving the small business with the problem of providing funding to bridge this gap. Managers at one laboratory questioned the need for the advance payment requirement for an SBIR or STTR project when the payment is coming from another federal program. In some cases, the federal agency funding the SBIR or STTR project has agreed to provide some funding upfront to help cover the DOE laboratory's work. Alternatively, managers at two of the DOE laboratories told us that they have assisted partners with a bridge loan by using an account set aside for such purposes by the contractor that operates the laboratory for DOE. Managers at 7 of 12 DOE laboratories cited the U.S. competitiveness requirements in the DOE model CRADA as an important barrier to technology partnerships at their laboratory. DOE requires that partners either manufacture substantially in the United States or provide a plan for ensuring that the partnership will result in a net economic benefit to the U.S. economy. Specifically, DOE's model CRADA states that because a purpose of the CRADA is to provide substantial benefit to the U.S. economy, partners are required to (1) substantially manufacture in the United States any products embodying the intellectual property developed under the CRADA; (2) incorporate any processes, services, and improvements developed under the CRADA into the partner's U.S. manufacturing facilities either prior to or simultaneously with implementation outside the United States; and (3) not reduce the use of such processes, services, and improvements in the United States because of their introduction elsewhere. DOE officials noted that DOE's requirements are more stringent than those in the Federal Technology Transfer Act of 1986, which requires that laboratory directors "give preference to business units located in the United States which agree that products embodying inventions made under the cooperative research and development agreement or produced through the use of such inventions will be manufactured substantially in the United States." Some laboratory managers said that DOE's requirements have created particular difficulties for large U.S.-based multinational companies, including IBM and Procter & Gamble, that would like to collaborate with a DOE laboratory. Managers noted that multinational companies often are unwilling to sign an agreement containing DOE's competitiveness clause because of its possible implications in subsequent years on the company's strategic manufacturing decisions. Alternatively, the managers noted that companies could submit a detailed explanation to DOE of how the CRADA research will provide "alternative benefits" to the U.S. economy. They pointed out, however, that documenting alternative benefits can be a long and cumbersome process. In addition, managers at 4 of the 12 laboratories cited as an important barrier the long delays--up to 6 months--associated with consulting the Office of the U.S. Trade Representative for CRADAs involving a company controlled by a foreign company or government. The Federal Technology Transfer Act of 1986 and Executive Order 12591 require that laboratory directors consider whether the foreign company's government permits comparable access to U.S. companies. The executive order also requires that laboratory directors consider whether the foreign company's government has policies to protect U.S. intellectual property. Moreover, the executive order directs laboratory directors to consult with the Office of the U.S. Trade Representative in addressing these issues. Managers at some of the 12 DOE laboratories cited other barriers to technology transfer, but we did not find a general consensus that these problems needed to be addressed. For example, managers at four laboratories cited administrative burdens and time delays in negotiating and signing a technology partnership agreement. Managers at Los Alamos National Laboratory told us that it takes about 3 months, on average, from the time funding for a CRADA is approved until the agreement is signed. Managers at Oak Ridge National Laboratory cited the administrative burden associated with obtaining DOE headquarters approval for technology partnerships as small as a $5,000 technical assistance project and suggested that DOE establish a threshold below which local approval would suffice. Managers at several laboratories, however, told us that DOE has made major improvements in reviewing CRADAs since the mid-1990s, when we reported that, on average, it took four DOE contractor-operated laboratories about 7.5 months to implement a one-collaborator, one- laboratory CRADA. We provided DOE with a draft of this report for its review and comment. We met with DOE officials, including the director of the Office of Science and Technology Policy, who said that DOE found the report to be a reasonable representation of the technology partnering activities at the 12 DOE laboratories surveyed. In commending GAO for gathering pertinent data and analyzing trends and barriers, DOE stated that the report provides a sound basis for assessing the current situation and charting future directions. DOE stated that, for purposes of portraying a broad perspective, it was helpful to include the work-for-others program among the five types of agreements most commonly used to transfer technology to U.S. businesses and other organizations. DOE also noted that a considerable amount of technology transfer takes place in the normal course of executing technical work associated with mission-related contracts and financial assistance, and that this work was not included in the report as technology transfer. While we agree with DOE that the laboratories' technology transfer activities are not limited to the five types of agreements discussed, we note that the laboratories' role in other forms of technology transfer was outside the scope of our review. DOE officials also provided comments to improve the report's technical accuracy, which we incorporated as appropriate. To obtain trend data on technology development partnerships, we asked managers at each of the 12 DOE laboratories to provide participation and funding data for fiscal years 1992 through 2001. To help ensure consistency across locations, we worked with these managers to establish uniform definitions and resolve any discrepancies. In addition, we (1) interviewed officials at DOE headquarters and (2) visited Argonne National Laboratory, Lawrence Berkeley National Laboratory, and Oak Ridge National Laboratory to obtain the views of administrators and scientists about their laboratories' participation in and funding of technology partnerships. To identify any barriers that may limit DOE laboratories' efforts to transfer technology to potential nonfederal partners, we interviewed officials at DOE headquarters and obtained the views of laboratory administrators at each of the 12 DOE laboratories. We conducted our review from October 2001 through March 2002 in accordance with generally accepted government auditing standards. We did not independently verify the data provided by DOE's laboratories. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to appropriate congressional committees, the secretary of energy, the director of the Office of Management and Budget, and other interested parties. We will also make copies available to others on request. If you or your staff have any questions about this report, please contact me at (202) 512-3841. Key contributors to this report were Richard Cheston, Kerry Hawranek, and Susan Swearingen. Appendix I: Technology Transfer Activities of 12 DOE Laboratories Funding was made available beginning in fiscal year 1994 through DOE's Defense Programs' Small Business Initiative. Data were not readily available. Oak Ridge was unable to provide the number of technical assistance for small businesses agreements by fiscal year, but estimated that the laboratory entered into 100 of these agreements over the 10-year period. Data were not readily available. Amounts shown are Ames' portion of the total royalties received by Iowa State University Research Foundation per a formula in the laboratory's management and operating contract. Data were not readily available. Data were not readily available. Data were not readily available. Data were not readily available.

Since 1980 Congress has passed laws to facilitate the transfer of technology from federal laboratories to U.S. businesses. In particular, the National Competitiveness Technology Transfer Act of 1989 authorized federal laboratories operated by contractors, including the Department of Energy's (DOE) national laboratories, to enter into cooperative research and development agreements (CRADA). Under a CRADA, the partner and DOE laboratory agree to jointly conduct research and typically share the research costs. By fiscal year 1992, DOE's national laboratories were among the leading federal laboratories participating in CRADAs. Recently however, the 12 laboratories that DOE surveyed have substantially reduced their CRADA partnerships and their technical assistance to small businesses. Instead, the laboratories have increasingly transferred technology through agreements that did not involve collaborative research and were funded by a business or other nonfederal entity. Managers at most of the laboratories say the lack of dedicated funding for technology for transfer to technology partnerships, including funding targeted to small businesses, is the most important barrier to their technology transfer activities. Managers at most laboratories said that DOE's lack of a high-level, effective advocate for technology transfer and DOE's lack of commitment to technology partnerships were important barriers. Several managers also said that requirements, such as DOE's advance payment clause, were often financially burdensome for small businesses.

To conduct this work, we first identified the top four federal construction agencies based on the amount of funds obligated during fiscal year 2013 using data from USASpending.gov. We selected three of the top four agencies for further review. These agencies were the Departments of Defense--specifically the Departments of the Army (Army) and the Navy (Navy)--and Veterans Affairs (VA), and the General Services Administration (GSA). The Army, Navy, VA and GSA accounted for almost 75 percent of the total $28 billion obligated for construction contracts in fiscal year 2013. To identify what is known about the prevalence of bid shopping on federal construction projects, we interviewed agency contracting officials, prime contractor and subcontractor trade associations, prime contractors and subcontractors; and reviewed GAO reports, articles, academic literature, and congressional testimonies addressing bid shopping. To identify possible cases of bid shopping, we used the Contractor Performance Assessment Reports System (CPARS)construction contracts where the prime contractors received low performance rating in subcontractor management. From these contracts, we judgmentally selected two contracts from each of the selected agencies for in-depth review, based on contract award amount, type of contract, and project location. At the Department of Defense, we selected two contracts awarded by the U.S. Army Corps of Engineers (USACE) and two awarded by the Naval Facilities Engineering Command (NAVFAC). The contracts were awarded between fiscal years 2009 and 2011, and in total were valued at about $760 million. We also performed a high-level review of two additional GSA contracts during our design phase to get a sense of what contract documentation (e.g. subcontracting plan) to request that may identify subcontractors on a construction project. To address how the federal government monitors subcontractor performance under federal construction contracts and if necessary, takes action to address unsatisfactory performance, we reviewed the FAR, which identifies tools available to the agencies to monitor and take actions to address or correct deficiencies. We also obtained and reviewed pertinent agency guidance and supplements to the FAR, Small Business Administration (SBA) regulations, and the Office of Management and Budget-Office of Federal Procurement Policy guide to best practices for contract administration. To determine if the federal agencies use these tools on construction contracts where there were subcontracting issues, we obtained information from the same eight construction contracts identified above to determine how agencies monitor prime contractor and subcontractor contract performance and address unsatisfactory performance. We reviewed documentation in the contract files such as the solicitation, proposals (including the technical evaluation), inspection reports, contractor performance reports, and other key documents for identification, monitoring and compliance purposes. We reviewed selected change orders for the contracts in our review to identify some of the reasons for cost increases and schedule delays. We also interviewed agency contracting officials, prime contractors and subcontractors about their experience in the contracting process. We contacted all eight prime contractors associated with the contracts in our sample to obtain information on their process to select subcontractors; three responded to our request. We also contacted 67 subcontractors for those eight contracts and received responses from eight. Our results from the analysis of these construction contracts are not generalizable agency- or government-wide. For the agencies and contracts we reviewed, our approach provided greater depth and insight into subcontractor selection. However, we did not determine whether agencies' construction contract oversight was effective. Further, to address this objective, through interviews and literature searches, we identified 12 states that took actions through regulation that could mitigate bid shopping. We contacted these states and from the five responses received, we obtained information from officials responsible for construction contracting on bid shopping and the actions taken to mitigate its use. In addition, we spoke with officials from SBA about its requirement that for contracts over certain dollar thresholds, a large prime construction contractor notify the contracting officer in writing if it does not subcontract to a small business subcontractor that was used in preparing its proposal. We also spoke with officials at the Smithsonian Institution about its practices to require the listing of subcontractors to ensure that those selected can adequately perform the work. We conducted this performance audit from February 2014 to January 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. After a prime contractor is awarded a construction contract, it negotiates with subcontractors on the scope of work and price before awarding subcontracts. This period is known as the buyout process--if a prime contractor were to practice bid shopping, it would shop the original subcontractor's bid to other subcontractors at this point. See figure 1 for a general description of the process to obtain federal construction services. For the purposes of this report, we refer to the prime contractor's offer to the government as a proposal; we refer to the subcontractor's offer to the prime contractor as a bid. We reported on the topic of bid shopping in 1971 and again in 1981. In those reviews, although bid shopping was generally acknowledged by government contracting personnel, state officials, and individuals in the construction industry to be a prevalent practice and recognized as a longstanding recurrent complaint by subcontractors, we were not furnished evidence of any specific cases of bid shopping having occurred. Contract administration is the management of all actions after award through the closing of the contract to assure that contractors comply with contract terms. Contract administration includes all dealings between parties to a contract from the time one is awarded until the work has been completed and accepted or the contract terminated, payment has been made, and disputes have been resolved. After a construction contract is awarded, the federal government is represented in the contracting process by a contracting officer, who has authority to modify or terminate contracts on behalf of the government. The contracting officer receives support from his/her onsite representative--the contracting officer's representative (COR) who is the liaison between the government and the prime contractor. The responsibilities of the COR may include contract administration tasks and directing daily operations within the scope of the contract, and monitoring contractor and subcontractor performance to help ensure that requirements meet the terms of the contract. We were not able to determine if bid shopping occurs or does not occur on federal construction projects, and thus were not able to determine the prevalence of bid shopping. Officials at the selected agencies we reviewed were not aware of instances of bid shopping on their construction projects, and we could not find evidence of bid shopping in the contract files we reviewed. However, many contractors in the construction industry that we spoke with told us that bid shopping does, in fact, occur. Our discussions with prime contractors as well as subcontractors indicated that some subcontractors may have a perception of bid shopping during the buyout process between prime contractors and its subcontractors. We found no conclusive evidence of bid shopping in our reviews of contract files, and government officials furnished no evidence of bid shopping. Government officials at the agencies we reviewed stated that they were not aware of bid shopping occurring on their construction projects. These officials also stated that the government in most cases does not have insight into how the prime contractors select their subcontractors, and if bid shopping were to occur, a contracting officer would not be aware of it unless a subcontractor filed a complaint. The selected contracts that we reviewed all showed evidence of prime contractors' performance issues with the management of subcontractors--such as untimely replacement of defective work--yet none presented evidence or complaints of bid shopping. Although none of the prime contractors, subcontractors, and construction industry associations we spoke with were able to provide current evidence of bid shopping on federal projects, they all told us that, based on their knowledge of the industry, it does in fact occur. Most of the subcontractors stated that they had not experienced it for themselves. The industry associations we spoke with were not in agreement on the prevalence of bid shopping--one thought it was very prevalent, while the others thought it was happening in only selected circumstances or was not sure how often it was occurring. Almost all of the prime contractors and subcontractors we spoke with told us that a prime contractor that practiced bid shopping would alienate subcontractors, and a few added that prime contractors would eventually not be able to find subcontractors willing to work with them. In our discussions with prime contractors, we found that the process used to develop a proposal and the subsequent selection of subcontractors may lead to a perception of bid shopping by subcontractors. Prime contractors told us that in preparing their proposals, they try to obtain multiple subcontractor bids from each trade (e.g., electrical, plumbing, mechanical). They then use the multiple subcontractors' bids to prepare their own estimates to include in their proposal to the government. The prime contractors we spoke with stated that they generally do not use a specific price bid by one subcontractor, but use the bids to benchmark their own estimates. One prime contractor representative we spoke with stated that the company tries to obtain three bids for each trade when developing a proposal to get a better sense of a reasonable estimate to include in its proposal. We also found that the process the prime contractor goes through to submit a proposal can be chaotic. According to both prime and subcontractors we interviewed, subcontractors, to remain competitive, often wait to submit their bids to the prime contractor until just minutes before the prime contractor is required to submit its proposal to the agency, which allows minimal time for the prime contractor to ensure that the bids are reasonable and cover the required scope of work. Four of the subcontractors we spoke with told us that this is one method to help prevent their bids being shopped prior to contract award. For a large project, the subcontractors' bids can number in the hundreds. In fact, one prime contractor estimated that for one large project it may review approximately 500 bids to prepare its proposal. Further, according to prime contractors, it can be uncertain at the time their proposals are submitted to the government that subcontractors bids include the full scope of work, so they must do their best to quickly assess the accuracy and completeness of the various bids they review for one trade. In addition, a prime contractor told us that he may submit a low proposal price depending on who he is competing against, and then hope to negotiate further with the subcontractors during the buyout process. We were told by the prime contractors that not until after the government awards the contract do they negotiate the specific tasks and prices with subcontractors during the buyout process. The prime contractor will verify that each subcontractor has a complete scope of work for the project, and then select and award a contract to a subcontractor to do the work. The subcontractors stated that it is common practice for prime contractors to negotiate with them on the scope and price of its proposed subcontract after contract award. Several of the subcontractors we interviewed also stated that a subcontractor may erroneously believe that its bid is being bid shopped, when in fact negotiation is part of the normal buyout process. Further, most of the subcontractors we interviewed told us that if they have not done business with and are unfamiliar with a specific prime contractor's negotiation procedures or if a prime contractor is known to shop bids, they may propose an inflated price under the assumption that the prime contractor will negotiate that price down during the buyout process. In contrast, if they are bidding to a prime contractor they know, they are more likely to provide the best price in the first bid. Accordingly, it is difficult to sort out whether the prime contractor's selection of subcontractors results from bid shopping or from the chaotic and challenging process of bidding and buying out a federal construction project. Subcontractors have suggested that bid shopping leads to poor quality construction, however we found that the selected agencies have existing tools to hold the prime contractor accountable for a project's work quality and progress and, when performance is unsatisfactory, have methods to address or correct deficiencies. The government can be protected from poor quality construction if it appropriately uses the various tools at its disposal to manage and address deficiencies. Examples of oversight tools include onsite agency representatives, daily construction progress reports and periodic inspection reports. These tools can help agencies catch instances of poor quality construction for immediate remedy. If problems persist, agencies have methods for addressing or correcting unsatisfactory performance including withholding of payments to the prime contractor and potential government-wide reporting of poor contractor performance. Further, one tool that is used by some states to prevent the poor quality construction allegedly caused by bid shopping is bid listing--whereby the prime contractor must name the subcontractors in its proposal to the state government. Bid listing may provide insight into subcontractor substitution after award. However, as past analyses of the use of bid listing in the federal government have found, the benefit of requiring it for the prevention of bid shopping is questionable in part because of the administrative burden. When contracting for construction services, the federal government's direct contractual relationship is with the prime contractor and not with the subcontractor, a doctrine of contract law known as privity of contract. In general, this means that the government cannot direct subcontractors to perform tasks under the contract, and the prime contractor retains legal and management responsibility for overall contract performance. Agency officials also said that due to privity of contract, they hold the prime contractor fully accountable for the subcontractors' work quality. In our review of selected contracts, we found that agencies use a variety of tools to monitor and assess work quality and progress on a project. Specifically, the tools agencies use include onsite representatives, inspection reports, and a host of reporting requirements to monitor and assess work quality and progress. Further, the FAR generally provides that each contract shall include quality control requirements which the prime contractor must meet in the performance of the construction contract. Agencies must use these quality control requirements to assess the prime contractor and their subcontractors to ensure they meet these standards for materials, workmanship and timeliness. Some of the tools agencies in our review used include the following: Onsite representatives. We found that agency construction projects had an onsite representative (e.g. resident engineer for construction or COR). The agency onsite representative is the agency's "eyes and ears" during construction and observes the work of the prime contractor and its subcontractors on a daily basis to ensure their work and materials conforms to contract requirements. It is this person's responsibility to assess the project's work quality, timeliness and performance of equipment and systems to help ensure that the federal government receives the services it contracts for. Daily construction reports. The contracts in our review generally require the prime contractor to furnish a report each day summarizing the daily activities onsite. At the VA, for example, the reports must show the number of trade workers, foremen/forewomen, and pieces of heavy equipment used by the prime contractor and its subcontractors on the prior day. The reports must also give a breakdown of employees by craft, location where employed, and the work performed for the day, and a list of materials delivered to the construction site on the date covered by the report. Examples of reports we reviewed for a NAVFAC project included the name of the firm and its trade (e.g. carpenters and electricians), and the type of work that they performed such as plumbing, and installing switches and doors. Periodic onsite progress meetings. Some of the contracts in our review identify what types of meetings should be held, who is to attend, and how often the meetings should be held. But depending on the type and complexity of the project, government contracting personnel can require more frequent meetings with prime contractors to monitor progress of the construction work. For example, USACE provided us examples of minutes from biweekly coordination meetings with the prime contractor; and biweekly meetings with the prime contractor and certain subcontractors for the purpose of testing the performance of certain systems, such as heating and ventilation systems. For one VA contract, the government's representatives required weekly meetings with the prime contractor and subcontractors to discuss project progress and to identify problems and solutions to those problems. Inspection reports. Inspections are performed at various stages of the project to ensure that the execution of the contract by the prime contractor (and its subcontractors) meets contract specifications. Our review of examples of inspection reports from a couple of the contract files showed inspections of work quality and in some cases testing of systems, such as mechanical, fire and electrical systems, throughout the project. The contracts may also require the prime contractor to notify the onsite representative when inspections and tests are to be conducted so that he or she may choose to be present to observe. Deficiency reports. If the agency identifies prime contractor or subcontractor nonconformance with contract material or workmanship requirements, we found that a report is prepared to notify the prime contractor of the deficiencies. The report notes who is responsible for taking corrective action, and tracks the status of corrective actions taken. In examples of the deficiency reports we reviewed, if the listed deficiency in material or workmanship was not corrected, then the deficiency stayed on the reports until it was corrected to contracting officer's satisfaction. In the final stages of a project, a list of tasks that need to be completed or corrected before the agency will accept the building for occupancy is developed, called a punch list. We found examples of punch lists in the contract files we reviewed identifying tasks to be resolved prior to final acceptance. Monthly progress payment reports. The FAR provides that agencies may make monthly progress payments to prime contractors as the work progresses. To achieve this, agency contracting personnel and the prime contractor agree to a schedule of tasks that need to be performed and their value. At the conclusion of each month, the prime contractor submits a payment request to the contracting officer that identifies the materials delivered and the percentage of work performed for each task. Since a single payment can be for millions of dollars, it is important that the project's contracting personnel adequately review the contractors' payment requests to ensure that work is billed accurately, reflects the materials used, and the work has been performed. If any discrepancies are noticed they must be resolved before any payment is made. The progress payment reports we reviewed from one GSA project summarized the status of cost and schedule information to inform how much of the contractor's monthly payment request should be approved. Submission of weekly certified payrolls. The prime contractors also submitted weekly certified payrolls, which includes information on subcontractors, so that the government can check for accuracy of wages including overtime and categorization for a particular trade (e.g., tile setter and electrician). Examples from contract files we reviewed at GSA and NAVFAC showed that the payrolls included information such as the name of subcontractor, name of employee and trade title, days and hours worked for the week. Liquidated damages. To protect itself from construction delays, an agency can include the liquidated damages clause in a prime contract, meaning that if the prime contractor fails to complete the work within the time specified in the contract, the contractor pays the government a daily fixed amount for each day of delay until the work is completed or accepted. Liquidated damages can result from a delay caused by the prime contractor or one of its subcontractors. They are not to serve as a penalty but to represent an assessment of probable damage costs that would be incurred by the agency if delay causes the work to extend beyond the contractual completion date. The liquidated damages daily rate for failure to timely complete the work is included in the prime contract. These costs can vary depending on the project. For example, for one VA contract the daily rate is $2,800 per calendar day of delay and for one USACE contract the daily rate is $16,500 per calendar day. While oversight can help agencies identify instances of poor quality construction, we found that the selected agencies use a number of methods to prompt the prime contractor to address or correct deficiencies identified during oversight activities if problems persist. In all cases, the government held the prime contractor solely responsible for correcting all deficiencies, whether or not the deficient work was performed by a subcontractor or the prime contractor. Retaining or withholding a certain percentage of each monthly progress payment owed by the government to prime contractors is a powerful motivator to encourage prime contractor and subcontractor performance. The FAR allows agencies to withhold up to 10 percent of each monthly progress payment to prime contractors in accordance with the contract until completion of all contract requirements. According to GSA officials, prime contractors can in turn withhold a similar percentage amount from each subcontractor's monthly progress payments until satisfactory completion of the work. Progress payments may be withheld on the contracts we reviewed to account for materials and workmanship deficiencies or lack of progress on the project by prime contractors or subcontractors. For one USACE contract, the agency retained $850,000 in payment for flooring and carpet damage and metal panel problems, among other things. Some agency officials we interviewed stated that prime contractors take their performance evaluations on a current contract very seriously because a negative performance report can work against them in trying to win future federal construction contracts. The FAR generally requires agencies to evaluate and document contractor performance on contracts that exceed certain dollar thresholds at least annually and at the time the work is completed, and to make that information available to other agencies through PPIRS, a shared government-wide database.completing past performance evaluations, the assessing officials rate the contractor on various elements such as quality of the product or service, schedule, and cost control. In addition, for each element, a narrative is provided to support the rating assigned. When assessing a contractor's past performance for a potential contract award, contracting officials may consider the evaluations in PPIRS. In For all of the eight contracts we reviewed, the contracting officer provided or approved performance evaluations for the prime contractors on the projects. For example, one rating for a GSA contract was marked marginal because the concrete subcontractor did not place the concrete correctly, and the prime contractor was given a poor performance rating based on this subcontractor's performance. A contracting officer can issue a cure notice informing the prime contractor of its failure to perform, which endangers meeting contractual requirements. A cure notice provides at least 10 days for the prime contractor to correct the issues identified in the notice or otherwise fulfill the requirements. A show cause notice goes a step further, advising the prime contractor that a termination for default is being considered and calls the contractor's attention to the contractual liabilities if the contract is terminated for default. At this point the prime contractor must show that its failure to perform arose from causes beyond its control and without fault or negligence on its part. In one example from our contract file review, a VA contracting officer issued a cure notice to the prime contractor citing, among other factors, failure to maintain an adequate quality control program to correct work deficiencies. According to the show cause notice, the prime contractor provided a response that did not address the deficiencies highlighted in the cure notice and subsequently the contracting officer issued a show cause notice. Even though the show cause notice was issued, the VA contracting officer did not terminate the contract in part because the prime contractor started to take corrective action. With the host of oversight mechanisms in place, the government can be protected from poor quality construction if it appropriately uses the various tools and methods at its disposal to manage and correct deficiencies. Bid listing is a practice whereby the potential prime contractors are required to identify certain subcontractors in their proposals that it will use if awarded the contract, which moves their selection and initial negotiations with subcontractors to earlier in the contracting process than if bid listing was not used. Bid listing may provide contracting officers with some insight as to when a subcontractor is substituted after contract award because if a proposed listed subcontractor is not used, the prime contractor must notify and justify to the contracting officer the reason for the substitution and obtain the contracting officer's approval. Congress has on multiple occasions proposed--but never passed--mandatory bid listing requirements to prevent the poor quality construction allegedly caused by bid shopping. Even though the FAR does not currently include a bid listing provision, it does provide the contracting officer authority to ask for identification of prospective subcontractors for the purpose of determining responsibility. We found instances in our review where prime contractors had to list their subcontractors within their proposals for the purpose of ensuring that a critical subcontractor is responsible and can meet specific requirements. For example, a Smithsonian solicitation we reviewed required the listing of subcontractors. Officials at the Smithsonian told us that this is a regular practice they use to ensure that the selected subcontractors can adequately perform the work. This requirement provides similar insights into subcontractor substitution as bid listing, as the prime contractor must notify the contracting officer of a substitution, and show that the new subcontractor is also responsible. More recently, the Small Business Administration, in response to the Small Business Job Act of 2010, implemented regulations effective in August 2013 that require a prime contractor to notify the contracting officer in writing whenever it does not subcontract to a small business subcontractor during contract performance that was used in preparing its proposal. This explanation must be submitted to the contracting officer prior to the submission of the invoice for final payment and contract close- However, during the public comment period prior to the approval of out.the regulations, some commenters expressed concerns on the proposed regulations that the notification requirement would be a disincentive for prime contractors from involving small businesses in the development of their proposal, which may potentially limit small businesses' ability to gain valuable insight into how prime contractors approach proposal development in general. Past federal research and efforts to mitigate bid shopping through subcontractor bid listing have shown that the benefits of doing so are questionable, in part because of the added administrative burden. In its 1972 report to improve federal procurement practices, the Commission on Government Procurement researched the issue of bid shopping and determined that it would not be materially improved by the adoption of mandatory bid listing requirements and that the cost of implementing requirements would likely outweigh the benefits. As a result, the Commission took a position against a mandatory government-wide requirement for subcontract listing in federal construction. Department of the Interior and GSA previously required subcontractor bid listing but stopped the practice in 1975 and 1983, respectively. GSA testified in 2000 that bid listing would create more harm than benefit and strongly opposed bid-listing requirements for a number of reasons, such as adverse affect on the timeliness and cost of contract performance and increase in the government's administrative expenses. Congress in the late 1960s created the Commission on Government Procurement to devise fundamental improvements to federal procurement practices. The Commission developed 149 recommendations to both Congress and the executive branch. Commission on Government Procurement, Report of the Commission on Government Procurement, (Washington D.C.: Dec. 31, 1972). subcontractors at the time of contract award. For example, one state reviews bids from subcontractors, and then tells the prime contractor which subcontractors to include in its proposal to the state, rather than the prime contractor selecting its own subcontractors. We found that bid shopping for some of these states was the factor for establishing procedures to identify subcontractors prior to contract award. In discussion with officials from some of these states, the requirement to list subcontractors in the prime contractor's proposal has been required for many years. Officials from one state told us that they are reconsidering the requirement for bid listing because of the administrative burden it is causing for state contracting officials, specifically an increase in bid protests. According to these officials, unsuccessful contractors are using this requirement to protest contract awards because of administrative mistakes in contractors listing their subcontractors. This is similar to the issue that GSA raised in the early 1980s when it stopped the requirement to list subcontractors. However, according to officials from the other states that we contacted that require bid listing, they have had no complaints from prime contractors in complying with this requirement. Moreover, in the instances from the contracts we reviewed where cost growth or schedule delays occurred as the result of government-driven changes after award or unforeseen conditions, bid listing, if required, would not have prevented these types of changes. The FAR and agencies' acquisition regulations provide for changes to fixed-price construction contracts, known as change orders. When the change is driven by the government, the government generally bears the additional cost. We found that most of the construction projects we reviewed experienced increased costs and schedule delays as a result of government-driven changes or unforeseen conditions. For example, on one NAVFAC contract the government decided to incorporate furniture, furnishings, and audiovisual equipment into the construction project, resulting in a cost increase of $1.9 million for an $11.6 million contract. On a GSA contract, after construction began, the government found a different site condition than expected and added soil remediation costs of approximately $400,000 and provided an extension of 52 days. Bid shopping is widely considered an unethical business practice, but the prevalence of the practice is unknown. It is difficult to determine, for a particular contract, whether the prime contractor's selection of subcontractors was truly a result of bid shopping or appears so due to the chaotic nature of bidding for and buying out a federal construction project. Specifically attributing poor performance to bid shopping is therefore also challenging. Though considered an administrative burden, bid listing is an optional practice available to contracting officers who determine it is necessary to ensure that the prime contractor's proposal identifies qualified responsible subcontractors. Nonetheless, in evaluating a prime contractor's proposal, the federal government must determine that the price is fair and reasonable. After the prime contractor is awarded a fixed-price contract, it must manage the subcontractors to complete the job within the established contract price and schedule. The government has additional tools available to provide oversight to manage or correct identified deficiencies during a project's duration. As the prevalence of bid shopping on federal construction contracts is unknown, and bid listing requirements to prevent it have been discontinued by federal agencies in part due to administrative burden, we are making no recommendations. We provided a draft of this report to the Departments of Defense and Veterans Affairs, and the General Services Administration for their review and comment. None provided comments on this report. We are sending copies of this report to the Secretaries of Defense and Veterans Affairs, and the Administrator for the General Services Administration as well as interested congressional committees and other interested parties. This report will also be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of our report. GAO staff who made key contributions to this report are listed in appendix I. Marie A. Mak, (202) 512-4841 or [email protected]. In addition to the contact named above, Tatiana Winger, Assistant Director; Marie Ahearn; Pete Anderson; Virginia Chanley, George Depaoli, Joe Hunter; Julia Kennon, Kenneth Patton, Russell Reiter and Ozzy Trevino made key contributions to this report.

In fiscal year 2014, the federal government obligated almost $32 billion for construction projects using primarily competitive, fixed-price contracts. In these contracts, the government holds the prime contractor fully responsible for project delivery at the agreed-to price and schedule. Once a construction contract is awarded, the prime contractor must manage subcontractors that typically perform 60 to 90 percent of the work on a construction project. Bid shopping--whereby a prime contractor uses one subcontractor's price in its proposal but negotiates a lower price with a subcontractor after the contract award for the purpose of retaining the difference for its benefit--is considered an unethical business practice by the construction industry. Subcontractors have alleged that bid shopping leads to poor quality construction. GAO was asked to review the government's insight into subcontractor selection and oversight of subcontractor performance on federal construction contracts. This report covers (1) what is known about the prevalence of bid shopping on federal construction projects and (2) what tools the federal government has to monitor and address contractor performance. GAO judgmentally selected and reviewed construction contracts from three of the four federal agencies that obligated the most funds for construction contracts in fiscal year 2013. GAO also interviewed agency and state contracting officials and construction industry representatives. GAO is not making recommendations in this report. The agencies in this review did not provide comments on this report. GAO was not able to determine if bid shopping occurs or does not occur when prime contractors select subcontractors on federal construction projects, but found that the selection process could lead to subcontractors' perceptions of bid shopping. GAO's review of selected contract files did not reveal evidence of bid shopping. Further, officials at the agencies GAO reviewed stated they were not aware of bid shopping occurring on their contracts. Many of the construction contractors that GAO spoke with said that bid shopping occurs, but could not furnish evidence of specific instances. Negotiation procedures between prime contractors and subcontractors may create the impression of bid shopping among subcontractors that submit bids. Specifically, prime contractors explained that they receive multiple subcontractor bids for each trade (e.g., electrical, plumbing) up to minutes before their proposal is submitted to the government; and they typically do not use a specific subcontractor's price in their proposal, but a price informed by the subcontractors' bids. After award, the prime contractor negotiates and selects a subcontractor for each trade during the "buyout process," as shown below. To hold the prime contractor accountable for a project's work quality and progress, selected agencies use oversight tools such as agency representatives deployed on site, daily progress reports, and When performance is unsatisfactory, agencies use a number of methods to address or correct deficiencies. For example, agencies can withhold progress payments to the prime contractor or report poor contractor performance in government databases. Further, the government can be protected from poor quality construction if it appropriately uses the oversight tools at its disposal. To address bid shopping, some states are using bid listing, which requires the prime contractor to name certain subcontractors in its proposal to the state government. But the benefit of requiring bid listing in the proposal solely for the prevention of bid shopping is not certain, as past analyses of its use in the federal government have found it adversely affects the timeliness and cost of contract performance, and increases the government's administrative expenses.

The mission of VA is to serve America's veterans and their families with dignity and compassion and to be their principal advocate in ensuring that they receive medical care, benefits, social support, and lasting memorials. VA is a cabinet-level agency with a budget of over $127 billion and is one of the world's largest health care, medical research, and insurance benefits organizations. In addition to a central office, VA consists of three administrations that generally operate as distinct entities: the Veterans Health Administration (VHA), the Veterans Benefits Administration (VBA), and the National Cemetery Administration (NCA). VHA's facilities are organized into 21 regional networks, known as VISNs, that are structured to manage and allocate resources to VA health care facilities across the United States. Each VISN is also responsible for coordination and oversight of all administrative and clinical activities within its specified region of the country. We reviewed the status of capital projects in 6 of VA's 21 VISNs, as shown in figure 1. To provide services to veterans, VA's current real property portfolio consists of U.S.-owned buildings under VA jurisdiction and control. VA also generally has authority to enter into enhanced-use leases, 3-year outleases, and sharing agreements relating to its real property or space. The assets include, for example, hospitals, clinics, cemeteries, and office buildings where veterans access their many benefits and VA administers its programs. VHA is the largest administration and, in terms of the number of acres owned and square footage, includes the greatest portion of VA's real property portfolio, as shown in figure 2. In response to our 1999 recommendations for improving agency capital asset planning and budgeting, VA initiated CARES. CARES was the first comprehensive, long-range assessment of VA's health care capital asset priorities since 1981 and was designed to assess buildings and land ownership under VA's jurisdiction and control in light of expected demand for VA inpatient and outpatient health care services across a planning horizon through fiscal year 2022. For example, VA recognized that the shift in veterans' demand for services could be met at community based outpatient clinics that are more geographically accessible to veterans than its hospitals. The CARES process validated gaps in VA's infrastructure and health care services provided to veterans. The process also included a set of tools for annual capital and strategic planning to enable VA to plan for real property needs to provide quality health care to veterans. Also in response to our 1999 recommendations, VA developed formal 5- year capital plans that are submitted with its annual budget requests to Congress. The 5-year capital plan included in VA's fiscal year 2011 budget submission document includes the following: capital planning linked to the agency mission, strategic goals, and objectives; baseline assessments and identification of performance gaps--such as underutilized or vacant property and the backlog of repairs needed at its facilities; an alternatives evaluation and resulting risk management plan for these performance gaps; a description of the agency's planning and approvals process; and a long-term capital plan. Effective planning for capital investments is important for several reasons. First, over time, large amounts of federal funds are spent on capital assets. Second, the performance of capital assets affects how agencies are able to achieve their missions, goals, and objectives to provide service to the public. Finally, capital planning drives budgeting, procurement, and management of an agency's capital assets. As VA increased its emphasis on outpatient care rather than inpatient care, it was left with an increasingly obsolete infrastructure, including many hospitals built or acquired more than 50 years ago in locations that are sometimes far from where veterans live. This challenge of misaligned infrastructure is not unique to VA. In January 2003, we identified federal real property management as a high-risk area, and VA was cited among those federal agencies that hold a majority of federally owned and leased space. We also reported on VA's long-standing problems with excess and underutilized property, deteriorating facilities, unreliable real property data, overreliance on costly leasing, and building security challenges. We did this to highlight the need for broad-based transformation in this area, which, if well implemented, will better position federal agencies to achieve mission effectiveness and reduce operating costs. As its newest capital planning effort, VA has initiated SCIP, which will be an agencywide review of VA's real property priorities and will inform its fiscal year 2012 annual budget submission. According to VA, SCIP will include six key components. Table 1 shows these components and the VA's planned actions to implement them. SCIP, which VA said builds on its existing capital planning processes, also addresses leading practices. It further strengthens VA's efforts in some areas and is still evolving and being refined. The SCIP components are linked to VA's previous capital planning efforts, including CARES and the development of its 5-year capital plan. Figure 3 illustrates VA's capital planning steps from 1999 to 2010. As a part of its shift from hospital based, inpatient care to outpatient care, VA has made changes to its real property portfolio on the basis of its May 2004 CARES Decision document and subsequent capital planning. As for specific CARES Decision projects, VA reported in its April 2010 Implementation Monitoring Report on Capital Asset Realignment for Enhanced Services that it has completed 13 of 59 planned major and minor construction projects, opened 82 of 156 planned community-based outpatient clinics (CBOC), and has another 19 ongoing major construction projects identified in the CARES Decision. As for net changes to VA's real property portfolio since the CARES Decision, our analysis of the data in VA's 5-year capital plans from 2004 to 2009 found that leases and leased space had increased due in part to VA's efforts to realign its portfolio towards more outpatient facilities, such as CBOCs and vet centers. These centers provide readjustment counseling and outreach services to all veterans and family members dealing with military-related issues. Although U.S.-owned buildings and vacant space under VA's jurisdiction and control show a decrease because of VA's disposal of assets, VA shows a net increase as a result of new construction projects. Similarly, the net increase in owned acreage can be attributed to property acquired by VA's National Cemetery Administration for new cemeteries. These results of VA's agencywide capital planning efforts since its March 2004 CARES Decision are shown in table 2. Our analysis also showed that, with the exception of hospitals, VA has expanded the number and types of buildings by which it delivers services. Table 3 shows VA's changes to its real property portfolio in terms of facility types. VA officials and stakeholders generally agreed that changes to the VA real property portfolio have benefited veterans. For example, both groups reported that the new facilities, such as more accessible clinics, had improved veteran access to services by limiting the distance that veterans travel to VA health care facilities. Officials from veteran service organizations with whom we spoke stated that upgrades to VA's real property portfolio had improved care for veterans. For example, these officials commented that real property changes in VA facilities in Denver, Colorado, and Syracuse, New York, have resulted in improved services for veterans with spinal cord injuries or diseases. Additionally, officials from VA's central office and the VISNs that we contacted cited recent initiatives, such as telehealth and telemental health services at CBOCs, as being beneficial to veterans. To gain further insight on the steps that VA took to realign its real property portfolio, we observed ongoing and completed projects at 5 VISNs that demonstrated VA's changes in the areas that CARES identified as priorities: improved access, modernization, special disability programs, underutilized or vacant property, CBOCs, VA and the Department of Defense (DOD) collaboration, long-term care, and mental health. As such, we visited several facilities in those VISNs as described in figures 4 through 9. VA has been appropriated about $16.7 billion from fiscal years 2004 through 2010 for major construction, minor construction, and nonrecurring maintenance. In addition, VA has identified several other high-cost projects that have not yet been funded. For example, VA reported in its 5-year capital plan for fiscal years 2010-2015 that agencywide, it has a backlog of $9.4 billion of facility condition assessment deficiencies (repairs). Furthermore, due to incremental funding of projects, 24 of the 69 ongoing major construction projects listed in the plan needed an additional $4.4 billion to complete. For example, the plan describes funding needed for the new medical facility in Denver. As of fiscal year 2010, VA has been funded only $307 million of the estimated $800 million total project cost. The President's budget for fiscal year 2011 included a request for $451 million for this project. Even if this amount is funded, VA's 5-year capital plan reports that this project would still need an additional $42 million to complete construction. VA officials commented that this phased approach enables the agency to request funding in stages that allow for the funding of independent and stand alone portions of projects to be built while allowing available resources to be utilized on other high-priority projects. Like other agencies across the government, VA has faced underlying obstacles that have exacerbated its real property management challenges and caused them to persist over time. Specifically, we have previously reported on such challenges, including competing stakeholder interests, legal and budgetary limitations, and the need for improved capital planning. These challenges can impact the agency's ability to fully realign its real property portfolio. Regarding competing stakeholder interests, we have reported that VA has faced challenges in coordinating with historic preservation and community organizations, as well as managing established relationships with other health care providers, such as college and university partnerships. While joint ventures for facilities present unique opportunities for VA to explore new ways to provide health care to veterans, it also raises issues for VA. These issues include the benefits and costs of investing in a joint facility compared with those of other alternatives, such as maintaining the existing facility or considering options with other health care providers in the area; legal matters associated with the new facility, such as leasing or transferring property, contracting, and employment; and potential concerns of stakeholders. We have also identified legal and budgetary issues that can hamper agencies' efforts to address their excess and underutilized real property problems. For example, federal agencies must assess and may be required by law to 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. Regarding VA, 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. For example, we previously reported that VA stated that except for enhanced-use leases, restrictions on retaining proceeds relating to VA controlled properties are a disincentive for VA to dispose of property. VA officials estimated that the average time it takes to implement an enhanced-use lease can range from 9 months to 2 years. VA can also dispose of underutilized and vacant property to other federal agencies and for programs for the homeless under the McKinney-Vento Act. However, VA officials stated that the process can average 2 years and that the agency may not receive compensation from such agreements entered into under this act. Over the years, we have reported that (1) prudent capital planning can help agencies make the most of limited resources and (2) timely and effective capital acquisitions can result in economical acquisitions that are on budget, on schedule, and in line with mission needs and goals. Both OMB and GAO guidance emphasize the importance of developing a long-term capital investment plan to guide the implementation of organizational goals and objectives and to help decision makers establish priorities over time. Capital planning is an especially important area for VA, given the agency's efforts to effect a large-scale transformation of its real property portfolio and the substantial capital investment these efforts will require. Congress, OMB, and GAO have identified the need for effective capital planning. In addition, budgetary constraints and demands to improve performance in all areas have put pressure on agencies to make sound capital acquisition proposals. In the overall capital programming process, planning is the first phase--and, arguably, the most important--since it drives the remaining phases of budgeting, procurement, and management. OMB has issued various guidance and requirements for agencies to follow and use in developing disciplined capital programming processes, including the 1997 Capital Programming Guide, to provide agencies with a basic reference for establishing an effective process for making investment decisions. In 1998, GAO issued its Executive Guide on the basis of a study of leading state and local government and private-sector capital investment practices. Our guide (1) summarizes fundamental practices that have been successfully implemented by organizations that are recognized for their outstanding capital decision-making practices and (2) provides examples of leading practices from which the federal government may draw lessons and ideas. Although our guide focuses on fundamental practices, rather than detailed guidance, the practices represent actions and steps to be taken. In addition, the examples presented in our guide illustrate and complement many of the phases and specific steps contained in OMB's guide. There is a great deal of overlap in the OMB and GAO guides since both suggest similar fundamental practices that are essential to making effective capital investment decisions. Because of the importance of planning, we focused on VA's implementation of the concepts that underlie the planning phase of OMB's guide and planning practices in our guide (see fig.10). OMB and our guidance stress the importance of linking capital asset investments to an organization's overall mission and long-term strategic goals. The guidance also emphasizes evaluating a full range of alternatives to bridge any identified performance gap, informed by agency asset inventories that contain condition information. Furthermore, the guidance calls for a comprehensive decision-making framework to review, rank, and select from among competing project proposals. Such a framework should include the appropriate levels of management review, and selections should be based on the use of established criteria. The ultimate product of the planning phase is a comprehensive capital plan, which defines the long-term capital decisions that resulted from the agency's capital planning process. Both OMB and our guidance highlight the importance of this plan. The planning phase is the crux of the capital decision-making process and the products that result from this phase are used throughout the remaining phases of the process. We found that VA's 5-year capital plan and SCIP reflect several of the leading capital planning practices that we have previously discussed. For example, VA's 5-year capital plan is updated annually as part of its annual budget submission to Congress and contains lists of projects, by administration, for the next 5 years. SCIP is an update to VA's capital planning process that builds on existing processes, including the principles and tools of CARES, and was used to inform VA's annual budget submission to Congress for fiscal year 2012. Figure 11 presents examples of how VA's planning efforts reflect leading practices. We compared VA's 5-year capital plan with the leading practices. In the area of strategic linkage, we found that VA's efforts reflect leading practices by identifying projects that received the highest priority ranking using criteria that reflect the goals and mission contained in VA's Strategic Plan. For example, one of the criteria by which potential capital projects were prioritized was "Departmental Alignment," which includes the Secretary's goals for improving management and performance and VA's strategic goals. In regard to assessing needs and identifying gaps, in 2004 we reported that VA neither had an agencywide inventory of existing capital assets nor agencywide information about the condition of those assets, but VA has since developed a capital asset database. VA officials said they recently completed facility condition assessments for all of its owned buildings and are considering whether to assess the condition of their leased buildings, many of which VA is not responsible for maintaining. VA uses facility condition assessments as one factor in guiding capital investment decisions to improve the condition of its most deteriorated buildings. VA's 5-year capital plan also includes steps to evaluate various alternatives for addressing real property priorities by requiring that four alternative approaches be considered to bridge any capital need--leasing; status quo; new construction; and rehabilitation, repair, or expansion of existing facilities. In the area of establishing a review and approval framework for VA's capital investment decisions, VA has a panel chaired by a department- wide group of senior VA management to assess capital investment proposals; evaluate, score, and prioritize proposals by VA administration; and make recommendations through the VA governance process to the Secretary of VA. VA's 5-year plan uses established criteria by which potential capital projects are evaluated, such as criteria that reflect VA's goal of increasing veterans' access to health care and supporting services for veterans suffering from spinal cord injury, traumatic brain injury, and post-traumatic stress disorder. Finally, in 2004 we reported that VA did not have a long-term capital plan that identified agencywide real property priorities. However, VA has since developed a 5-year capital plan, updated annually, which is used to inform the agency's annual budget submission. It describes VA's capital planning process and gives brief descriptions of capital investment projects included in its budget submission. VA also modified its capital planning efforts in 2010 by developing a new process, called SCIP, which was used to inform its fiscal year 2012 budget submission to Congress. VA officials told us that SCIP builds on its existing capital planning processes, addresses leading practices, and further strengthens VA's efforts in some areas. Under SCIP, VA will continue to link its investments with its strategic goals, assess the agency's real property priorities, evaluate various alternatives, and use a similar review and approval framework when making capital investment decisions. In addition, SCIP also strengthens VA's capital planning in some areas. Specifically, SCIP extends the horizon of its 5-year capital plan to 10 years, providing VA with a longer range picture of the agency's future real property priorities. As a result of SCIP, VA officials told us that the agency developed cost estimates for all of its major and minor construction projects, leases, and nonrecurring maintenance projects for the next 10 years. SCIP is also centralizing VA's process for ranking and selecting capital investments on the basis of established criteria. For example, in the past, VA would develop a list of prioritized projects for each of its administrations, such as VBA, NCA, and VHA, for projects less than $10 million dollars. However, VA is now prioritizing projects from an agencywide perspective across all of its administrations and developing one list to guide its capital planning decisions. VA has also drafted a set of weighted criteria by which it plans to evaluate projects. The criteria listed below assess whether capital investments improve the safety and security of VA facilities by mitigating potential damage to buildings facing the risk of a seismic event, improving compliance with safety and security laws and regulations, and ensuring that VA can provide service in the wake of a catastrophic event; address selected key major initiatives and supporting initiatives identified in VA's strategic plan; address existing deficiencies in its facilities that negatively impact the delivery of services and benefits to veterans; reduce the time and distance a veteran has to travel to receive services and benefits, increase the number of veterans utilizing VA's services, and improve the services provided; right-size VA's inventory by building new space, converting underutilized space, or reducing excess space; and ensure cost-effectiveness and the reduction of operating costs for new capital investments. VA officials said that SCIP is still evolving and being refined. For example, VA officials said that the agency completed a series of "lessons learned" sessions to determine how the process can be improved and to make changes, if needed, for the 2013 budget cycle. Despite the positive aspects of VA's capital planning efforts, VA's resulting 5-year capital plan that it provides yearly to Congress lacks transparency about the cost of future priorities beyond the current budget year. For projects VA proposes to initiate in the current budget year, VA's 5-year capital plan includes current year estimates for cost of construction, equipment, and operating costs for major and minor construction projects, such as new and replacement medical facilities. It also provides estimates to complete these and other ongoing projects in future years. However, the plan identifies other potential projects, not beginning in the current budget year, for which it lists project name but contains no information on what these projects might cost or the priority, as VA has not assigned one to them. For example, VA's most recent capital plan, submitted with its 2011 budget request, lists potential projects--including 100 major construction and 1,062 minor construction projects--for which pricing estimates are not provided. We have previously reported that capital planning should result in a long- term capital plan with prioritized projects and justification of capital requests, such as project resource estimates and costs. The cost estimates of prioritized projects can then be incorporated into an agency's annual budget request to Congress. The yearly request reflects the agency's policy decisions regarding what it has determined, in consultation with OMB, should be funded. VA officials told us that it has been VA's policy to not include multiyear pricing information for projects in their current 5-year capital plan and budget submission to Congress. VA's SCIP, according to VA officials and VA documents we reviewed, will identify costs for future projects and information about their relative priority within their organization. VA commented that the future priority of unfunded projects cannot be provided as these projects are reprioritized each year using updated weights and decision criteria. Further, during our review, VA officials told us they are considering the release of future year capital cost estimates to Congress. A decision on the release of this information is expected to be reflected in the fiscal year 2012 budget and SCIP plan to be released in February 2011. VA officials added that pricing information is viewed as an internal tool for prioritizing projects and preparing budget requests and that project cost estimates become more reliable as the projects move closer to the year of construction. While we agree that cost estimates beyond the current year are less reliable, this could be made clear to decision makers, and as the projects move closer to the year of implementation, the estimates can be refined. VA officials told us that the agency already maintains future year estimates internally. While VA may view this information as suitable only for internal use, decision makers in Congress would benefit from having it for several reasons. Specifically, transparency about future priorities allows decision makers to weigh current year budget decisions in context with the magnitude of future costs. In the case of VA, which has identified a significant number of future projects in the tens of billions of dollars, full transparency regarding these future priorities may spur discussion and debate about actions Congress can take to address them. This could include not only appropriations, but also programmatic changes and real property management tools that could help VA to leverage its real property to more efficiently and effectively meet the future needs of veterans. Additionally, transparency regarding future capital costs puts VA's priorities in context with the overall fiscal condition of the U.S. government. There is widespread agreement that the federal government faces formidable near- and long-term fiscal challenges. GAO has long stated that increased information and better incentives for budget decisions involving both existing and proposed programs that require significant future resources could facilitate consideration of competing demands and help put our finances on a more sustainable footing. And lastly, one of VA's key stakeholders, the Senate Appropriations Committee, recently asked VA for more information on its future capital project costs. The committee is aware of VA's SCIP process and requested that the department submit with its fiscal year 2012 budget request, all findings associated with this review. At the time of our review, VA had not determined how it would respond to this request. Providing cost estimates for future projects to Congress for capital programs is not without precedent in the federal government. For example, in 1987, Congress directed the Department of Defense to submit a 5-year defense program (referred to as the future years defense program,(FYDP)) used by the Secretary of Defense in formulating the estimated expenditures and proposed appropriations included in the President's annual budget to support DOD programs, projects, and activities. The FYDP provides DOD and Congress with a tool for looking at future funding needs beyond immediate budget priorities and can be considered a long-term capital plan. As another example, the judiciary recognized that it was facing space shortages, security shortfalls, and operational inefficiencies at courthouse facilities around the country. In March 1996, the judiciary issued a 5-year plan for courthouse construction, which was intended to communicate the judiciary's urgent housing needs to Congress and the General Services Administration, and identified 45 projects for funding on the basis of information from Congress and GSA that $500 million could be used as a planning target in estimating funds that will be available for courthouse construction each year. The judiciary also developed a methodology, including criteria and weights, for assigning urgency scores to projects. As another example, we reported earlier this year that House and Senate appropriators have voiced interest in having the Army Corps of Engineers include additional information in the agency's budget presentation. We found that an information gap is created when an administration highlights its priority projects, but does not provide sufficient information on other future resource needs. Congressional users of the Corps' budget presentation told us that not having information on future resource needs limits the ability of Congress to make fully informed decisions when making appropriations decisions. Further, such information would increase the usefulness and transparency of the budget presentation. VA has an important mission in serving veterans, and its real property portfolio is critical to ensuring that veterans have access to benefits and services. Billions of dollars have already been appropriated to VA to realign and modernize its portfolio. Further, VA has identified ongoing and future projects that could potentially require several additional billion dollars over the next few years to complete. Given the fiscal environment, VA and Congress would benefit from a more transparent view of potential projects and their estimated costs than VA currently provides. Such a view would enable VA and Congress to better evaluate the full range of real property priorities over the next few years and, should fiscal constraints so dictate, identify which might take precedence over the others. In short, more transparency would allow for more informed decision making among competing priorities, and the potential for improved service to veterans over the long term would likely be enhanced. To enhance transparency and allow for more informed decision making related to VA's real property priorities, we recommend that the Secretary of Veterans Affairs provide the full results of VA's SCIP process and any subsequent capital planning efforts, including details on the estimated cost of all future projects, to Congress on a yearly basis. We provided a draft of this report to VA for their review and comment. VA generally agreed with our conclusions and concurred with our recommendation. VA also provided technical corrections and clarifications, which we incorporated as appropriate. See appendix II for VA's comments. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees, to the Secretary of Veterans' Affairs, and other interested parties. The report also will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-2834 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 III. We addressed the following objectives: (1) To what extent have the Department of Veterans Affairs' (VA) capital planning efforts resulted in changes to its real property portfolio and what priorities remain? and (2) To what extent do VA's capital planning efforts follow leading practices and provide the information needed for informed decision making? To determine the extent to which VA's capital planning efforts, including the Capital Asset Realignment for Enhanced Services (CARES), have resulted in changes to its real property portfolio and to identify the agency's remaining priorities, we interviewed VA officials located in the central office in Washington, D.C., and 6 Veterans Integrated Service Networks (VISN) and observed VA facilities in 5 of these 6 VISNs. (See table 4 for a list of VA departments, VISNs interviewed and projects observed.) Based on the number of veterans served annually, we selected 2 large, medium, and small VISNs each, out of a total of 21. To further guide our selections, we also considered a number of other factors, including the number of completed and ongoing projects, new medical facilities, and geographic dispersion. Within each VISN, we selected projects in various stages, CARES projects being monitored by VA according to seven centrally tracked implementation measures, and sites throughout the geographic footprint of each selected VISN. We also interviewed senior officials at 5 veterans service organizations chartered by Congress or recognized by VA for claim representation. (See table 5 for a list of the veterans service organizations that we interviewed.) We also reviewed agency data in VA's CARES Decision, its Implementation Monitoring Report on Capital Asset Realignment for Enhanced Services, and its 5-year capital plan about changes to its real property portfolio and the number and cost of projects needing additional funding. In addition, we reviewed the funding that VA has received for major and minor construction projects and nonrecurring maintenance since fiscal year 2004 in VA budget submission documentation, its 5-year capital plans, and appropriation laws. We assessed the funding and facilities data from the VA and determined it was reliable for our purposes. To determine the extent to which VA's capital planning efforts follow leading practices and provide the information needed for informed decision making, we interviewed VA officials involved in its capital planning efforts. We also collected information on leading capital planning practices from the Office of Management and Budget's Capital Programming Guide and GAO's Executive Guide, and compared it with VA's efforts as described in the agency 5-year capital plan. In addition, we collected information and interviewed officials on VA's new capital planning process, called SCIP, and compared it to leading capital planning practices. To compare VA's efforts with the efforts of other federal agencies that have provided estimates to Congress regarding the magnitude of future real property priorities, we reviewed our previous reports on capital planning across the federal government, including the Department of Defense's future years defense program and efforts by the judiciary in March 1996 to communicate its urgent housing needs to Congress. Finally, we collected VA data on the agency's future real property priorities and reviewed a recent request by Congress to VA to develop and submit a comprehensive capital plan, along with other information related to VA's capital planning efforts. In addition to the individual named above, David Sausville, Assistant Director; Daniel Cain; George Depaoli; Colin Fallon; Wati Kadzai; and Erica Miles made key contributions to this report.

The Department of Veterans Affairs (VA) has undertaken various planning efforts to realign its real property portfolio, including the Capital Asset Realignment for Enhanced Services (CARES), creation of a 5-year capital plan, and its newest effort, the Strategic Capital Investment Planning process (SCIP). Through these efforts, VA has identified numerous real property priorities it believes should be completed if the agency's facilities are to meet veterans' needs for services now and in the future. This congressionally requested report addresses the extent to which VA's capital planning efforts (1) have resulted in changes to its real property portfolio and (2) follow leading practices and provide information for informed decision making. To perform this work, GAO reviewed leading capital planning practices and data on VA's real property portfolio and future priorities. GAO also interviewed VA officials and veterans service organizations, and visited sites in 5 of VA's 21 veterans integrated service networks. Through its capital planning efforts, VA has taken steps to realign its real property portfolio from hospital based, inpatient care to outpatient care, but a substantial number of costly projects and other long-standing challenges also remain. Several of VA's most recent capital projects--such as community based outpatient clinics, rehabilitation centers for blind veterans and spinal cord injury center--were based on its CARES efforts and subsequent capital planning. VA officials and veterans service organizations GAO contacted agreed that these facilities have had a positive effect on veterans' access to services. However, VA has identified several high-cost priorities such as facility repairs and projects that have not yet been funded. For example, VA reported in its 5-year capital plan for fiscal years 2010-2015 that it had a backlog of $9.4 billion of facility repairs. The 5-year plan further identified an additional $4.4 billion in funding to complete 24 of the 69 ongoing major construction projects. Besides substantial funding priorities, VA, like other agencies, has faced underlying obstacles that have exacerbated its real property management challenges and can also impact its ability to fully realign its real property portfolio. GAO has previously reported that such challenges include competing stakeholder interests, legal and budgetary limitations, and capital planning processes that did not always adequately address such issues as excess and underutilized property. VA's capital planning efforts generally reflect leading practices, but lack transparency about the cost of future priorities that could better inform decision making. For example, GAO found that VA's 5-year capital plan links its investments with its strategic goals, assesses the agency's capital priorities, and evaluates various alternatives. Also, SCIP strengthens VA's capital planning efforts by extending the horizon of its 5-year plan to 10 years, and providing VA with a longer range picture of the agency's future real property priorities. While these are positive steps, VA's planning efforts lack transparency regarding the magnitude of costs of the agency's future real property priorities, which may limit the ability of VA and Congress to make informed funding decisions among competing priorities. For instance, for potential future projects, VA's 5-year capital plan only lists project name and contains no information on what these projects are estimated to cost or the priority VA has assigned to them beyond the current budget year. VA officials said during the review that they are considering the release of future year capital cost estimates to Congress. Transparency about future requirements would benefit congressional decision makers by putting individual project decisions in a long-term, strategic context, and placing VA's fiscal situation within the context of the overall fiscal condition of the U.S. government. Providing future cost estimates to Congress for urgent, major capital programs is not without precedent in the federal government. Other federal agencies, such as the Department of Defense, have provided more transparent estimates to Congress regarding the magnitude of its future capital priorities beyond immediate budget priorities. GAO recommends that VA annually provide to Congress the full results of its SCIP process and any subsequent capital planning efforts, including details on estimated cost of future projects. VA concurred with this recommendation.

In carrying out its Afghan assistance efforts, USAID has experienced a number of systemic challenges that have hindered its ability to manage and oversee contracts and assistance instruments, such as grants and cooperative agreements. These challenges include gaps in planning for the use of contractors and assistance recipients and having visibility into their numbers. While this statement focuses on the challenges confronting USAID in Afghanistan, our work involving the Departments of Defense and State has found similar issues not only in Afghanistan but also in other countries, such as Iraq. The need for visibility into contracts and assistance instruments to inform decisions and perform oversight is critical, regardless of the agency or the country, as each agency relies extensively on contractors and assistance recipients to support and carry out its respective missions. While USAID has faced challenges, it has also taken actions to help mitigate some of the risks associated with awarding contracts and assistance instruments in Afghanistan. Most notably, through its vendor vetting program, USAID seeks to counter potential risks of U.S. funds being diverted to support criminal or insurgent activity. Our work has identified gaps in USAID's planning efforts related to the role and extent of reliance on contractors and grantees. For example, we reported in April 2010 that USAID's workforce planning efforts, including its human capital and workforce plans, do not address the extent to which certain types of contractors working outside the United States should be used. We further reported in June 2010 that USAID's workforce plan for fiscal years 2009 through 2013 had a number of deficiencies, such as lacking supporting analyses that covered the agency's entire workforce, including contractors, and not containing a full assessment of the agency's workforce needs, including identifying existing workforce gaps and staffing levels required to meet program needs and goals. Such findings are not new. We noted, for example, in our 2004 and 2005 reviews of Afghanistan reconstruction efforts, when USAID developed its interim development assistance strategy, it did not incorporate information on the contractor and grantee resources required to implement the strategy. We determined that this hindered USAID's ability to make informed decisions on resource allocations for the strategy. Further, as mentioned earlier, such findings have not been unique to USAID. For example, in our April 2010 report, we noted that the Department of State's workforce plan generally does not address the extent to which contractors should be used to perform specific functions, such as contract and grant administration. In the absence of strategic planning for its use of contractors, we found that it was often individual offices within USAID that made case-by-case decisions on the use of contractors to support contract or grant administration functions. In our April 2010 report, we noted that USAID used contractors to help administer its contracts and grants in Afghanistan, in part to address frequent rotations of government personnel, as well as security and logistical concerns. Functions performed by these contractors included on-site monitoring of other contractors' activities and awarding and administering grants. The Departments of Defense and State have also relied on contractors to perform similar functions in both Afghanistan and Iraq. While relying on contractors to perform such functions can provide benefits, we found that USAID did not always fully address related risks. For example, USAID did not always include a contract clause required by agency policy to address potential conflicts of interest, and USAID contracting officials generally did not ensure enhanced oversight in accordance with federal regulations for situations in which contractors provided services that closely supported inherently governmental functions. Over the last four years, we have reported on limitations in USAID's visibility into the number and value of contracts and assistance instruments with performance in Afghanistan, as well as the number of personnel working under those contracts and assistance instruments. Having reliable, meaningful data on contractors and assistance recipients is a starting point for informing agency decisions and ensuring proper management and oversight. In 2008, in response to congressional direction, USAID along with the Departments of Defense and State designated the Synchronized Predeployment and Operational Tracker (SPOT) database as their system of record to track statutorily required information on contracts and contractor personnel working in either Iraq or Afghanistan, a designation which the agencies reaffirmed when the requirement was expanded to include assistance instruments and associated personnel. However, we found that as of September 2011, SPOT still did not reliably track this information. As a result, USAID relied on other data sources, which had their own limitations, to prepare a 2011 report to Congress. Specifically, we found USAID's reporting to be incomplete, particularly in the case of personnel numbers that were based on unreliable data. For example, for the number of contractor and assistance personnel in Afghanistan, USAID developed estimates that, according to a USAID official, were based in part on reports submitted by only about 70 percent of its contractors and assistance recipients. Further, USAID acknowledged that it had limited ability to verify the accuracy or completeness of the data that were reported. Similarly, we found that the Department of Defense underreported the value of its contracts in Iraq and Afghanistan by at least $3.9 billion, while the Department of State did not report statutorily required information on assistance instruments and the number of personnel working on them in either country. Given the repeated limitations we have found in SPOT and the ability of USAID, Defense, and State to provide statutorily required information, we recommended in 2009 and then subsequently reiterated that the three agencies develop a joint plan with associated time frames to address limitations and ensure SPOT's implementation to fulfill statutory requirements. In response to our 2009 recommendation, USAID did not address the recommendation, while the Departments of Defense and State cited on-going interagency coordination efforts as sufficient. However, we concluded that based on our findings, coordination alone is not sufficient and have continued to call for the agencies to develop a plan. We have recently begun reviewing the three agencies' April 2012 report to Congress on their contracts, assistance instruments, and associated personnel in Iraq and Afghanistan and the actions they are taking to improve their database. Commission on Wartime Contracting in Iraq and Afghanistan, Transforming Wartime Contracting: Controlling Costs, Reducing Risks (Arlington, Va.: Aug. 2011). settings, ensuring the government can provide sufficient acquisition management and contractor oversight, and taking actions to mitigate the threat of additional waste due to a lack of sustainment by host governments. We are currently reviewing what actions USAID and the Departments of Defense and State are taking to address the Commission's recommendations. In response to continued congressional attention and their own concerns about actual and perceived corruption and its impact on U.S. and international activities in Afghanistan, U.S. government agencies have established efforts to identify malign actors, encourage transparency, and prevent corruption. Under the auspices of its Accountable Assistance for Afghanistan initiative, USAID is seeking to address some of the challenges associated with providing assistance in Afghanistan. One element of the initiative is the vendor vetting program. In January 2011, in order to counter potential risks of U.S. funds being diverted to support criminal or insurgent activity, USAID created a process for vetting prospective non-U.S. contractors and assistance recipients (i.e., implementing partners) in Afghanistan. This process is similar to the one USAID has used in the West Bank and Gaza since 2006. USAID's process in Afghanistan was formalized in a May 2011 mission order, which established a vetting threshold of $150,000 and identified other risk factors, such as project location and type of contract or service being performed by the non-U.S. vendor or recipient. The mission order also established an Afghanistan Counter-Terrorism Team that can review and adjust the risk factors as needed. At the time our June 2011 report on vetting efforts was issued, USAID officials said that the agency's vendor vetting process was still in the early stages, and that it would be an iterative implementation process, some aspects of which could change--such as the vetting threshold and the expansion of vetting to other non-U.S. partners. We recommended that USAID consider formalizing a risk-based approach that would enable it to identify and vet the highest-risk vendors and partners, including those with contracts below the $150,000 threshold. We also made a recommendation to promote interagency collaboration to better ensure that non-U.S. vendors potentially posing a risk are vetted. Specifically, we recommended that USAID, the Department of Defense (which had a vendor vetting program), and the Department of State (which did not have a vendor vetting program comparable to USAID's or Defense's) should consider developing formalized procedures, such as an interagency agreement, to ensure the continuity of communication of vetting results and to support intelligence information, so that other contracting activities may be informed by those results. USAID concurred with our recommendations and noted that the agency had already begun to implement corrective measures to ensure conformity with our recommendations and adherence to various statutes, regulations, and executive orders pertaining to terrorism. Specifically, under the May 2011 mission order, the Afghanistan Counter-Terrorism Team is to work to establish an interagency decision-making body in Afghanistan to adjudicate vetting results, establish reporting metrics for USAID's vetting process, and work with the vetting unit to modify as needed the criteria used to establish risk-based indicators for vetting. We have previously reported on systematic weaknesses in USAID's oversight and monitoring of the performance of projects and programs carried out by its implementing partners in Afghanistan. In 2010, we reported that USAID did not consistently follow its established performance management and evaluation procedures with regard to its agriculture and water sector projects in Afghanistan.There were various areas in which the USAID Mission to Afghanistan needed to improve. We found that the Mission had been operating without an approved Performance Management Plan to guide its oversight efforts after 2008. In addition, while implementing partners had routinely reported on the progress of USAID's programs, we found that USAID did not always approve the performance indicators these partners were using and did not ensure, as its procedures require, that implementing partners establish targets for each performance indicator. For example, only two of seven USAID-funded agricultural programs that were active during fiscal year 2009 and included in our review had targets for all of their indicators. Within the water sector, we found that USAID collected quarterly progress reports from five of the six water project implementers for the projects we reviewed, but it did not analyze and interpret this information as required. We also found that USAID could improve its assessment and use of performance data submitted by implementing partners or program evaluations to, among other things, help identify strengths or weaknesses of ongoing or completed programs. In addition, USAID officials face a high risk security environment and the USAID Mission to Afghanistan has experienced high staff turnover, which hinder program oversight. For example, in July 2010, we reported that the lack of a secure environment has challenged the ability of USAID officials to monitor construction and development efforts.Also, USAID personnel are assigned 1-year assignments with an option to extend assignments for an additional year--which USAID acknowledged hampered program design and implementation. The Department of State's Office of the Inspector General noted in its 2010 inspection of the entire embassy and its staff, including USAID, that 1-year assignments coupled with multiple rest-and-recuperation breaks limited the development of expertise and contributed to a lack of continuity. We also found that a lack of documentation of key programmatic decisions and an insufficient method to transfer knowledge to successors had contributed to the loss of institutional knowledge--a challenge that we reported USAID should address. In the absence of consistent application of its existing performance management and evaluation procedures and the lack of mechanisms for knowledge transfer, USAID programs are more vulnerable to corruption, waste, fraud, and abuse. In 2010, we recommended, among other things, that the Administrator of USAID take steps to (1) address preservation of institutional knowledge, (2) ensure programs have performance indicators and targets, and (3) consistently assess and use program data and evaluations to shape current programs and inform future programs. USAID concurred with these recommendations and identified several actions the agency is taking in Afghanistan to address them, including the following: In 2011, USAID established mandatory technical guidance for program monitoring officials on how to establish and where to maintain files, in addition to key responsibilities of the office director to ensure that files are maintained before officials leave their positions. In 2010, USAID approved a new performance management plan for its agriculture programs and worked with its implementing partners to align their existing indicators with those in the new plan. In 2011, USAID delegated more authority to field program officers to serve as activity managers of agriculture programs, making them responsible for conducting regular project monitoring and reporting on program performance, verifying data reported by implementing partners, and assuring the quality of data being reported through regular site visits. In addition, USAID has taken steps to increase the use of third-party monitoring to ensure data integrity and quality. Risk assessments and internal controls to mitigate identified risks are key elements of an internal control framework to provide reasonable assurance that agency assets are safeguarded against fraud, waste, abuse, and mismanagement. Although USAID conducted preaward risk assessments for most of its bilateral direct assistance to the Afghan government, we found that USAID's policies did not require preaward risk assessments in all cases. For example, we reported in 2011 that USAID did not complete preaward risk assessments, such as determining the awardees' capability to independently manage and account for funds, in two of the eight cases of bilateral direct assistance. USAID made those two awards after the USAID Administrator had committed to Congress in July 2010 that USAID would not proceed with direct assistance to an Afghan ministry before it had assessed the institution's capabilities. We recommended that USAID update its risk assessment policies to reflect the USAID Administrator's commitment to Congress. USAID has since updated its policies to require preaward risk assessments for all bilateral direct assistance awards, periodic reassessment, and risk mitigation measures, as appropriate. Since October 2011, USAID has awarded $35 million in direct assistance funds to two Afghan ministries and, in compliance with its updated policies, completed risk assessments prior to awarding the funds in both cases. We also found that USAID established general financial and other controls in its bilateral direct assistance agreements with Afghan ministries, including requiring that the ministries: establish separate noncommingled bank accounts, grant USAID access rights to the bank accounts, have a monitoring and evaluation plan, comply with periodic reporting requirements, and maintain books and records subject to audit. In addition to these general financial controls, USAID is required to establish additional monitoring and approval controls in its direct bilateral assistance agreements that provide USAID funds to Afghan ministries to contract for goods and services. USAID had agreements with two Afghan ministries that allowed them to contract out. However, we previously found that USAID did not always document its approval of these ministries' procurements prior to contract execution. We recommended that USAID ensure compliance with the monitoring and approval requirements. We are now following up with USAID to ensure it is implementing our recommendation. With respect to direct assistance provided multilaterally through public international organizations such as the World Bank, USAID's policy is to generally rely on the organization's financial management, procurement, and audit policies and procedures. We found, however, that USAID has not consistently complied with its multilateral trust fund risk assessment policies in awarding funds to the World Bank's ARTF. For example, in 2011, we reported that USAID did not conduct a risk assessment before awarding an additional $1.3 billion to the World Bank for ARTF.We also found that USAID did not conduct preaward determinations for 16 of 21 modifications to the original World Bank grant agreement. In response to our findings and a prior GAO report, USAID revised and expanded its guidance on preaward risk assessments for the World Bank and other public international organizations. Under the revised guidance, USAID is required to determine the World Bank's level of responsibility through consideration of several factors, including the quality of the World Bank's past performance and its most recent audited financial statements. The World Bank has established financial controls over donor contributions to the ARTF. For example, the World Bank hired a monitoring agent responsible for monitoring the eligibility of salaries and other recurrent expenditures that the Afghan government submits for reimbursement against ARTF criteria. The World Bank also reports that it assesses projects semi-annually as part of regular World Bank supervision in accordance with its policies, procedures and guidelines based in part on project visits. However, we found examples that the financial controls established by the World Bank over the ARTF face several challenges: The World Bank and international donors have expressed concern over the level of ineligible expenditures submitted by the Afghan government for reimbursement. While ineligible expenditures are not reimbursed, the bank considers the level of ineligible expenditures to be an indicator of weaknesses in the Afghan government's ability to meet agreed-upon procurement and financial management standards. Afghanistan's Control and Audit Office conducts audits of Afghan government programs, including those funded by the ARTF, but lacked qualified auditors and faced other capacity restraints, according to the Special Inspector General for Afghanistan Reconstruction and USAID. As a result, the office used international advisers and contracted auditors, funded by the World Bank, to help ensure that its audits of ARTF complied with international auditing standards. Security conditions prevented Afghanistan's Control and Audit Office auditors from visiting most of the provinces where ARTF funds were being spent. The office was able to conduct audit tests in 10 of Afghanistan's 34 provinces from March 2009 to March 2010 and issued a qualified opinion of the financial statements of ARTF's salary and other recurrent expenditures. Mr. Chairman, Ranking Member Carnahan, and Members of the Subcommittee, this concludes our statement. We would be happy to answer any questions you may have at this time. For further information on this statement, please contact John P. Hutton at (202) 512-4841 or [email protected] or Charles Michael Johnson, Jr. at (202) 512-7331 or [email protected]. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this statement include Johana R. Ayers, Assistant Director; Tetsuo Miyabara, Assistant Director; Pierre Toureille, Assistant Director; Thomas Costa; David Dayton; Emily Gupta; Farahnaaz Khakoo-Mausel; Bruce Kutnick; Angie Nichols-Friedman; Mona Sehgal; and Esther Toledo. 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.

Since 2002, the United States has appropriated nearly $90 billion to help stabilize Afghanistan and build the Afghan government's capacity to provide security, enhance governance, and develop a sustainable economy. To assist Congress in its oversight, GAO has issued over 100 reports and testimonies related to U.S. efforts in Afghanistan, including those managed by USAID and the Departments of Defense and State. USAID provides assistance to Afghanistan through contracts and assistance instruments, such as grants and cooperative agreements, and in the form of direct assistance--funding provided through the Afghan national budget for use by its ministries. Direct assistance is provided (1) bilaterally to individual Afghan ministries or (2) multilaterally through trust funds administered by the World Bank and the United Nations Development Program. This testimony discusses findings from GAO reports issued primarily in 2010 and 2011 that cover USAID's (1) management of contracts and assistance instruments, (2) oversight of development-related program performance and results, and (3) accountability for direct assistance. The U.S. Agency for International Development (USAID) has experienced systemic challenges that have hindered its ability to manage and oversee contracts and assistance instruments in Afghanistan. Key challenges include gaps in planning for the use of contractors and assistance recipients and having visibility into their numbers. For example, GAO reported in April 2010 that, absent strategic planning for its use of contractors, individual offices within USAID often made case-by-case decisions on using contractors to support contract or grant administration and risks, such as possible conflicts of interest, were not always addressed. While having reliable data on contractors and assistance recipients is a starting point for informing agency decisions and ensuring proper management, GAO has also reported on limitations in USAID's visibility into the number and value of contracts and assistance instruments in Afghanistan, as well as the number of personnel working under them. USAID, along with other agencies, has not implemented GAO's recommendation to address such limitations. USAID, however, has taken other actions to mitigate risks associated with awarding contracts and assistance instruments in Afghanistan. In June 2011, GAO reported on USAID's vendor vetting program, then in its early stages, which was designed to counter potential risks of U.S. funds being diverted to support criminal or insurgent activity. GAO recommended that USAID take a more risk-based approach to vet non-U.S. vendors and develop formal mechanisms to share vetting results with other agencies, both of which USAID agreed to do. GAO has found systematic weaknesses in USAID's oversight and monitoring of project and program performance in Afghanistan. In 2010, GAO reported that USAID did not consistently follow its established performance management and evaluation procedures for Afghanistan agriculture and water sector projects. For example, only two of seven USAID-funded agricultural programs included in GAO's review had targets for all their performance indicators. Moreover, the USAID Mission was operating without a required performance management plan. In addition, GAO reported on a lack of documentation of key programmatic decisions and an insufficient method to transfer knowledge to successors. USAID has taken several actions in response to these findings, such as updating its performance management plan and establishing mandatory guidelines on file maintenance to help ensure knowledge transfer. USAID has established and generally complied with various financial and other controls in its direct assistance agreements, such as requiring separate bank accounts and maintenance of records subject to audit. However, GAO found in 2011 that USAID had not always assessed the financial risks in providing direct assistance to Afghan government entities before awarding funds. For example, USAID did not complete preaward risk assessments in two of eight cases of bilateral assistance GAO identified. With regard to direct assistance provided multilaterally through the World Bank's Afghanistan Reconstruction Trust Fund (ARTF), GAO found in 2011 that USAID had not consistently complied with its own risk assessment policies, and USAID had not conducted a risk assessment before awarding $1.3 billion to ARTF in March 2010. In response to GAO reports, USAID revised and expanded its guidance on preaward risk assessments for the World Bank and other public international organizations. GAO is not making new recommendations but has made numerous recommendations aimed at improving USAID's management and oversight of assistance funds in Afghanistan. USAID has generally concurred with most of these recommendations and has taken or planned steps to address them.

By definition, alien smuggling (sometimes called people smuggling or human smuggling) is transnational in that it involves more than one country and also usually involves persons who have consented to be transported to another country. This activity generally produces short- term profits for the smugglers. That is, after the aliens reach their final destinations, they have no continuing relationship with the smugglers. In legal and diplomatic references, alien smuggling is distinct from human trafficking, although both smuggling and trafficking may have similarities or common elements. In human trafficking, the criminality and human rights abuses--such as coercion for prostitution, labor sweat shops, or other exploitative purposes and servitude arrangements--may continue after the migrants reach the United States in order to produce both short- term and long-term profits. Whereas a trafficked person is a victim, an alien who consents to be smuggled is subject to criminal processing and deportation. Given the underground nature of alien smuggling, exact figures quantifying the size or scope of this transnational crime are not available. Nonetheless, estimates by the United Nations and the federal law enforcement and intelligence communities indicate that people smuggling is a huge and highly profitable business worldwide, involving billions of dollars annually, and the United States is a major destination country. People smuggling is a continuously growing phenomenon, according to the International Criminal Police Organization (Interpol). The types of smugglers can range from opportunistic business owners who seek cheap labor to well-organized criminal groups that engage in alien smuggling, drug trafficking, and other illegal activities. Partly because of increased border monitoring by governments, Interpol has noted that criminal networks increasingly control the transnational flow of migrants. That is, willing illegal migrants increasingly rely on the services of criminal syndicates that specialize in people smuggling, even though traveling conditions may be inhumane and unsafe. Alien smuggling generally is prosecuted under section 274 of the Immigration and Nationality Act, which prohibits knowingly or recklessly bringing in, transporting, or harboring certain aliens. Depending on the conduct charged, a conviction under section 274 could result in a maximum penalty of 10 years' imprisonment per alien smuggled. Moreover, significant enhanced penalties are provided for some section 274 violations that involve serious bodily injury or placing life in jeopardy. If certain violations result in the death of any person, the convicted defendant may be punished by imprisonment for any term of years or be subjected to a death sentence. Other federal criminal statutes may also be applicable. Specifically, alien-smuggling-related offenses are among the list of Racketeer Influenced and Corrupt Organizations predicate offenses (18 U.S.C. SS 1961(1)) and also are included within the definition of specified unlawful activity for purposes of the money-laundering statute (18 U.S.C. SS 1956). Further, criminal and civil forfeiture statutes may apply to alien- smuggling cases. Although ICE is a primary DHS component for investigating alien smuggling, combating the smuggling of aliens into the United States can involve numerous federal agencies, as well as the cooperation and assistance of foreign governments. In addition to ICE, other relevant DHS components are the Border Patrol (a "front-line defender"), which is now part of CBP, and the U.S. Coast Guard, which is tasked with enforcing immigration law at sea. Additionally, significant roles in combating alien smuggling are carried out by Department of Justice components, including the Criminal Division, the Federal Bureau of Investigation (FBI), and U.S. Attorney's Offices, and Department of the Treasury components, such as Internal Revenue Service (Criminal Investigation) and the Financial Crimes Enforcement Network (FinCEN). Further, Department of State components have significant roles. For instance, the Bureau of Diplomatic Security--the law enforcement arm of the State Department--is statutorily responsible for protecting the integrity of U.S. travel documents. Perhaps the most coveted and sought after travel documents in the world are U.S. passports and visas. Alien smuggling and travel document fraud often are inextricably linked. An interagency coordination mechanism to help ensure that available resources are effectively leveraged is the National Security Council's Migrant Smuggling and Trafficking Interagency Working Group, which is cochaired by State and Justice. The Interagency Working Group has a targeting subgroup, whose role is to identify for investigation and prosecution the most dangerous international alien smuggling networks, especially those that pose a threat to national security. Another coordination mechanism is the Human Smuggling and Trafficking Center, an interagency entity for disseminating intelligence and other information to address the separate but related issues of alien smuggling, trafficking in persons, and clandestine terrorist travel. Although its establishment was announced in December 2000, the center was not operational until July 2004. The March 2003 creation of DHS, including its largest investigative component (ICE), ushered in an opportunity for developing a strategy to combat alien smuggling by, among other means, using financial investigative techniques. Two months later, in May 2003, ICE used such techniques to follow the money and prosecute the perpetrators of a smuggling operation that had resulted in the deaths of 19 aliens in Victoria, Texas. The Victoria 19 case has been cited by ICE as representing a new model for fighting alien smuggling--a model that ICE (1) subsequently used to launch a multi-agency task force (Operation ICE Storm) in the Phoenix (Arizona) metropolitan area and (2) reportedly was using to develop ICE's national "Antismuggling/Human-Trafficking Strategy." Although its development was announced as early as June 2003, a national strategy for combating alien smuggling had not been finalized and implemented by ICE as of July 5, 2005. During congressional testimony, an ICE official said ICE was developing a strategy that would address alien smuggling (and human trafficking) at the national and international level because as in the war on terrorism, the most effective means of addressing these issues is by attacking the problem in source and transit countries to prevent entry into the United States. In the absence of a national strategy to combat alien smuggling, including investigating the money trail, ICE has used various means to provide interim guidance to investigators. Such guidance included, for instance, the formation of working groups with members from various field offices and disciplines, as well as a presentation at a March 2004 conference of special-agents-in-charge and attaches. Moreover, ICE said it continues to provide guidance to the field in the form of training seminars and managerial conferences. Also, ICE indicated that it has posted guidance and policy memorandums to the field on its Web site, which is available and accessible to agents at their desktops for reference. According to ICE, the Web site is regularly reviewed and updated to ensure that the most recent guidance is available to the field. Additionally, ICE officials said that headquarters staff routinely travel to field offices to review ongoing undercover operations and large-scale investigations to help ensure compliance with existing policies and priorities. ICE officials indicated that the draft strategy was being adjusted to broadly cover all aspects of smuggling--encompassing aliens, as well as drugs and other illegal contraband--and to focus initially on the Southwest border, between the United States and Mexico--the most active area in terms of smuggling activity and open investigations. The officials explained that ICE was developing a comprehensive southwest border strategy, given the anticipated displacement of smuggling activity to other areas along the border resulting from Operation ICE Storm and its expansion statewide under the Arizona Border Control Initiative. The officials explained that criminal enterprises tend to smuggle not only people but also drugs, weapons, counterfeit trade goods, and other illegal contraband. The ICE officials emphasized that irrespective of whether smuggling involves aliens or contraband, ICE can use similar investigative techniques for following the money trail. Moreover, the officials said that, following a certain period of implementation, the Southwest border strategy would be evaluated and expanded into a nationwide strategy. The officials noted, for instance, that although there is no one law enforcement strategy totally effective in all areas of the nation, the methodologies applied in Arizona with both Operation ICE Storm and the Arizona Border Control Initiative would be evaluated and tailored for use in other parts of the country. The strategy's continuing development period is attributable partly to organizational and training needs associated with integrating the separate and distinct investigative functions of the legacy INS and the U.S. Customs Service, following creation of DHS in March 2003. Also, ICE and CBP-- two DHS components with complementary antismuggling missions-- signed a memorandum of understanding in November 2004 to address their respective roles and responsibilities, including provisions to ensure proper and timely sharing of information and intelligence. CBP has primary responsibility for interdictions between ports of entry while ICE has primary responsibility for investigations, including those resulting from alien smuggling interdictions referred by CBP. Accordingly, sharing of information between the two components is critical to achieving ICE's investigative objective of determining how each single violation ties into the larger mosaic of systemic vulnerabilities and organized crime. The ability to make such determinations should be enhanced when DHS components have compatible or interoperable information technology systems--which is a long-term goal of an ongoing, multiyear project called the Consolidated Enforcement Environment. Currently, however, there is no mechanism in place for tracking the number and the results of referrals or leads made by CBP to ICE for investigation, including even whether ICE declined to act on the referrals. Without such a mechanism, there may be missed opportunities for identifying and developing cases on large or significant alien-smuggling organizations. For instance, if a tracking mechanism were in place, CBP could continue pursuing certain leads if ICE--for lack of available resources or other reasons--does not take action on the referrals. The principal federal statute used to prosecute alien smugglers is section 274 of the Immigration and Nationality Act, which prohibits knowingly or recklessly bringing in, transporting, or harboring certain aliens. Under this statute, which is codified at 8 U.S.C. SS 1324, about 2,400 criminal defendants were convicted in federal district courts in fiscal year 2004. According to federal officials we interviewed, most alien-smuggling prosecutions stem from reactive or interdiction-type cases at the border, wherein in-depth investigations to follow a money trail are not warranted. However, during our field visits in September 2004 to Phoenix and Houston, we asked U.S. Attorney's Office officials for their observations regarding whether there has been an increasing emphasis on the financial aspects of alien-smuggling investigations since the creation of DHS and ICE. In Arizona, federal prosecutors emphasized that Operation ICE Storm is a clear indication of ICE's efforts to become more proactive in alien- smuggling investigations. Also, federal prosecutors in Texas (Houston) said the money trail is being pursued when appropriate, such as proactive cases involving smuggling organizations that are based in the Far East (e.g., Thailand and certain provinces in the People's Republic of China) and have networks in Latin America and Mexico. The federal officials noted that investigations of these cases may include FBI participation and the use of undercover agents and electronic surveillance and may result in assets being seized and suspects being charged with money laundering and violations of the Racketeer Influenced and Corrupt Organizations Act. More recently, in December 2004, ICE headquarters officials told us that ongoing alien-smuggling cases in other areas of the nation--Florida, Georgia, New York, and Washington--were also using financial investigative techniques and are expected to result in asset seizures. Because these cases were ongoing, the officials declined to provide specific details, other than information already made available to the public. For fiscal year 2004, ICE reported seizures totaling $7.3 million from its alien-smuggling investigations--plus an additional $5.3 million generated by the state of Arizona under Operation ICE Storm. To obtain additional perspectives on the results of alien-smuggling investigations in terms of recovered funds or seized assets, we contacted Treasury's Executive Office for Asset Forfeiture, which provides management oversight of the Treasury Forfeiture Fund--the receipt account for the deposit of nontax forfeitures made pursuant to laws enforced or administered by the Internal Revenue Service-Criminal Investigation and DHS components (including ICE, CBP, the U.S. Secret Service, and the U.S. Coast Guard). The Treasury officials told us they anticipate that ICE will have increased seizures in fiscal year 2005 or later, as ICE further applies its financial and money- laundering expertise to address alien smuggling. Similarly, ICE officials anticipate increased seizures. In this regard, for the first 6 months of fiscal year 2005, ICE reported seizures of $7.8 million from alien-smuggling investigations. As mentioned previously, alien smuggling globally generates billions of dollars in illicit revenues annually, according to some estimates. How much of the total involves aliens smuggled into the United States is not known, although the United States is often a primary destination country. Also, according to ICE officials, much of the U.S.-related smuggling revenues either may not be paid in this country or, if paid here, may be transported or transmitted abroad quickly. As such, federal efforts to combat alien smuggling by following the money trail frequently may present investigators and prosecutors with opportunities and challenges related to identifying and seizing funds or assets not located in the United States. To help investigators and prosecutors meet the opportunities and challenges associated with transnational crime, the United States has negotiated and signed more than 50 bilateral mutual legal assistance treaties (MLAT) with law enforcement partners around the world, according to the Department of Justice. Such treaties--which are a mechanism for obtaining evidence in a form admissible in a prosecution-- provide for a broad range of cooperation in criminal matters, such as locating or identifying persons, taking testimonies and statements, obtaining bank and business records, and assisting in proceedings related to immobilization and forfeiture of assets. To get a sense of the extent to which federal law enforcement agencies were using the MLAT process to follow the money trail abroad in alien smuggling cases, we contacted Justice's Office of International Affairs, which is responsible for coordinating the gathering of international evidence and in concert with the State Department, engages in the negotiation of new MLATs. According to the Deputy Director, the number of outgoing requests for formal law enforcement assistance in alien- smuggling cases is few in comparison with cases in drug trafficking, money laundering, fraud, and various other offenses. For matters considered to be alien-smuggling cases, the Deputy Director noted that it would be very difficult to quantify the exact number of requests made to foreign countries because, among other reasons, the Office of International Affairs' database was not originally designed to include a category of "alien smuggling." Also, we asked ICE headquarters for information regarding use of MLAT requests made in attempts to follow the money trail on alien-smuggling investigations that have extended overseas. That is, we asked how many MLAT requests were made in fiscal years 2003 and 2004, to which countries, and what have been the results in terms of assets tracked or seized. ICE's Office of Investigations' Asset Forfeiture Unit responded that it had no way of determining the number of MLAT requests. ICE officials noted, however, that none of ICE's reported seizures from alien-smuggling cases in fiscal year 2004 ($7.3 million) and the first 6 months of fiscal year 2005 ($7.8 million) were made abroad. Generally, regarding asset seizures and forfeitures, ICE officials noted that there can be competing demands for investigative resources. The mission of ICE's Office of Investigations--which has more than 5,000 agents in 26 field offices nationwide--encompasses a broad array of national security, financial, and smuggling violations, including narcotics smuggling, financial crimes, illegal arms exports, commercial fraud, child pornography or exploitation, immigration fraud, and human trafficking. ICE headquarters officials cautioned that alien-smuggling cases, in comparison with drug cases, are much less likely to result in seizures of money. The officials explained that almost all drug deals are conducted in cash, and it is not unusual for law enforcement to arrest criminals handling hundreds of thousands or even millions of dollars in drug money. In contrast, the officials noted that alien-smuggling fees per person generally involve less money and the alien smuggler is not arrested with large cash amounts. However, even absent the significant differences in amounts of seized money or other assets from alien smugglers, ICE headquarters and field office officials stressed the importance and utility of applying investigative expertise for determining the scope and operational patterns of alien-smuggling organizations, identifying the principals, and obtaining evidence to build prosecutable cases. Both criminal and civil forfeiture authority have limitations that affect the government's ability to seize real property in alien smuggling cases-- particularly stash houses used by smugglers. Asset forfeiture law has long been used by federal prosecutors and law enforcement as a tool for punishing criminals and preventing the use of property for further illegal activity. In a criminal forfeiture action, upon conviction, the defendant forfeits and the government takes ownership of property that the defendant used to commit or facilitate the offense or property that constituted the proceeds of the illegal activity. Criminal asset forfeiture is rarely an option in alien-smuggling cases for two reasons. First, because criminal asset forfeiture is dependent on conviction of the defendant, it is not available if the defendant is a fugitive, which alien smugglers often are according to Justice. Second, because the stash house is often rental property, it is rare that the property owner is convicted as it is difficult to establish the owner's knowledge of the smuggling. In contrast to criminal forfeiture, in a civil forfeiture action, the government is not required to charge the owner of the property with a federal offense. However, to forfeit property used to facilitate the offense but purchased with legitimately earned funds, the government must establish a substantial connection between the use of the property and the offense. Once that connection is established, the government can forfeit the house if the owner cannot show innocent ownership due to the owner's willful blindness to the criminal activity. However, taking civil action as an alternative to criminal action for real property seizures is not an option in alien smuggling cases. Civil forfeiture in alien smuggling cases is generally limited to personal property such as vessels, vehicles, and aircraft and does not extend to real property. Thus, the house used to hide the aliens and conduct the alien-smuggling business could not be forfeited in a civil forfeiture action. Civil forfeiture of real property is available in cases where the house was used to conduct drug transactions, including the storing of drugs and money, child pornography, and money laundering. In the view of Justice and ICE, this statutory distinction between alien smuggling and other criminal offenses is inappropriate. An amendment to the civil forfeiture authority, according to Justice, would enhance federal efforts to dismantle smuggling organizations because would-be defendants often are fugitives, which makes criminal forfeiture unavailable. Also, a civil forfeiture authority for real property used to facilitate alien smuggling would enable the government to establish willful blindness arguments against landlords who hope to profit from such ventures without becoming directly involved. However, our May 2005 report noted that Justice does not have a legislative proposal on this subject pending before Congress because the department's legislative policy resources have been focused on other priorities. Expanding civil forfeiture authority in alien smuggling cases to include real property used to facilitate the offense may raise concerns, including the potential for abuse of this type of forfeiture and the adequacy of protection for the rights of innocent property owners. In 2000, several reforms were made to civil asset forfeiture law to provide procedural protections for innocent property owners. These reforms were part of a compromise that was developed over several years by Congress, the executive branch, and interest groups. Some observers felt that the legislation did not provide enough reforms and protections, while others felt that it went too far and would curtail a legitimate law enforcement tool. Creation of DHS in March 2003 has provided new opportunities to more effectively combat alien smuggling, particularly in reference to using financial investigative techniques to target and seize the monetary assets of smuggling organizations. However, after more than 2 years, the federal response to alien smuggling is still evolving, including development and implementation of a strategy to follow the money trail. Also evolving is the working relationship of ICE and CBP, two DHS components that have the primary responsibility for investigating and interdicting alien smugglers. Having clearly defined roles and responsibilities for these components is important, given their complementary antismuggling missions. In this regard, ICE's and CBP's November 2004 memorandum of understanding did not address a mechanism for tracking the number and the results of leads referred by CBP to ICE for investigation. If a tracking mechanism were in place, CBP could continue pursuing certain leads if ICE--for lack of available resources or other reasons--does not take action on the referrals. As such, a tracking mechanism would help to further ensure that large or significant alien-smuggling organizations are identified and investigated. Federal law enforcement has concerns that efforts to dismantle alien- smuggling organizations are constrained by the current absence of civil forfeiture authority for real property used to facilitate the smuggling of aliens. In contrast, for drug trafficking and various other criminal offense categories, civil forfeiture authority is available for seizing real property used to facilitate these crimes. According to Justice and ICE, the absence of civil forfeiture authority for real property used to facilitate the smuggling of aliens is inappropriate because law enforcement is unable in many cases to seize stash houses where smugglers hide aliens while awaiting payment and travel arrangements to final destinations throughout the nation. To enhance the federal response to alien smuggling, our May 2005 report made two recommendations. Specifically, we recommended that the Secretary of Homeland Security establish a cost-effective mechanism for tracking the number and results of referrals by CBP to ICE, and the Attorney General, in collaboration with the Secretary of Homeland Security, consider developing and submitting to Congress a legislative proposal, with appropriate justification, for amending the civil forfeiture authority for real property used to facilitate the smuggling of aliens. DHS and Justice expressed agreement with the respective recommendation. DHS said CBP and ICE, in consultation with Border and Transportation Security, would work together to identify and implement a solution to address our recommendation. Justice said it plans to move forward with a proposal as GAO recommended. 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. For information about this testimony, please contact Richard Stana, Director, Homeland Security and Justice Issues, at (202) 512-8777, or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Other individuals making key contributions to this testimony include Danny Burton, Grace Coleman, Frances Cook, Odilon Cuero, and Kathleen Ebert. 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.

Globally, alien smuggling generates billions of dollars in illicit revenues annually and poses a threat to the nation's security. Creation of the Department of Homeland Security (DHS) in March 2003 has provided an opportunity to use financial investigative techniques to combat alien smugglers by targeting and seizing their monetary assets. For instance, the composition of DHS's largest investigative component--U.S. Immigration and Customs Enforcement (ICE)--includes the legacy Customs Service, which has extensive experience with money laundering and other financial crimes. Another DHS component, U.S. Customs and Border Protection (CBP) has primary responsibility for interdictions between ports of entry. In summer 2003, ICE announced that it was developing a national strategy for combating alien smuggling. This testimony is based on GAO's May 2005 report on the implementation status of the strategy and investigative results in terms of convictions and seized assets. As of July 5, 2005, ICE had not finalized its strategy for combating alien smuggling. ICE was adjusting the draft strategy to focus on the southwest border and encompass all aspects of smuggling, aliens as well as drugs and other contraband. In adjusting the strategy, ICE officials stressed the importance of incorporating lessons learned from ongoing follow-the-money approaches such as Operation ICE Storm, a multi-agency task force launched in October 2003 to crack down on migrant smuggling and related violence in Arizona. Also, the strategy's effectiveness depends partly on having clearly defined roles and responsibilities for ICE and CBP, two DHS components that have complementary antismuggling missions. CBP is primarily responsible for interdictions between ports of entry and ICE for investigations that extend to the U.S. interior. In this regard, ICE and CBP signed a memorandum of understanding in November 2004 to address their respective roles and responsibilities, including provisions for sharing information and intelligence. Currently, however, there is no mechanism in place for tracking the number and the results of referrals made by CBP to ICE for investigation. CBP and ICE officials acknowledged that establishing a tracking mechanism could have benefits for both DHS components. Such a mechanism would help ICE ensure that appropriate action is taken on the referrals. Also, CBP could continue to pursue certain leads if ICE--for lack of available resources or other reasons--cannot take action on the referrals. In fiscal year 2004, about 2,400 criminal defendants were convicted in federal district courts under the primary alien-smuggling statute, and ICE reported seizures totaling $7.3 million from its alien-smuggling investigations. For the first 6 months of fiscal year 2005, ICE reported $7.8 million in seizures from alien-smuggling investigations. A concern raised by ICE and the Department of Justice is the lack of adequate statutory civil forfeiture authority for seizing real property, such as "stash" houses where smugglers hide aliens while awaiting payment and travel arrangements to final destinations throughout the nation. However, Justice does not have a legislative proposal on this subject pending before Congress because the department's legislative policy resources have been focused on other priorities.

The Air Force and the Navy budget and spend billions annually to procure and repair aviation spare parts. For example, for fiscal year 1997, the Navy budgeted $1.4 billion for this purpose. For fiscal year 1996, the Air Force budgeted $3.9 billion to procure and repair aviation spare parts. The Air Force's F-100 engines used on F-15 and F-16 aircraft and the Navy's F-404 engines used on F/A-18 aircraft account for a sizable portion of the procurement and repair budgets and expenditures for aviation spare parts. Both services use automated systems to compute requirements and to prepare their annual budgets for aviation spare parts. The systems base the computations on past usage, acquisition lead times, flying hour programs, maintenance replacement factors, and additional special needs. Requirements are then offset by the assets on hand and on order to arrive at the amounts needed. Although Air Force and Navy policies and procedures related to reserving on-hand assets for depot maintenance requirements differ, both agencies' policies and procedures result in overstated requirements. Our review of overall budget inventory data related to these assets and our sampling tests of F-100 and F-404 engine parts showed that the Air Force and the Navy overstated budgeted buys and repairs by about $132 million. This overstatement occurred because of questionable Air Force and Navy policies concerning the determination of requirements and the accountability for assets held in reserve to satisfy depot maintenance needs. Since 1984, Air Force policy has been to reserve on-hand consumable parts for depot maintenance needs and not to use these assets to offset computed requirements when deciding to buy or projecting annual budgeted buys. This Air Force policy is unlike the Navy's, which does require that assets held for depot level maintenance needs be applied to computed requirements. The Congress has made several attempts to change the Air Force's policy. In response to our 1989 report, the House Committee on Armed Services directed the Air Force to consider depot supply level assets in its requirements and budget computations. In 1992, we reported that the Air Force continued to exclude depot supply level assets from its requirements and budget computations. As a result, the Congress reduced the Air Force's operation and maintenance budget for fiscal year 1994. Despite these efforts, the Air Force continues its policy of not considering depot supply level assets in requirements and budget computations. Our analysis of overall inventory data for fiscal year 1995 showed that the Air Force overstated fiscal year 1996 budgeted requirements by $72 million because assets reserved for depot maintenance were not applied to budgeted buy requirements. Our sampling test of 22 F-100 engine parts for which there were actual and budgeted buys also showed that the Air Force continues to exclude depot supply level assets from its periodic requirement and annual budget computations. Of 22 sample items, 10 had depot supply level assets valued at about $1.8 million that the Air Force did not apply to offset recurring depot level maintenance requirements in the periodic requirements and annual budget computations. Of the 10 items, 3 had current buys costing about $2.7 million, which could have been reduced by about $366,000 if depot supply level assets had been applied to offset requirements. For example, in September 1994, the San Antonio Air Logistics Center computed an initial buy quantity of 31,420 F-100 engine duct segments (NSN 2840-01-270-7659PT) costing about $2.8 million. In finalizing the buy computation, the Center made changes, lowering the buy to 2,868 items costing about $307,000. However, the computation did not consider 3,680 depot supply assets that were available to offset requirements. If these assets had been applied to offset requirements, this procurement would not have been necessary. Similarly, the Center overstated budget requirements by not applying these depot supply level assets. According to Department of Defense (DOD) Materiel Management Regulation 4140.1-R, dated January 1993, the inventory managers, for the purpose of limiting buys and repairs, shall apply all retail and wholesale assets against wholesale requirements. Nevertheless, DOD's and the Air Force's position is that depot supply level assets are set aside for depot maintenance and, therefore, are not considered to offset wholesale requirements. We do not agree with this position because depot supply level assets are a part of the wholesale inventory. They have not been issued from wholesale storage and transferred to the depot maintenance activities. Further, because wholesale requirements are based on past recurring demands, it is reasonable to expect that assets procured to meet these demands should be considered when making future procurement decisions. The Navy's policies and procedures related to assets reserved for depot maintenance needs, unlike the Air Force's policies and procedures, require the Navy to apply these assets to computed requirements. However, we found that some Navy requirements are duplicated, resulting in overstated requirements. On the basis of our review of overall fiscal year 1995 budget data for aviation parts and our sampling test of 12 F-404 engine parts, we found that the Navy overstated fiscal year 1997 stock fund budgets by at least $60 million. This occurred because the Navy included reserve level depot maintenance requirements in periodic requirements and annual budget computations twice. These reserve levels are included once as recurring demands based on past depot maintenance usage and again in a planned program requirements category that is not based on recurring demands. For example, in May 1995, the Aviation Supply Office budgeted a fiscal year 1997 buy for 4,734 F-404 nozzle segments (NSN 2840-01-166-4886TN) costing about $7.8 million. We found that the budgeted buy requirement was overstated by 1,008 units, valued at about $1.7 million, because this requirement was included twice. It was included as a separate, identifiable nondemand-based requirement and again as part of the recurring demand-based requirements. Aviation Supply Office officials told us that the apparent duplication of requirements in the fiscal year 1997 aviation parts budget was offset by the application of assets reserved for depot maintenance to the recurring demand requirements. We disagree that the duplication of requirements is entirely offset by the application of these assets because the requirements are still incorrectly included as both recurring and nonrecurring demand requirements, but the assets are only applied once. We reviewed a sample of 34 F-100 and F-404 engine parts for which the Air Force and the Navy projected high-dollar buys or repairs in fiscal year 1995. We identified inaccuracies in the periodic requirement or budget computations for 22 items (64 percent of the sample items) that resulted in under or overstated requirements valued at $35 million. These inaccuracies were due to the use, in requirement computations, of unsupported or incorrect (1) maintenance replacement rates, (2) demand rates, (3) planned program requirements, (4) due-out quantities, (5) lead times, (6) repair costs, and (7) asset quantities on hand and on order. We reviewed 22 F-100 engine consumable parts and found inaccuracies in the Air Force's computations for 12 items. The inaccuracies caused the fiscal year 1995 budget requirements to be understated by about $2 million on some items and overstated by about $10 million on others. The inaccuracies occurred because inventory managers used incorrect requirement and asset information or did not make necessary changes when updating budget requirement computations. The inaccurate information included incorrect (1) lead times, (2) due-out quantities, and (3) asset quantities on hand and on order. For example, in September 1994 the San Antonio Air Logistics Center computed an initial buy quantity of 756 F-100 engine ring assemblies (NSN 2840-01-327-2917PT). In finalizing the buy computation, the Center made changes to reflect updated information that decreased lead time and due-out requirements and increased on-hand and on-order assets. As a result, the computation changed from a 756 buy to a zero buy. Changes made on buy computations also affect budget requirement projections. However, in this case the Center did not make these changes in the final budget requirements computation. As a result, budget requirements were overstated by $4.3 million. In another example, the San Antonio Air Logistics Center (in September 1994) computed an initial buy quantity of 21,524 F-100 engine stage compressor blades (NSN 2840-00-371-2217PT). In finalizing the buy computation, the Center made changes to reflect updated information that decreased lead time and due-out requirements and increased on-hand and on-order assets. As a result, the computation changed from a 21,524 buy to a zero buy. However, the changes were not reflected in the final budget requirements computation. As a result, budget requirements were overstated by $1.1 million. Our review identified a need to strengthen existing procedures and practices for management level review and validation of budget requirement computations. Air Force Materiel Command Regulation 57-6, dated January 29, 1993, assigns primary responsibility for the accuracy and integrity of consumable item requirements to Air Logistics Center management. However, the regulation allows management personnel at the centers to delegate authority to lower level analysts to carry out certain quality review and control functions. We found that periodic requirements and annual budget computations for the 22 sample items generally were signed off at the supervisor level. However, this level of review is not ensuring that necessary requirement changes are reflected in the budget requirement computations. We reviewed 12 F-404 engine parts and found inaccuracies in the Navy's computations for 10 items. The inaccuracies caused buys and repairs to be understated by about $8 million on some items and overstated by about $15 million on others. These inaccuracies included unsupported or incorrect (1) maintenance replacement rates, (2) demand rates, (3) planned program requirements, (4) repair costs, and (5) lead times. For example, in March 1995, the Aviation Supply Office computed a repair requirement for 328 F-404 engine compressor rotor assemblies (NSN 2840-01-288-1767) costing $26.6 million. The computation overstated repair requirements by 76, valued at about $6.1 million, because an incorrect maintenance demand rate and an erroneous parts application was used. We could find no data supporting the maintenance demand rate used. The Office provided data that showed a lower demand rate should have been used. Also the data indicated that the rotor assembly was applicable only to one type of fan and not to a second fan, which also was included in the computation. In another case, in May 1995, the Aviation Supply Office budgeted fiscal year 1997 funds for the repair of 554 F-404 engine high-pressure rotors (NSN 2840-01-201-1357) costing $19.1 million. The budgeted repair cost was understated by $7.2 million because an outdated unit repair cost was used. The Office used a unit repair cost of $34,479, but the latest negotiated unit repair cost was $47,577. Our review identified a need to strengthen existing procedures and practices for management level review and validation of requirement and budget computations. For example, we noted that repair computations were not receiving higher management level review and approval. These computations contained a large portion of the inaccuracies identified. We recommend that the Secretary of Defense direct the Secretary of the Air Force to revise buy and budget requirement computation policies and procedures to require that on-hand assets reserved for depot maintenance needs be considered in periodic requirement and annual budget computations and strengthen management oversight procedures and internal controls to ensure that key elements (such as on-hand and due-out quantities and lead times) of requirement and budget computations are accurate. We also recommend that the Secretary of Defense direct the Secretary of the Navy to revise policies and procedures for buy and budget requirement computations to eliminate duplication of depot maintenance requirements and strengthen management oversight procedures and internal controls to ensure that key elements of requirement and budget computations are accurate. DOD agreed that action should be taken to improve the accuracy of requirement determination processes and stated that the Air Force and the Navy are taking such actions (see app. I for DOD's complete comments). The Air Force is issuing a new instruction that will establish levels of management review depending on the dollar value of the requirement actions. This instruction is expected to provide a stronger management overview that will ensure that key elements of the requirements computation are more accurately maintained. The Navy is implementing an automated system to improve data element validation. The system will provide an on-line checkoff list of key data elements for the item manager to validate when making decisions on requirements execution and budget development. DOD did not agree that current Air Force and Navy procedures related to reserving on-hand assets for depot maintenance resulted in overstated requirements. With regard to the Air Force, DOD stated that if assets were applied to maintenance requirements, as we believe they should be, those assets would not be available to meet other requirements. DOD also stated the issue is becoming moot because wholesale management of nearly all Air Force consumable items are being transferred to the Defense Logistics Agency. We continue to disagree with the DOD position because wholesale requirements include depot maintenance needs that are based on past recurring demands. We believe it would be reasonable inventory management and would save money to use reserved assets to offset wholesale requirements when making procurement decisions. As for the transfer of consumable item management to the Defense Logistics Agency, this transfer is not scheduled to be completed until late 1997. Once the transfer is made, the Defense Logistics Agency must ensure that the Air Force pays for assets when they are received at the depots. Otherwise, the Air Force may continue to reserve assets for depot maintenance, thereby precluding the Defense Logistics Agency from considering them when making procurement decisions. With regard to the Navy, DOD stated that both planned program and recurring demand requirements are needed to provide sufficient supply support, but do not result in overstated requirements. However, DOD acknowledged that, in some situations, depot demands are considered twice. We believe that DOD is wrong in stating that this duplication does not result in overstated requirements. Some of the demands to satisfy depot maintenance needs are included once as recurring demands based on past usage and again as nonrecurring demands to meet planned program requirements. The Navy needs to eliminate this duplication to improve the accuracy of procurement and budget requirement computations and to save money. We reviewed Air Force and Navy policies and procedures relating to periodic requirement and annual budget computations for aviation spare parts. We discussed the rationale for current policies and procedures with officials of the Air Force's San Antonio Air Logistics Center and the Navy's Aviation Supply Office. At the San Antonio Air Logistics Center, we reviewed 22 consumable F-100 aircraft engine parts for which the Center projected high-dollar buys for fiscal year 1995. At the Aviation Supply Office, we reviewed 12 consumable and reparable F-404 aircraft engine parts for which the Office projected high-dollar buys or repairs for fiscal year 1995. At both locations, we evaluated periodic requirement and annual budget computations. We analyzed related supporting documentation on which these buy or repair projections were based and discussed the computations with inventory managers and their supervisors. We obtained and reviewed fiscal years 1995 and 1996 buy and repair budgets for the Air Force's aviation spare parts. We obtained and reviewed fiscal years 1995 and 1997 buy and repair budgets for the Navy's aviation spare parts. We also obtained and analyzed Air Force and Navy reserve depot maintenance asset totals for fiscal year 1995. We performed our review between March and November 1995 in accordance with generally accepted government auditing standards. The head of a federal agency is required by 31 U.S.C. 720 to submit a written statement on actions taken on our recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight not later than 60 days after the date of the report. A written statement also must be sent to the Senate and House Committees on Appropriations with the agency's first request for appropriations made more than 60 days after the date of the report. We are sending copies of this report to the appropriate congressional committees; the Secretaries of the Navy and the Air Force; and the Director, Office of Management and Budget. Please contact me at (202) 512-5140 if you have any questions. The major contributors to this report are listed in appendix II. The following are GAO's comments on the Department of Defense's (DOD) letter dated February 13, 1996. 1. We have decreased the amount of assets reserved for depot maintenance needs from $226 million to $132 million. This reflects a reduction in the Navy's assets from at least $154 million to at least $60 million. We made this reduction because more current information provided by the Aviation Supply Office indicates that the issuance of some reparable reserve assets does not duplicate requirements. These issues do not register as recurring demands in the wholesale supply system. 2. We deleted this recommendation from the final report. Subsequent to the completion of our fieldwork, the Aviation Supply Office furnished us an instruction outlining procedures for management review and approval of buy and repair computations. In reviewing the repair computations, we found that these procedures were not being followed in that the repair computation documents did not show evidence of management level review and approval. Implementation of our recommendation to strengthen management oversight procedures and internal controls should help eliminate this problem. Calvin Phillips Enrique E. Olivares Bonifacio Roldan-Galarza Richard Madson Donald McCuistion The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. 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GAO reviewed the Air Force's and Navy's policies and procedures for procuring aviation spare parts, focusing on whether their requirements and budgets reflect the amounts they actually need. GAO found that: (1) the Air Force and Navy budgeted $132 million more than needed for aviation spare parts because they used questionable policies to determine their requirements and assign accountability for depot maintenance assets; (2) the Air Force did not include $72 million of its on-hand assets in preparing its fiscal year (FY) 1996 budget request; (3) the Navy twice counted $60 million in depot maintenance requirements when preparing its FY 1997 budget request; (4) Air Force and Navy computation errors were a result of unsupported and incorrect maintenance replacement rates, demand rates, planned program requirements, repair costs, lead times, due-out quantities, and asset quantities on hand and on order; and (5) errors found in the sample items reviewed totalled $35 million and resulted in some requirements being overstated by as much as $25 million and some being understated by $10 million.

Ephedra, the most widely used ingredient in dietary supplements for weight loss, is a powerful stimulant that can affect the nervous and cardiovascular systems. Adverse events among consumers of dietary supplements containing ephedra have been described in scientific literature and in detailed adverse event reports. Because of concerns about the risks of ephedra, medical organizations, states, and athletic associations have sought to reduce the use of dietary supplements containing ephedra. Under DSHEA, FDA regulates dietary supplements, including vitamins, minerals, herbs and other botanicals, amino acids, certain other dietary substances, and derivatives of these items. DSHEA requires that dietary supplement labels include a complete list of ingredients and the amount of each ingredient in the product. Dietary supplements may not contain synthetic active ingredients that are sold in over-the-counter drugs and prescription medications and cannot be promoted as a treatment, prevention, or cure for a specific disease or condition. Under DSHEA, manufacturers are responsible for ensuring the safety of dietary supplements they sell. Dietary supplements do not need approval from FDA before they are marketed; thus FDA generally addresses safety concerns only after dietary supplements are marketed. DSHEA does not require manufacturers to register with FDA, identify the products they manufacture, or provide reports of adverse events to FDA. Mechanisms that FDA uses to oversee dietary supplements and other products it regulates differ (see app. I for more details). Since manufacturers of dietary supplements are not required to provide reports of adverse events to FDA, the agency relies on voluntary postmarket reporting of adverse events to better understand the safety of dietary supplements. Some individual adverse event reports are especially valuable to FDA because they include enough information to help FDA determine if the adverse event was likely caused by the supplement. These reports include information about the receipt of medical care, health care professionals' attribution of adverse events to the consumption of dietary supplements, the consumer's appropriate use of the products, the consumer's use of other products, underlying health conditions and other alternative explanations for the adverse event, and the consistency of symptoms with the documented effects of the dietary supplement. FDA, through the Department of Justice, can take enforcement action in court against dietary supplements that are adulterated to remove them from the market. A dietary supplement is considered adulterated under a number of circumstances, including when it presents a "significant or unreasonable risk of illness or injury" under the conditions of use recommended or suggested in its labeling, or under ordinary conditions of use if there are no suggestions or recommendations in the labeling, or bears or contains any "poisonous or deleterious substance" which may render it injurious to health under the conditions of use recommended or suggested in its labeling. Instead of going to court, FDA may choose to take administrative action to prohibit the sale of dietary supplements it considers to be adulterated. FDA can promulgate a regulation declaring a particular dietary supplement to be adulterated. FDA has not taken this action with any dietary supplement. FDA can also issue an advisory letter explaining why it considers the dietary supplement to be adulterated. The advisory letter provides guidance to the industry regarding FDA's opinion and notifies the public that FDA may take legal action against firms or individuals that do not follow the letter's advice. FDA has done this for two dietary supplement ingredients, comfrey and aristolochic acid. In addition, although it has never been done, the Secretary of Health and Human Services (HHS) may declare that a dietary supplement is adulterated because it poses an "imminent hazard" to public health or safety. In doing so, the Secretary must initiate an administrative hearing to affirm or withdraw the declaration. Ephedra has been associated with numerous adverse health effects. As we previously reported, case reports and scientific literature have suggested that ephedrine alkaloids can increase blood pressure in those with normal blood pressure, predispose certain individuals to rapid heart rate, and cause stroke, among other things. We also reported descriptions of adverse events associated with ephedrine alkaloids that affected the central nervous system, such as seizures, mania, and paranoid psychoses. FDA has received reports of adverse events associated with dietary supplements containing ephedra, including heart attack, stroke, seizure, psychosis, and death, that are consistent with the scientific literature. In February 2003, the RAND Corporation released a review of the scientific evidence on the safety and efficacy of dietary supplements containing ephedra and concluded that a sufficient number of cases of these same types of events had occurred in young adults to warrant further scientific study of the causal relationship between ephedra and these serious adverse events. RAND also found that use of ephedra or ephedrine plus caffeine is associated with a number of other adverse effects, including an increased risk of nausea, vomiting, heart palpitations, and psychiatric symptoms such as anxiety and change in mood. Because of these health concerns, many organizations and jurisdictions have taken actions aimed at reducing the use of dietary supplements containing ephedra. The American Medical Association and the American Heart Association have urged FDA to ban the sale of dietary supplements containing ephedra. In January 2002, Health Canada issued a Health Advisory for Canadians not to use certain products containing ephedra, especially those that also contain caffeine and other stimulants. In 2003, Illinois banned the sale of products containing ephedra and other states have similar bans under consideration. In addition, some states have banned the sale of such products to minors or required label warnings. Several sports organizations, including the NCAA, the National Football League, the U.S. Olympic Committee, and the International Olympic Committee, have banned the use of ephedra by their athletes. In 2003, General Nutrition Centers, the nation's largest specialty retailer of nutritional supplements, discontinued the sale of products containing ephedra, as have three other major retail outlets. Some manufacturers have stopped producing dietary supplements containing ephedra. Other manufacturers continue to offer dietary supplements containing ephedra while also offering similar products that are ephedra-free. Using the adverse event reports it has received and evidence from the scientific literature, FDA has concluded that dietary supplements containing ephedra pose a "significant public health hazard." FDA and others have received thousands of reports of adverse events among users of dietary supplements containing ephedra, more than for any other dietary supplement ingredient. Metabolife International also received thousands of reports of adverse events. FDA has received more reports of adverse events for dietary supplements containing ephedra than for any other dietary supplement ingredient. In addition, poison control centers and one manufacturer, Metabolife International, have received thousands of reports of adverse events associated with dietary supplements containing ephedra. From February 22, 1993, through July 14, 2003, FDA received 2,277 reports of adverse events associated with dietary supplements containing ephedra, which was 15 times more reports than it received for the next most commonly reported herbal dietary supplement, St. John's wort. Other organizations also have received a large number of adverse event reports for dietary supplements containing ephedra. The American Association of Poison Control Centers received 1,428 reports of adverse events associated with dietary supplements containing ephedra, either alone or in combination with other botanical dietary supplement ingredients, in 2002, nearly two-thirds as many as FDA received over a 10- year period. The centers noted that there were more reports of adverse events for ephedra-containing dietary supplements than for others. Further, as we reported in March 2003, Metabolife International had 14,684 health-related call records that contained reports of adverse events associated with its product, Metabolife 356, from May 1997 through July 2002. Neither the American Association of Poison Control Centers nor Metabolife International is required to report these adverse events to FDA. From the adverse event reports it has received and the scientific literature it has reviewed, FDA concluded in March 2000 that dietary supplements containing ephedra pose a significant public health hazard that primarily involves consumers who are young to middle-aged and can result in adverse cardiovascular and nervous system effects. It further concluded that many of the adverse events were serious, resulting in morbidity and mortality that would not be expected in a young population and that could further compromise the health of more vulnerable older adults or those with underlying conditions. A study commissioned by FDA estimated that the agency receives reports for less than 1 percent of adverse events associated with dietary supplements. Although causality cannot be determined based on the individual adverse event reports FDA receives, the agency uses these reports to identify possible risks to consumers from dietary supplements. As we have previously reported, there are well-known weaknesses in the current system of voluntary reporting of adverse events, such as different interpretations in determining an adverse event, underreporting, difficulties estimating population exposure, and poor report quality. Despite these limitations, FDA maintains that even isolated reports can be definitive in associating products with an adverse effect if the report contains sufficient evidence, such as supporting medical documents, a temporal relationship between the product and effect, and evidence of dechallenge and rechallenge. The types of adverse events that we identified in the Metabolife International call records are consistent with the types of adverse events reported to FDA and with the documented physiological effects of ephedra. As we recently reported, most of the Metabolife International call records contained limited information about the event and the consumer. Nonetheless, the call records contribute to existing knowledge about adverse events that have been associated with ephedra use. In our review, we identified 14,684 call records that contained reports of at least one adverse event among consumers of Metabolife 356. Within these call records, we found 92 reports of serious adverse events--heart attacks, strokes, seizures, and deaths--a count that was similar to that of other reviews of the call records. In addition, the call records contain reports of serious adverse events in consumers who were young and among those who used the product within the recommended guidelines. These findings are consistent with reports FDA has received regarding dietary supplements containing ephedra. In our review of health-related call records for users of Metabolife 356, we found that the information in the call records was limited. Call records were sometimes difficult to read and interpret, and consumer information was not consistently recorded. In some cases, the evidence for a report of an adverse event was limited to a single word on a call record. In other cases, information was entered into a form developed by Metabolife International with multiple boxes for consumer- and event-related information. Most call records did not document complete information about the consumer's age, sex, weight, and height. Because the company did not systematically follow up on calls reporting adverse events, and the adverse events were not reported to FDA, it is not possible to gather more complete information or medical records. As we reported in March 2003, we identified 14,684 call records that contained at least one report of an adverse event among consumers of Metabolife 356. The types of reported adverse events were consistent with the cardiovascular and central nervous system effects that have been associated with ephedra products in the literature, adverse event reports received by FDA, other case reports, and RAND's review. Within the call records, we identified 92 reports of heart attack, stroke, seizure, and death (see table 1). Our count of reports of these serious adverse events was similar to that of other reviews of the Metabolife International call records, including counts by Metabolife International and its consultants. We also found 1,079 reports of other types of adverse events that FDA identified as serious or potentially serious. These included chest pain, significant elevations in blood pressure, systemic rash, and urinary infection. In addition to these 1,079 reports, we found records that contained reports of a broad range of other types of adverse events, including changes in heart rate such as palpitations and increased heart rate; blood in stool; blood in urine; bruising; hair loss; and menstrual irregularity. Within the subset of call records that contained information on age, the distribution of ages suggests that a relatively young population was experiencing the reported serious adverse events. Among the call records that contained a report of a serious event, 44 percent included information on age. For these call records, more than one-third concerned consumers who reported an age under 30--the average reported age was 38 (ranging from 17 to 65). As noted above, FDA has also received reports of serious adverse events occurring in a population of young adults. Because we do not know the age profile of all Metabolife 356 consumers, we cannot determine if the age distribution among those reporting serious adverse events in the Metabolife International call records reflects that age profile. Within the subset of Metabolife International call records that contained information on how the product was used by the consumer, most of the reported serious adverse events occurred among consumers who reported using the product within the guidelines on the Metabolife 356 label--that is, who reported that they did not take more of the product or take it for a longer period than recommended. Information about product use, however, was incomplete--40 and 55 percent of the call records that reported a serious event contained information about the amount of Metabolife 356 used and the duration of use, respectively. Among the call records that reported a serious adverse event and also contained information about product use, 97 percent of consumers reported using an amount of product within the recommended guidelines. Similarly, 71 percent of those consumers reported using the product for a length of time that was within the recommended guidelines. This pattern is consistent with findings from FDA's review of adverse events associated with ephedra products. As part of its oversight of dietary supplements, FDA has taken some actions specifically focused on dietary supplements containing ephedra. FDA has issued warnings that focus on improper product labeling, issued warnings to consumers, and issued a proposed rule in 1997 that, among other things, would require a health warning on the label of dietary supplements containing ephedra and prohibit a dietary supplement from containing both ephedra and a stimulant. However, parts of this rule remain under consideration 6 years after it was first proposed. As we previously reported, FDA has focused its enforcement actions regarding dietary supplements on improper labeling. For example, in February 2003, FDA issued warning letters to 26 firms that sell dietary supplements containing ephedra. All of these letters advised marketers that label claims for enhancement of physical performance were unsubstantiated and the products were therefore misbranded. FDA and HHS have also directly warned consumers about the safety of dietary supplements containing ephedra. In February 1995, FDA issued a press release warning consumers about a specific dietary supplement product that contained both ephedra and caffeine, because it had determined that the product represented a threat to public health. Further, in February 2003, the Secretary of HHS issued a statement to caution people against using dietary supplements containing ephedra and indicated that FDA continues to have serious concerns about the risks of these dietary supplements. FDA has also taken actions in its oversight of dietary supplements in general. Specifically, FDA has conducted facility inspections and proposed good manufacturing practice (GMP) regulations that focus on product quality in general, not the safety of an individual ingredient. FDA first issued a proposed rule to regulate dietary supplements containing ephedrine alkaloids in 1997. The proposed rule would define the amount of ephedrine alkaloids in a serving of dietary supplement at and above which the product would be deemed adulterated (8 milligrams), establish labeling requirements regarding maximum frequency of use and daily serving limits, require that labels on these supplements contain a statement warning that the product should not be used for more than 7 days, prohibit the use of ephedrine alkaloids with ingredients that have a known stimulant effect (e.g., caffeine), prohibit labeling claims that promote long-term intake of the supplements to achieve the purported purpose, require a warning statement in conjunction with claims that encourage short-term excessive intake to enhance the purported effect, and require that specific warning statements appear on product labels. Our 1999 report on the proposed rule was critical of the science FDA used to support the serving size and duration of use limits in the proposed rule. However, we did not conclude that dietary supplements containing ephedra were safe, and we commented that the adverse events reported to FDA were serious enough to warrant FDA's further investigation of ephedra safety. Primarily, we were concerned that FDA used only 13 adverse event reports to establish serving limits and had weak support for proposed limits on duration of use. Partly as a result of our review, FDA withdrew the sections of the proposed rule on serving size and duration of use limits. In the interim, FDA has taken action to regulate certain drugs that contain ephedrine, the active ingredient in ephedra. In September 2001, FDA issued a final rule stating that certain over-the-counter drugs containing ephedrine and related alkaloids in combination with an analgesic or stimulant could not be marketed as over-the-counter drugs. There currently is no similar rule prohibiting the marketing of dietary supplements containing ephedra in combination with analgesics or stimulants, such as caffeine. As a result, dietary supplements may contain ingredients that are prohibited in drugs. In fact, many dietary supplements with ephedra, such as Metabolife 356, also include caffeine. The proposed rule contains a provision that would prohibit dietary supplements from containing both ephedra and other stimulants. In March 2003, almost 6 years after the initial proposal, FDA reopened the comment period for the remaining provisions of this proposed rule for 30 days. FDA sought comments on three areas: New evidence on health risks associated with ephedra. Whether the currently available evidence and medical literature demonstrate that dietary supplements containing ephedra pose a "significant or unreasonable risk of illness or injury" under the conditions of use recommended or suggested in their labeling, or under ordinary conditions of use if there are no suggestions in the labeling. A new warning label for ephedra products that warns about reports of serious adverse events after the use of ephedra, including heart attack, seizure, stroke, and death; cautions that the risk can increase with the dose, with strenuous exercise, and with other stimulants such as caffeine; specifies certain groups (such as women who are pregnant or breast feeding and persons under 18) who should not use these products; and lists other diseases, such as heart disease and high blood pressure, that should rule out the use of ephedrine alkaloids. On July 14, 2003, FDA reported to us that the agency is in the process of reviewing the comments and has not reached a decision regarding further action. While FDA has not attempted to ban the marketing of dietary supplements containing ephedra, the agency has sought, in these comments, additional information that would help it determine whether or not such action would be warranted. Because the regulatory framework for dietary supplements is primarily a postmarketing program and FDA does not review the safety of dietary supplements before they are marketed, adverse event reports are important sources of information about the health risks of dietary supplements containing ephedra. It is often difficult to demonstrate conclusively that a single reported adverse event was caused by ephedra, but some individual reports, particularly when they are complemented by follow-up investigation of the case, can be especially informative. Although the information in the Metabolife International call records we examined was limited, the types of adverse events we observed were consistent with the known risks of ephedra, including serious events such as five reports of death. Based on the pattern of adverse event reports FDA has received and the consistency of those reports with the known effects of ephedra from the scientific literature, the agency concluded 3 years ago that dietary supplements containing ephedra pose a "significant public health hazard." FDA is currently reviewing information that will help the agency determine what further actions are warranted. 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 more information regarding this testimony, please call Marcia Crosse at (202) 512-7119. Key contributors include Martin T. Gahart, Carolyn Feis Korman, Chad Davenport, Roseanne Price, and Julian Klazkin. Mandatory manufacturer reporting of adverse events Under the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, Pub.L. No. 107-188, 116 Stat. 594, manufacturers and distributors are required to registered with FDA no later than December 13, 2003. Monograph drugs are typically over-the-counter drugs that must adhere to specific safety standards set for each ingredient and do not undergo clinical testing. New Drug Applications must be submitted to FDA for all prescription drugs and some over-the- counter drugs prior to marketing. This application must include data that demonstrate the safety and efficacy of the product. 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.

Dietary supplements containing ephedra have been associated with serious health-related adverse events, including heart attacks, strokes, seizures, and deaths. The Food and Drug Administration (FDA) regulates dietary supplements under the Dietary Supplement Health and Education Act of 1994 (DSHEA). Reports of adverse events have been received by FDA and others, including Metabolife International, the manufacturer of a dietary supplement containing ephedra, Metabolife 356. Because of concerns surrounding the safety of dietary supplements containing ephedra, GAO was asked to discuss and update some of the findings from its prior work on ephedra, including its examination of Metabolife International's records of health-related calls from consumers of Metabolife 356. Specifically, GAO examined (1) FDA's analysis of the adverse event reports it received for dietary supplements containing ephedra, (2) how the adverse events reported in the health-related call records collected by Metabolife International illustrate the health risks of dietary supplements containing ephedra, and (3) FDA's actions in the oversight of dietary supplements containing ephedra. FDA has used the adverse event reports it has received to conclude that dietary supplements containing ephedra pose a significant public health hazard. Since February 1993, FDA has received 2,277 reports of adverse events associated with dietary supplements containing ephedra, 15 times more reports than it has received for the next most commonly reported herbal dietary supplement. The types of adverse events that GAO identified in the health-related call records from Metabolife International were consistent with the types of adverse events reported to FDA and with the documented physiological effects of ephedra. Although call records contained limited information for most of the reports, GAO identified 14,684 call records that had reports of at least one adverse event among consumers of Metabolife 356. GAO's count of 92 serious events--heart attacks, strokes, seizures, and deaths--was similar to that of other reviews of the call records, including counts by Metabolife International and its consultants. Many of the serious events were reported among relatively young consumers--more than one-third concerned consumers who reported an age under 30. In addition, for call records containing information on the amount of product consumed or length of product use, GAO found that most of the reported serious adverse events occurred among consumers who followed the usage guidelines on the Metabolife 356 label. As part of its oversight of dietary supplements, FDA has taken some actions specifically focused on dietary supplements containing ephedra. FDA has issued warnings that focus on improper labeling, issued warnings to consumers, and issued a proposed rule in 1997 that, among other things, would require a health warning on the label of dietary supplements containing ephedra and prohibit a dietary supplement from containing both ephedra and a stimulant. FDA subsequently banned the sale of certain classes of over-the-counter drugs containing ephedrine and related alkaloids--the active ingredient in ephedra--in combination with an analgesic or stimulant. As the 1997 proposed rule has not been finalized, there is no rule prohibiting the marketing of dietary supplements with similar ingredients, and many dietary supplements with ephedra, such as Metabolife 356, also include caffeine or other stimulants. To receive comments on new evidence, FDA recently reopened the comment period for the proposed rule, and FDA reported to GAO that the agency is in the process of reviewing comments it has received and has not reached a decision regarding further action.

Today it is evident that recent surpluses were the result not only of hard choices made earlier in the 1990s, but also of fortuitous economic, demographic, and policy trends that are no longer working for us as we enter the 21st century. In retrospect, the nation emerged from deficits of nearly three decades only to find itself in what has been called "the eye of the storm." The passage to surpluses was aided by a tailwind consisting of (1) extraordinarily strong economic growth, (2) a slowing of health care cost growth, (3) a demographic holiday stemming from low birth rates during the Depression and World War II paired with a large workforce resulting from the post-war baby boom--which together gave rise to a stable worker-to-beneficiary ratio in Social Security, and (4) the fall of the Soviet Union permitting a decline in defense spending as a share of the economy. The fiscal winds have now shifted--many of these fortunate trends have now reversed course and are making the choices harder. Although it appears the economy may have turned the corner, forecasters are not showing a return to the extremely rapid growth the nation enjoyed during the last half of the nineties. Health care costs have once again resumed growing at double-digit rates. Reductions in defense spending can no longer be used as a means to help fund other claims on the budget; indeed, spending on defense and homeland security will grow as we seek to defeat terrorism worldwide. Finally--and I know this is one of the reasons you invited me here today--the nation's demographic holiday is ending. In 2008--only 6 years from now--demographic storm clouds will begin to shadow the baseline as the first wave of baby boomers become eligible to claim Social Security. However one allocates credit across the events and decisions that led to years of surpluses, we benefited from that achievement. These large surpluses not only helped in the short term by reducing debt and interest costs but also strengthened the budget and the economy for the longer term. The budgetary surpluses of recent years put us in a stronger position to respond both to the events of September 11 and to the economic slowdown than would otherwise have been the case. However, going forward, the nation's commitment to surpluses will truly be tested. For the last few years surpluses were built in to the baseline so that given a lack of policy action, there would be a surplus. Last year, the Congressional Budget Office (CBO) baseline not only projected unified surpluses for at least the 10-year window but also substantial surpluses in the non-Social Security portion of the budget. Saving the Social Security surplus became an achievable and compelling fiscal policy goal for the nation in this context. This is no longer true. At least for the next several years the baseline does not turn to unified surplus. A surplus in the non- Social Security portion of the budget is not projected under the baseline to emerge until 2010. As a result, explicit policy actions on spending and/or revenue will be necessary to return to and maintain surpluses over the next 10 years. Although in important ways you begin the task of crafting a budget this year in a very different place than you did last year, in other ways the responsibilities remain the same. We still have a stewardship obligation to future generations. By stewardship obligation I mean that in making budget decisions today, it is important to be mindful of their impact on the future. This means that in responding to the legitimate needs of today, we should take into account the longer-term fiscal pressures we face. The message of GAO's long-term simulations, updated using CBO's new budget estimates, is consistent with previous simulations: absent change, spending for federal health and retirement programs eventually overwhelms all other federal spending. As we look ahead we face an unprecedented demographic challenge. A nation that has prided itself on its youth will become older. Between now and 2035, the number of people who are 65 or over will double. As the share of the population over 65 climbs, federal spending on the elderly will absorb larger and ultimately unsustainable shares of the federal budget. Federal health and retirement spending are expected to surge as people live longer and spend more time in retirement. In addition, advances in medical technology are likely to keep pushing up the cost of providing health care. Moreover, the baby boomers will have left behind fewer workers to support them in retirement, prompting a slower rate of economic growth from which to finance these higher costs. Absent substantive change in related entitlement programs, large deficits return, requiring a combination of unprecedented spending cuts in other areas, and/or unprecedented tax increases, and/or substantially increased borrowing from the public (or correspondingly less debt reduction than would otherwise have been the case). These trends have widespread implications for our society, our culture, our economy, and--of most relevance here--our budget. Ultimately, as this Committee and its counterpart in the House recommended on October 4, the federal government should attempt to return to a position of surplus as the economy returns to a higher growth path. Returning to surpluses will take place against the backdrop of greater competition of claims within the budget. Although budget balance may have been the desired fiscal position in the past decade, surpluses would promote the level of savings and investment necessary to help future generations better afford the commitments of an aging society. Early action is important. We all recognize that we have urgent matters to address as a nation and our history shows we have been willing to run deficits during wars and recessions. However, it remains important that to get on with the task of addressing the long-term pressures sooner rather than later. Some will suggest that early action may not be necessary--for example, that faster economic growth may enable a smaller pool of workers to more easily finance the baby boom retirement. While this might happen, the best estimates of the actuaries suggest it is unlikely. CBO has also said that the nation's long-term fiscal outlook will largely be determined by federal spending for retirees, especially for health.. Although long-term projections are inherently more uncertain than short- term forecasts, in some ways we can be surer about the outlook 20 years from now since it is driven by known demographics. The swing in 1-, 5-, and 10-year projections over the last 12 months has served to emphasize the extent to which short-term projections are subject to uncertainty. And CBO notes that this year the near-term projections are subject to unusual uncertainties as the nation wages war on terrorism and recovers from a recession. CBO pointed out that it is considered more difficult to forecast the economy when it is entering or exiting a recession. This year there are additional uncertainties in the near-term budget outlook. CBO's reference case--the baseline--from which you begin your deliberations (and which in the first 10 years is the underpinning for our long-term model) is a representation of current laws and policies. Thus, by definition it does not account for the effects of future legislation, including likely increases in spending for defense and homeland security to which both parties have agreed in principle. Nor, as CBO noted, does it make assumptions about a number of issues, e.g., the extension of agriculture programs, Medicare prescription drug coverage, changes in the Alternative Minimum Tax, or the extension of various expiring tax provisions. Given this extreme uncertainty around the next 1 to 5 years, why look out 20 or 30 years? Absent some draconian or unexpected dramatic event, the long-term budget outlook is driven by factors already in motion--most notably the aging of the population. In previous testimonies before you, I have talked about a demographic tidal wave. Beginning about 2010, the share of the population that is age 65 or older will begin to climb, surpassing 20 percent by 2035. (See fig. 1.) Because of the coming demographic shift, the message from our simulations remains the same as last year, indeed as since we first published results from our long-term model in 1992: Absent policy change, in the long term, persistent deficits and escalating debt driven by entitlement spending will overwhelm the budget. This year we ran three different policy paths to illustrate the implications of a range of budgetary choices. I'd like to emphasize again that these simulations are not intended to endorse a particular policy but rather to illustrate the long-term implications of different scenarios. All three scenarios begin with CBO's baseline estimates. The first starts with the baseline where for the first 10 years tax and entitlement laws are unchanged--including sunset provisions--and discretionary spending grows with inflation. After the first 10 years, we hold discretionary spending and revenues constant as a share of gross domestic product (GDP) and allow Social Security and Medicare to grow based on the actuaries' intermediate estimates. In this path, the unified surpluses that emerge in 2004 are saved. Nevertheless, deficits return in 2036. At the other end is an alternative policy path in which discretionary spending grows with the economy in the first 10 years and in which last year's tax cuts are extended. This yields a smaller period of surpluses with deficits returning in 2011. In both of these paths taxes remain constant as a share of GDP after 2012; this is, of course, a policy decision. To illustrate something in between these two paths, we simulated a third that tracks the CBO baseline until 2010. After 2010 we assume that the full Social Security surplus is saved through 2024--this requires some combination of tax and spending policy actions. In this simulation deficits reemerge in 2025. (See fig. 2.) In all three paths, surpluses eventually give way to large and persistent deficits. These simulations show that there is a benefit to fiscal discipline--it delays the return to deficits--but that even the most demanding path we simulated--a path that does not provide for funding Presidential or many Congressional initiatives--is structurally imbalanced over the long term. Although savings from higher surpluses are important, they must be coupled with action to slow the long-term drivers of projected deficits, i.e. Social Security and health programs. Surpluses can help--they could, for example, facilitate the needed reforms by providing resources to ease transition costs--but, by themselves, surpluses will not be sufficient. In the long term, under all three paths federal budgetary flexibility becomes increasingly constrained and eventually disappears. To move into the future with no changes in federal health and retirement programs is to envision a very different role for the federal government. Assuming, for example, that last year's tax reductions are made permanent and discretionary spending keeps pace with the economy, spending for net interest, Social Security, Medicare, and Medicaid consumes nearly three- quarters of federal revenue by 2030, leaving little room for other federal priorities including defense and education. By 2050, total federal revenue is insufficient to fund entitlement spending and interest payments--and deficits are escalating out of control. (See fig. 3.) Reducing the relative future burdens of Social Security and federal health programs is critical to promoting a sustainable budget policy for the longer term. Absent reform, the impact of federal health and retirement programs on budget choices will be felt as the baby boom generation begins to retire. While much of the public debate concerning the Social Security and Medicare programs focuses on trust fund balances--that is on the programs' solvency--the larger issue concerns sustainability. The 2001 Trustees Reports estimate that the Old-Age Survivors Insurance and Disability Insurance (OASDI) Trust Funds will remain solvent through 2038 and the Hospital Insurance (HI) Trust Fund through 2029. Furthermore, because of the nature of federal trust funds, HI and OASDI Trust Fund balances do not provide meaningful information about program sustainability--that is, the government's fiscal capacity to pay benefits when the program's cash income falls below benefit expenses. From this perspective, the net cash impact of the trust funds on the government as a whole--not trust fund solvency--is the important measure. Under the trustees' intermediate assumptions, the OASDI Trust Funds are projected to have a cash deficit beginning in 2016 and the HI Trust Fund a deficit also beginning in 2016. (See fig. 4.) At that point, the programs become net claimants on the Treasury. In addition, as we have noted in other testimony, a focus on HI solvency presents an incomplete picture of the Medicare program's expected future fiscal claims. The Supplementary Medical Insurance (SMI) portion of Medicare, which is not reflected in the HI solvency measure, is projected to grow even faster than HI in the near future. According to the best estimates of the Medicare trustees, Medicare HI and SMI together will double as a share of GDP between 2000 and 2030 (from 2.2 percent to 4.5 percent) and reach 8.5 percent of GDP in 2075. Under the trustees' best estimates, Social Security spending will grow as a share of GDP from 4.2 to 6.5 percent between 2000 and 2030, reaching 6.7 percent in 2075. Medicare HI Medicare HI cash deficit cash deficit To finance these cash deficits, Social Security and the Hospital Insurance portion of Medicare will need to draw on their special issue Treasury securities acquired during the years when these programs generated cash surpluses. This negative cash flow will placed increased pressure on the federal budget to raise the resources necessary to meet the program's ongoing costs. In essence, for OASDI or HI to "redeem" their securities, the government will need to obtain cash through increased taxes, and/or spending cuts, and/or increased borrowing from the public (or correspondingly less debt reduction than would have been the case had cash flow remained positive). Our long-term simulations illustrate the magnitude of the fiscal challenges associated with an aging society and the significance of the related challenges the government will be called upon to address. As we have stated elsewhere, early action to change these programs would yield the highest fiscal dividends for the federal budget and would provide a longer period for prospective beneficiaries to make adjustments in their own planning. Waiting to build economic resources and reform future claims entails risks. First, we lose an important window where today's relatively large workforce can increase saving and enhance productivity, two elements critical to growing the future economy. We lose the opportunity to reduce the burden of interest in the federal budget, thereby creating a legacy of higher debt as well as elderly entitlement spending for the relatively smaller workforce of the future. Most critically, we risk losing the opportunity to phase in changes gradually so that all can make the adjustments needed in private and public plans to accommodate this historic shift. Unfortunately, the long-range challenge has become more difficult, and the window of opportunity to address the entitlement challenge is narrowing. It remains more important than ever to return to these issues over the next several years. Ultimately, the critical question is not how much a trust fund has in assets, but whether the government as a whole can afford the promised benefits now and in the future and at what cost to other claims on scarce resources. One of the reasons to address these longer-term pressures is their potential to crowd out the capacity to support other important priorities throughout the rest of the budget. The tragedy of September 11 made us all realize the benefits fiscal flexibility provides to our nation's capacity to respond to urgent and newly emergent needs. Obviously we will allocate whatever resources are necessary to protect the nation. However, these new commitments will compete with and increase the pressure on other priorities within the budget. Financing these compelling new claims within an overall fiscal framework that eventually returns the budget to surplus is a tall order indeed. The budget process is the one place where we as a nation can conduct a healthy debate about competing claims and new priorities. However, such a debate will be needlessly constrained if only new proposals and activities are on the table. A fundamental review of existing programs and operations can create much-needed fiscal flexibility to address emerging needs by weeding out programs that have proven to be outdated, poorly targeted, or inefficient in their design and management. It is always easier to subject proposals for new activities or programs to greater scrutiny than that given to existing ones. It is easy to treat existing activities as "given" and force new proposals to compete only with each other. Such an approach would move us further, rather than nearer, to budgetary surpluses. Moreover, it is healthy for the nation periodically to review and update its programs, activities and priorities. As we have discussed previously, many programs were designed years ago to respond to earlier challenges. In the early years of a new century, we have been reminded how much things have changed. For perspective, students who started college this past fall were 9 years old when the Soviet Union broke apart and have no memory of the Cold War; their lifetimes have always known microcomputers and AIDS. In previous testimony, both before this Committee and elsewhere, I noted that it should be the norm to reconsider the relevance or "fit" of any federal program or activity in today's world and for the future. Such a review might weed out programs that have proven to be outdated or persistently ineffective, or alternatively could prompt us to update and modernize activities through such actions as improving program targeting and efficiency, consolidation, or reengineering of processes and operations. Ultimately, we should strive to hand to the next generations the legacy of a government that is effective and relevant to a changing society--a government that is as free as possible of outmoded commitments and operations that can inappropriately encumber the future. We need to think about what government should do in the 21st century and how it should do business. The events of last fall have provided an impetus for some agencies to rethink approaches to long-standing problems and concerns. In particular, agencies will need to reassess their strategic goals and priorities to enable them to better target available resources to address urgent national preparedness needs. For instance, the threat to air travel has already prompted attention to chronic problems with airport security that we and others have been pointing to for years. Moreover, the crisis might prompt a healthy reassessment of the broader transportation policy framework with an eye to improving the integration of air, rail, and highway systems to better move people and goods. Other long-standing problems also take on increased relevance in today's world. Take, for example, food safety. Problems such as overlapping and duplicative inspections across many federal agencies, poor coordination, and inefficient allocations of resources are not new and have hampered productivity and safety for years. However, they take on new meaning and urgency given the potential threat from bioterrorism. We have argued for a consolidated food safety initiative merging the separate programs of the multiple federal agencies involved. Such a consolidated approach can facilitate a concerted and effective response to the new threats. The federal role in law enforcement is another area that is ripe for reexamination following the events of September 11. In the past 20 years, the federal government has taken on a larger role in financing criminal justice activities that have traditionally been viewed as the province of the state and local sector. This is reflected in the growth of the federal share of financing--from 12 percent in 1982 to nearly 20 percent in 1999. Given the new daunting new law enforcement responsibilities in the wake of September 11 and limited budgetary resources at all levels, the question is whether these additional responsibilities should prompt us to rethink the priorities and roles of federal, state, and local levels of government in the criminal justice area and ultimately whether some activities are affordable in this new setting. The Federal Bureau of Investigation has already begun thinking about reprioritization and how its investigative resources will shift, given the new challenges posed by the terrorism threat. With the Coast Guard's focus on homeland security, it has de-emphasized some of its other critical missions in the short term, most notably fisheries enforcement and drug and migrant interdiction. The Coast Guard is currently developing a longer-term mission strategy, although it has no plans at present to revise the schedule or asset mix for its Deepwater Project (which will be awarded mid-2002). In rethinking federal missions and strategies, it is important to examine not only spending programs but the wide range of other more indirect tools of governance the federal government uses to address national objectives. These tools include loans and loan guarantees, tax expenditures, and regulations. For instance, in fiscal year 2000, the federal health care and Medicare budget functions include $37 billion in discretionary budget authority, $319 billion in entitlement outlays, $5 million in loan guarantees, and $91 billion in tax expenditures. The outcomes achieved by these various tools are in a very real sense highly interdependent and are predicated on the response by a wide range of third parties, such as states and localities and private employers, whose involvement has become more critical to the implementation of these federal initiatives. The choice and design of these tools is critical in determining whether and how federal objectives will be addressed by these third parties. Any review of the base of existing policy should address this broader picture of federal involvement. GAO has also identified a number of areas warranting reconsideration based on program performance, targeting, and costs. Every year, we issue a report identifying specific options, many scored by CBO, for congressional consideration stemming from our audit and evaluation work. This report provides opportunities for (1) reassessing objectives of specific federal programs, (2) improved targeting of benefits, and (3) improving the efficiency and management of federal initiatives. Just as long-standing areas of federal involvement need re-examination, so proposed new initiatives designed to address the new terrorism threat need appropriate review. With the focus on counterterrorism, you will undoubtedly face many proposals redefined as counterterrorism activities. The Congress will need to watch for the redefinition of many claims into counterterrorism activities. It will be especially important to seek to distinguish among these claims. In sorting through these proposals, we might apply investment criteria in making choices. Well-chosen enhancements to the nation's infrastructure are an important part of our national preparedness strategy. Investments in human capital for certain areas such as public health or airport security will also be necessary as well to foster and maintain the skill sets needed to respond to the threats facing us. A variety of governmental tools will be proposed to address these challenges--grants, loans, tax expenditures, and/or direct federal administration. The involvement of a wide range of third parties--state and local governments, nonprofits, private corporations, and even other nations--will be a vital part of the national response as well. In the short term, we will do whatever is necessary to get this nation back on its feet and compassionately deal with the human tragedies left in its wake. However, as we think about our longer-term preparedness and develop a comprehensive homeland security strategy, we can and should select those programs and tools that promise to provide the most cost- effective approaches to achieve our goals. Today the Congress faces the challenge of sorting out these many claims on the federal budget without the fiscal benchmarks and rules that served as guides through the years of deficit reduction. Going forward, new rules and goals will be important both to ensure fiscal discipline as we sort through these new and compelling claims and to prompt policymakers to focus on the longer-term implications of current policies and programs. For more than a decade, budget process adaptations have been designed to reach a zero deficit. With the advent of surpluses, a new framework was needed--one that would permit accommodating pent-up demands but not eliminate all controls. A broad consensus seemed to develop to use saving the Social Security surplus or maintaining on-budget balance as a kind of benchmark. However, the combination of the economic slowdown and the need to respond to the events of September 11 has overtaken that measure. Once again, Congress faces the challenge of designing a budget control mechanism. Last October, Mr. Chairman, you and your colleague Senator Domenici and your House counterparts called for a return to budget surplus as a fiscal goal. This remains an important fiscal goal, but achieving it will not be easy. In the near term, limits on discretionary spending may be necessary to prompt the kind of reexamination of the base I discussed above. There are no easy choices. There will be disagreements about the merits of a given activity--reasonable people can disagree about federal priorities. There may also be disagreements about the appropriate response to program failure: Should the program be modified or terminated? Would the program work better with more money or should funding be cut? Spending limits can be used to force choices; they are more likely to do so, however, if they are set at levels viewed as reasonable by those who must comply with them. Spending limits alone cannot force a reexamination of existing programs and activities. However, the recognition that for most agencies the new responsibilities acquired since September 11 cannot merely be added to existing duties requires that decisions be made about priorities. In the last decade Congress and the Administration put in place a set of laws designed to improve information about cost and performance. This information can help inform the debate about what the federal government should do. In addition, the budget debate can benefit from the kind of framework I discussed above. In previous testimony before this committee, I suggested that Congress might equip itself to engage in this debate by developing a congressional performance resolution to target its oversight on certain governmentwide performance issues cutting across agencies and programs. Along with caps, this and other measures might help ensure that Congress becomes part of the debate over reprioritization and government performance. The dramatic shift in budget projections since last year has prompted discussion of shortening the budget window. This may well be a sensible approach to reducing uncertainty. However, such a change should be coupled with steps to provide a broader and longer-term fiscal horizon: goals and metrics to address the longer-term implications of today's choices. This does not mean that we should budget for a 20- or 30-year period. It does mean considering establishing indicators and targets that bring a long-term perspective to budget deliberations and a process that prompts attention to the long-term implications of today's decisions. Periodic simulations along the lines we and CBO have developed can and should become a regular feature of budget debate. We would be the first to say that the simulations are not predictions of the future or point estimates, rather they serve as indicators--or warning lights--about the magnitude and direction of different policy profiles. These scenarios are particularly helpful in comparing long-term consequences of different fiscal paths or major reforms of entitlements using the same assumptions. As I said earlier, the demographic tidal wave that drives the long-term budget challenge is a known element with predictable consequences. Some kind of fiscal targets may be helpful. As a way to frame the debate, targets can remind us that today's decisions are not only about current needs but also about how fiscal policy affects the choices over the longer term. Other nations have found it useful to embrace broader targets such as debt-to-GDP ratios, or surpluses equal to a percent of GDP over the business cycle. To work over time targets should not be rigid--it is in the nature of things that they will sometimes be missed. It should be possible to make some sort of compelling argument for the target--and it should be relatively simple to explain. Reaching a target is not a straight line but an iterative process. The other nations we have studied have found that targets prompted them to take advantage of windows of opportunity to save for the future and that decisionmakers must have flexibility each year to weigh pressing short-term needs and adjust the fiscal path without abandoning the longer-term framework. In re-examining what I have called the "drivers" of the long-term budget, we need to think about new metrics. We have been locked into the artifacts of the trust funds, which do not serve as appropriate signals for timely action to address the growth in these programs. As I mentioned earlier, trust fund solvency does not answer the question of whether a program is sustainable. Although aggregate simulations are driven by these programs, the need for a longer-term focus is about more than Social Security and Medicare. In recent years there has been an increased recognition of the long-term costs of Social Security and Medicare. While these are the largest and most important long-term commitments--and the ones that drive the long-term outlook--they are not the only ones in the budget that affect future fiscal flexibility. For Congress, the President, and the public to make informed decisions about these other programs, it is important to understand their long-term cost implications. A longer time horizon is useful not only at the macro level but also at the micro-policy level. I am not suggesting that detailed budget estimates could be made for all programs with long-term cost implications. However, better information on the long-term costs of commitments like employee pension and health benefits and environmental cleanup could be made available. Here again, new concepts and metrics may be useful. We have been developing the concept of "fiscal exposures" to represent a range of federal commitments--from explicit liabilities to implicit commitments. Exactly how such information would be incorporated into the budget debate would need to be worked out--but it is worth serious examination. In one sense much has changed in the budget world since last February. There are even more compelling needs and demands on the federal budget than a year ago--and policymakers must deal with them absent the surpluses that were projected then. However, the demographic trends that drive the long-term outlook have not changed. The baby boom generation is still getting older and closer to retirement. Because of the coming demographic shift, the message from our simulations remains the same as last year, indeed as since we first published results from our long-term model in 1992: Absent changes in Social Security and health programs, in the long term, persistent deficits and escalating debt driven by entitlement spending will overwhelm the budget.

Combating terrorism and ensuring homeland security have created urgent claims on the nation's attention and on the federal budget. Although an economic recovery seems to be underway, the recession that began last spring has had real consequences for the budget. At the same time, the fiscal pressures created by the retirement of the baby boomers and rising health care costs continue unchanged. However, the surpluses also put the nation in a stronger position to respond to the events of September 11 and to the economic slowdown. The nation's commitment to surpluses will be tested. A return to surplus will require sustained discipline and difficult choices. Because the longer-term outlook is driven in large part by known demographic trends, the outlook 20 years from now is surer than the forecast for the next few years. The message of GAO's updated simulations remains the same as last year: absent structural changes in entitlement programs for the elderly, persistent deficits and escalating debt will overwhelm the budget in the long term. Both longer-term and new commitments undertaken after September 11 sharpen the need for competing claims and new priorities. A fundamental review of existing programs and activities is necessary both to increase fiscal flexibility and to make government fit the modern world. Stated differently, there is a need to consider the proper role of the federal government in the 21st century and how government should do business. The fiscal benchmarks and rules that moved the country from deficit to surplus expire this fiscal year. Any successor system should include a debate about reprioritization today and a better understanding of the long-term implications of different policy choices. Many things that the nation may be able to afford today may not be sustainable in the future.

In order for students attending a school to receive Title IV funds, a school must be: 1. licensed or otherwise legally authorized to provide higher education in the state in which it is located, 2. accredited by an agency recognized for that purpose by the Secretary 3. deemed eligible and certified to participate in federal student aid programs by Education. Under the Higher Education Act, Education does not determine the quality of higher education institutions or their programs; rather, it relies on recognized accrediting agencies to do so. As part of its role in the administration of federal student aid programs, Education determines which institutions of higher education are eligible to participate in Title IV programs. Education is responsible for overseeing school compliance with Title IV laws and regulations and ensuring that only eligible students receive federal student aid. As part of its compliance monitoring, Education relies on department employees and independent auditors of schools to conduct program reviews and audits of schools. Institutions that participate in Title IV programs must comply with a range of requirements, including consumer disclosure requirements, which include information schools must make available to third parties, as well as reporting requirements, which include information schools must provide to Education. Congress and the President enact the statutes that create federal programs; these statutes may also authorize or direct a federal agency to develop and issue regulations to implement them. Both the authorizing statute and the implementing regulations may contain requirements that recipients must comply with in order to receive federal funds. The statute itself may impose specific requirements; alternatively, it may set general parameters and the implementing agency may then issue regulations further clarifying the requirements. Federal agencies may evaluate and modify their regulatory requirements, but they lack the authority to modify requirements imposed by statute. In addition, when issuing rules related to programs authorized under Title IV, Education is generally required by the HEA to use negotiated rulemaking, a process that directly involves stakeholders in drafting proposed regulations. Once the department determines that a rulemaking is necessary, it publishes a notice in the Federal Register, announcing its intent to form a negotiated rulemaking committee, and holds public hearings to seek input on the issues to be negotiated. Stakeholders, who are nominated by the public and selected by Education to serve as negotiators, may include schools and their professional associations, as well as student representatives and other interested parties. A representative from Education and stakeholders work together on a committee that attempts to reach consensus, which Education defines as unanimous agreement on the entire proposed regulatory language. If consensus is reached, Education will generally publish the agreed-upon language as its proposed rule. If consensus is not reached, Education is not bound by the results of the negotiating committee when drafting the proposed rule. According to proponents, the negotiated rulemaking process increases the flow of information between the department and those who must implement requirements. Once a proposed rule is published, Education continues the rulemaking process by providing the public an opportunity to comment before issuing the final rule. The Paperwork Reduction Act (PRA) requires federal agencies to assess and seek public comment on certain kinds of burden, in accordance with its purpose of minimizing the paperwork burden and maximizing the utility of information collected by the federal government. Under the PRA, agencies are generally required to seek public comment and obtain Office of Management and Budget (OMB) approval before collecting information from the public, including schools. Agencies seek OMB approval by submitting information collection requests (ICR), which include among other things, a description of the planned collection efforts, as well as estimates of burden in terms of time, effort, or financial resources that respondents will expend to gather and submit the information. Agencies are also required to solicit public comment on proposed information collections by publishing notices in the Federal Register. If a proposed information collection is part of a proposed rulemaking, the agency may include the PRA notice for the information collection in the Notice of Proposed Rulemaking for that rule. The PRA authorizes OMB to approve information collections for up to 3 years. Agencies seeking an extension of OMB approval must re-submit an ICR using similar procedures, including soliciting public comment on the continued need for and burden imposed by the information collection. Over the last two decades, there have been several efforts to examine the federal regulatory burden faced by schools (see table 1). While intending to make regulations more efficient and less burdensome, several of these efforts also acknowledge that regulation provides benefits to government and the public at large. The specific results of initiatives varied, as described below. For example, Executive Order 13563, which was issued in 2011, requires agencies to, among other things, develop plans to periodically review their existing significant regulations and determine whether these regulations should be modified, streamlined, expanded, or repealed to make the agencies' regulatory programs more effective or less burdensome. Consistent with the order's emphasis on public participation in the rulemaking process, OMB guidance encourages agencies to obtain public input on their plans. The specific results of initiatives varied, as described below. Although the 18 experts we interviewed offered varied opinions on which Title IV requirements are the most burdensome, 16 said that federal requirements impose burden on postsecondary schools. While no single requirement was cited as most burdensome by a majority of experts, 11 cited various consumer disclosures schools must provide or make available to the public, students, and staff (see table 2). Among other things, these disclosure requirements include providing certain information about schools, such as student enrollment, graduation rates, and cost of attendance. The most frequently mentioned consumer disclosure requirement--cited by 5 experts as burdensome--was the "Clery Act" campus security and crime statistics disclosure requirement. Two experts noted the burden associated with reporting security data, some of which may overlap with federal, state, and local law enforcement agencies. Beyond consumer disclosures, 4 experts stated that schools are burdened by requirements related to the return of unearned Title IV funds to the federal government when a student receiving financial aid withdraws from school. According to 2 experts, schools find it particularly difficult both to calculate the precise amount of funds that should be returned and to determine the date on which a student withdrew. Finally, 6 experts we interviewed stated that, in their view, it is the accumulation of burden imposed by multiple requirements--rather than burden derived from a single requirement--that accounts for the burden felt by postsecondary schools. Three stated that requirements are incrementally added, resulting in increased burden over time. Experts also described some of the benefits associated with Title IV requirements. For example, one expert stated that requiring schools to disclose information to students to help them understand that they have a responsibility to repay their loans could be beneficial. Another expert noted that consumer disclosures allow students to identify programs relevant to their interests and that they can afford. School officials who participated in our discussion groups told us that Title IV requirements impose burden in a number of ways, as shown in table 3. Participants in all eight groups discussed various requirements that they believe create burden for schools because they are, among other things, too costly and complicated. For example, participants in four groups said the requirement that schools receiving Title IV funds post a net price calculator on their websites--an application that provides consumers with estimates of the costs of attending a school--has proven costly or complicated, noting challenges such as those associated with the web application, obtaining the necessary data, or providing information that may not fit the schools' circumstances. School officials from six discussion groups also noted that complying with requirements related to the Return of Title IV Funds can be costly because of the time required to calculate how much money should be returned to the federal government (see Appendix III for information on selected comments on specific federal requirements school officials described as burdensome). Participants in six of eight discussion groups said that consumer disclosures were complicated, and participants in seven groups said that Return of Title IV Funds requirements were complicated. For example, participants in one discussion group stated that consumer disclosures are complicated because reporting periods can vary for different types of information. Another explained that the complexity of consumer disclosures is a burden to staff because the information can be difficult to explain to current or prospective students. Also, participants in two groups stated that the complexity of consumer disclosures makes it difficult for schools to ensure compliance with the requirements. Likewise, participants noted that calculating the amount of Title IV funds that should be returned can be complicated because of the difficulty of determining the number of days a student attended class as well as the correct number of days in the payment period or period of enrollment for courses that do not span the entire period. Participants in three discussion groups found the complexity of Return of Title IV requirements made it difficult to complete returns within the required time frame. In addition, participants from four groups noted the complexity increases the risk of audit findings, which puts pressure on staff. Discussion group participants identified other types of concerns that apply primarily to consumer disclosures. For example, participants in two groups said that it is burdensome for schools to make public some disclosures, such as graduates' job placement data, because they cannot easily be compared across schools, thereby defeating the purpose of the information. Like six of the experts we interviewed, participants in six discussion groups noted that burden results from the accumulation of many requirements rather than a few difficult requirements. Two participants said that when new requirements are added, generally, none are taken away. Similarly, two other participants commented that the amount of information schools are required to report grows over time. Another commented that it is difficult to get multiple departments within a school to coordinate in order to comply with the range of requirements to which schools are subject under Title IV. Other federal requirements, in addition to those related to Title IV, may also apply to postsecondary schools (see Appendix IV for selected examples). School officials also described some benefits of Title IV requirements. Participants in three discussion groups pointed out that some consumer information can be used to help applicants choose the right school. Other participants commented that consumer disclosures encourage transparency. For example, participants in two groups said the information schools are required to disclose regarding textbooks helps students compare prices and consider the total cost of books. Regarding Return of Title IV Funds, participants in three discussion groups stated that the process helps restore funds to the federal government that can be redirected to other students. Education seeks feedback on burden through formal channels such as publishing notices seeking comments on its burden estimates for proposed information collections, its retrospective analysis plan, and negotiated rulemaking. As shown in table 4, the department publishes notices in the Federal Register, on its website, and through a listserv to make the public aware of opportunities to provide feedback on burden.Department officials also said they receive some feedback from school officials through informal channels such as training sessions and open forums at conferences. Although Education has published notices seeking feedback on burden, officials said the department has received few comments in response to its solicitations. For example, Education said it received no comments in response to its request for public comment on burden estimates included in its 2010 "Program Integrity" Notices of Proposed Rulemaking, which proposed multiple regulatory changes with increased burden estimates. In addition, Education officials said some of the comments they receive about burden estimates are too general to make modifications in response to them. We focused on ICRs submitted by two Education offices that manage postsecondary issues: the Office of Federal Student Aid and the Office of Postsecondary Education. We selected the time period because it coincides with the 2006 launch of the OMB and General Services Administration web portal used by agencies to electronically post comments and other documents related to information collections to reginfo.gov; includes the enactment of the Higher Education Opportunity Act in 2008, which resulted in regulatory changes; and includes ICRs recently submitted. See Appendix I for additional information on the types of ICRs included in our review. shows that fewer than one-fourth (65 of 353) received public comments, of which 25 included comments that addressed burden faced by schools (see fig 1). For example, 2 ICRs received input on the difficulties of providing data requested by the department. We identified 40 ICRs that did not receive comments on burden faced by schools; several ICRs, for example, received input on simplifying the language of student loan- related forms. Further, in a review of the 30 comments received by the department in response to its proposed retrospective analysis plan, we identified 11 comments related to higher education, of which 9 mentioned regulatory burden. For example, one commenter described difficulties that smaller schools may have meeting reporting requirements. Negotiated rulemaking presents another opportunity for schools and others to provide feedback on burden. Six experts and participants in six discussion groups thought aspects of negotiated rulemaking are beneficial overall. However, some experts and discussion group participants said certain aspects of the process may limit the impact of feedback on burden. Specifically, four experts and participants in six of our discussion groups expressed concern that when the negotiated rulemaking process does not achieve consensus, the department may draft regulations unencumbered by negotiators' input, which may have addressed burden. According to those we spoke with, consensus may not be achieved, for example, if Education includes controversial topics over which there is likely to be disagreement or declines to agree with other negotiators. Education officials responded that their goal during negotiated rulemakings is to draft the best language for the regulation. Further, department officials said that negotiators can collectively agree to make changes to the agenda, unanimous consensus provides negotiators with an incentive to work together, and that the department cannot avoid negotiated rulemaking on controversial topics. Education officials said that when consensus is not achieved, the department rarely deviates from any language agreed upon by negotiators. Notwithstanding the benefits of Title IV requirements, school officials believe that the burden created by federal requirements diverts time and resources from their primary mission of educating students. Our findings--as well as those of previous studies--indicate that the burden reported by school officials and experts not only stems from a single or a few requirements, but also from the accumulation of many requirements. While Education has solicited feedback on the burdens associated with federal requirements, our findings show that stakeholders do not always provide this feedback. As a result, stakeholders may be missing an opportunity to help reduce the burden of federal requirements on schools. We provided a draft of this report to Education for comment. Education's written comments are reproduced in Appendix II. Education sought a clearer distinction in the report between statutory and regulatory requirements as well as Education's authority to address statutory requirements. We have added information accordingly. Education also recommended the report distinguish between reporting and disclosure requirements, and we have provided definitions in the background in response. Education expressed concern that the report did not sufficiently consider the benefits of federal requirements. We agree that federal requirements generally have a purpose and associated benefits--such as benefits associated with program oversight and consumer awareness-- which we acknowledge in our report. Analyzing the costs and benefits associated with individual requirements was beyond the scope of this report, as our primary objective was to obtain stakeholder views on burdens. Education also suggested we report more on its efforts to balance burden and benefits when designing information collections. We acknowledged these efforts in our report and incorporated additional information that Education subsequently provided. Education also provided technical comments that were incorporated, as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretary of Education, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. We are sending copies of this report to the appropriate congressional committees and the Secretary of Education. In addition, the report is 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 (617) 788-0534 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in Appendix V. To identify which, if any, federal requirements experts say create burden for postsecondary schools, we interviewed a range of experts. We chose these experts based on factors such as: familiarity or experience with Title IV requirements, recognition in the professional community, relevance of their published work to our topic, and recommendations from others. We conducted interviews with representatives of nine higher education associations that represent public, private nonprofit, private for- profit schools, including associations representing research universities, community colleges, and minority-serving institutions. We also conducted interviews with nine other postsecondary experts, including researchers and officials from individual schools with knowledge of Title IV requirements. Because our review focused on the burden and benefits experts say requirements create, we did not evaluate consumers' perspectives on information schools provide. To determine the types of burdens and benefits that schools say federal requirements create, we conducted eight discussion groups at two national conferences with a nongeneralizable sample of officials from 51 schools. Discussions were guided by a moderator who used a standardized list of questions to encourage participants to share their thoughts and experiences. To optimize time during each session, we focused part of the discussion on the perceived benefits and burdens associated with one of the two sets of requirements most often cited as burdensome during the interviews we conducted with experts: consumer disclosures and Return of Title IV Funds. Specifically, four groups primarily focused on the burdens and benefits associated with consumer disclosures and four groups focused primarily on Return of Title IV Funds. In addition, each group was provided the opportunity to discuss other requirements that officials found to be burdensome, as well as how, if at all, officials communicate feedback on burden to Education. Discussion groups are not an appropriate means to gather generalizable information about school officials' awareness of feedback opportunities because participants were self-selected and may be more aware of federal requirements and feedback opportunities than others in the population. Methodologically, group discussions are not designed to (1) demonstrate the extent of a problem or to generalize results to a larger population, (2) develop a consensus to arrive at an agreed-upon plan or make decisions about what actions to take, or (3) provide statistically representative samples or reliable quantitative estimates. Instead, they are intended to generate in-depth information about the reasons for the discussion group participants' attitudes on specific topics and to offer insights into their concerns about and support for an issue. In addition, the discussion groups may be limited because participants represented only those schools that had representatives at the specific conferences we attended and because participants are comprised of self-selected volunteers. To determine how Education solicits feedback from stakeholders on burden, we conducted interviews with Education officials and reviewed documentation, such as agency web pages and listserv postings used by Education to inform schools and other interested parties about negotiated rulemaking and information collections. We also solicited the views of experts during interviews, and asked school officials in discussion groups about how, if at all, they communicate feedback on burden to Education. Because participants were self-selected, they are more likely to be aware of federal requirements and feedback opportunities than the general population. We reviewed Education's ICRs related to postsecondary education submitted to OMB from August 1, 2006, to October 31, 2012, to determine how many received public comments. We also reviewed the ICRs that received comments to determine how many received comments related to burden. To do so, we used OMB's reginfo.gov website, and took steps to verify the reliability of the database. We interviewed agency officials, tested the reliability of a data field, and reviewed documentation. We found the database to be reliable for our purposes. In our review of ICRs, we included new information collections along with revisions, reinstatements, and extensions of existing information collections without changes. We excluded ICRs that agencies are not required to obtain public comment on, such as those seeking approval of nonsubstantive changes. We also excluded ICRs for which the associated documents did not allow us to interpret the comments. To determine how many ICRs received comments that discussed burden faced by schools, one analyst reviewed comments for each ICR and classified them as being related or not related to the burden faced by schools. Another analyst verified these categorizations and counts. We also reviewed the number and nature of comments on Education's preliminary plan for retrospective analysis by downloading comments from regulations.gov. We verified with Education the total number of comments received. To determine whether comments discussed burdens faced by schools, one analyst reviewed each comment and classified it as being related or not related to higher education regulations and whether it referenced burden faced by schools. Another analyst verified these categorizations and counts. We did not review comments submitted to Education in response to proposed rules. Education has received thousands of comments in response to proposed regulations in recent years, and the site does not contain a search feature that would have allowed us to distinguish comments regarding burden estimates from other topics. For all objectives, we reviewed relevant federal laws and regulations. We conducted this performance audit from April 2012 to April 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The table below lists some of the specific concerns expressed by school officials we spoke to in discussion groups in response to questions about burdensome federal requirements. GAO identified statutory or regulatory provisions that relate to the burdens described by school officials and compiled these summaries to better illustrate the underlying requirements about which we received comments. These are only examples, not a list of every requirement specifically reported to us as burdensome. The summaries provided below are not intended to be complete descriptions of each requirement, and additional statutory or regulatory provisions related to these comments may also apply. In some cases a provision may have multiple sources, such as where statutory requirements are further interpreted in a regulation or guidance document. Discussion Group Participant Concern Consumer Disclosures: This category encompasses a number of different federal requirements to collect information on various topics and make that information available to specified groups or entities. Students, prospective students, and others can use this information to be better informed. The information can help people make decisions such as whether or not to attend or seek employment at a school. Summary of Related Federal Provisions The statute and regulations require eligible institutions to collect certain information on campus crime statistics and security policies and prepare, publish, and distribute an annual security report to all current students and employees (and to any prospective student or employee upon request). The report must contain, among other information, statistics on certain crimes reported to campus security authorities or local police agencies. 20 U.S.C. SS 1092(f)(1)(F), 34 C.F.R. SSSS 668.41(e), 668.46. The regulations require that an institution "make a reasonable, good faith effort to obtain the required statistics" and may rely on information supplied by a local or state police agency. "If the institution makes such a reasonable, good faith effort, it is not responsible for the failure of the local or State police agency to supply the required statistics." 34 C.F.R. SS 668.46(c)(9). Discussion Group Participant Concern Placement rates. Placement rate calculations are different for different schools or within schools and confusing to students, requiring school staff to give additional explanation to some data. Summary of Related Federal Provisions The statute requires that institutions produce and make readily available upon request--through appropriate publications, mailings, and electronic media--to an enrolled student and to any prospective student the placement in employment of, and types of employment obtained by, graduates of the institution's degree or certificate programs, gathered from such sources as alumni surveys, student satisfaction surveys, the National Survey of Student Engagement, the Community College Survey of Student Engagement, State data systems, or other relevant sources. 20 U.S.C. SS 1092(a)(1)(R). According to the regulations, information concerning the placement of, and types of employment obtained by, graduates of the institution's degree or certificate programs may be gathered from: (1) the institution's placement rate for any program, if it calculates such a rate; (2) state data systems; (3) alumni or student satisfaction surveys; or (4) other relevant sources. The institution must identify the source of the information provided, as well as any time frames and methodology associated with it. In addition, the institution must disclose any placement rates it calculates. 34 C.F.R. SS 668.41(d)(5). Return of Title IV Funds: In general, if a recipient of Title IV grant or loan assistance withdraws from an institution, the statute and regulations establish a procedure for calculating and returning unearned funds. Returning these funds can protect the interests of the federal government and the borrower. The statute provides that, for institutions required to take attendance, the day of withdrawal is determined by the institution from such attendance records. 20 U.S.C. SS 1091b(c)(1)(B). The regulations prescribe in further detail which institutions are required to take attendance and how to determine the withdrawal date: For a student who ceases attendance at an institution that is required to take attendance, including a student who does not return from an approved leave of absence, or a student who takes a leave of absence that does not meet the regulatory requirements, the student's withdrawal date is the last date of academic attendance as determined by the institution from its attendance records. 34 C.F.R. SS 668.22(b). "Institutions that are required to take attendance are expected to have a procedure in place for routinely monitoring attendance records to determine in a timely manner when a student withdraws. Except in unusual instances, the date of the institution's determination that the student withdrew should be no later than 14 days (less if the school has a policy requiring determination in fewer than 14 days) after the student's last date of attendance as determined by the institution from its attendance records." Federal Student Aid Handbook, June 2012, and Education "Dear Colleague Letters" GEN-04-03 Revised, Nov. 2004, and DCL GEN-11-14, July 20, 2011. Summary of Related Federal Provisions An institution is required to return any unearned Title IV funds it is responsible for returning within 45 days of the date the school determined the student withdrew. 20 U.S.C. SS 1091b(b)(1), 34 C.F.R. SSSS 668.22(j)(1), 668.173(b). For a student who withdraws from a school that is not required to take attendance without providing notification, the school must determine the withdrawal date no later than 30 days after the end of the earlier of (1) the payment period or the period of enrollment (as applicable), (2) the academic year, or (3) the student's educational program. 34 C.F.R. SS 668.22(j)(2). "If a student who began attendance and has not officially withdrawn fails to earn a passing grade in at least one course over an entire period, the institution must assume, for Title IV purposes, that the student has unofficially withdrawn, unless the institution can document that the student completed the period. "In some cases, a school may use its policy for awarding or reporting final grades to determine whether a student who failed to earn a passing grade in any of his or her classes completed the period. For example, a school might have an official grading policy that provides instructors with the ability to differentiate between those students who complete the course but failed to achieve the course objectives and those students who did not complete the course. If so, the institution may use its academic policy for awarding final grades to determine that a student who did not receive at least one passing grade nevertheless completed the period. Another school might require instructors to report, for all students awarded a non- passing grade, the student's last day of attendance (LDA). The school may use this information to determine whether a student who received all "F" grades withdrew. If one instructor reports that the student attended through the end of the period, then the student is not a withdrawal. In the absence of evidence of a last day of attendance at an academically related activity, a school must consider a student who failed to earn a passing grade in all classes to be an unofficial withdrawal." Federal Student Aid Handbook, June 2012, and Education "Dear Colleague Letter" GEN-04-03 Revised, Nov. 2004. All references to "statute" or "regulations" are references to the Higher Education Act of 1965 (HEA), as amended, and Education's implementing regulations. All references to "eligible institutions" refer to eligible institutions participating in Title IV programs, as defined by the HEA, as amended. Postsecondary schools may be subject to numerous federal requirements in addition to those related to Title IV of the Higher Education Act of 1965, as amended, which may be established by various other statutes or regulations promulgated by different agencies. The specific requirements to which an individual school is subject may depend on a variety of factors, such as whether it conducts certain kinds of research or is tax- exempt (see the following examples). This is not intended to be a comprehensive list; rather the examples were selected to represent the variety of types of requirements to which schools may be subject. Nuclear Research: Schools licensed to conduct medical research using nuclear byproduct material must follow Nuclear Regulatory Commission requirements on safety and security, or compatible requirements issued by a state that has entered into an agreement with the Nuclear Regulatory Commission. Schools that house nuclear reactors for research purposes are also subject to additional regulations, including those on emergency management. Research Misconduct: To receive federal funding under the Public Health Service Act for biomedical or behavioral research, institutions (including colleges and universities) must have written policies and procedures for addressing research misconduct and must submit an annual compliance report to the federal government. The Public Health Service has issued regulations detailing institutions' responsibilities in complying with these requirements. Research on animals: Applicants for funding for biomedical or behavioral research under the Public Health Service Act must provide an assurance to the National Institutes of Health that the research entity complies with the Animal Welfare Act and the Public Health Service Policy on Humane Care and Use of Laboratory Animals, and that it has appointed an appropriate oversight committee (an Institutional Animal Care and Use Committee). The oversight committee must review the care and treatment of animals in all animal study areas and facilities of the research entity at least semi-annually to ensure compliance with the Policy. Employment Discrimination: Title VII of the Civil Rights Act of 1964, as amended, prohibits employment practices that discriminate based on race, color, religion, sex and national origin. These requirements apply to schools that qualify as employers as defined by Title VII, generally including private and state or local employers that employ 15 or more employees. Disabilities. The Americans with Disabilities Act of 1990 prohibits discrimination against individuals with disabilities in several areas, including employment, state and local government activities, and public accommodations. Act of 1973, as amended, prohibits discrimination on the basis of disability under any program or activity that receives federal financial assistance. Colleges, universities, other postsecondary institutions, and public institutions of higher education are subject to these requirements. In addition, section 504 of the Rehabilitation Sex Discrimination. Title IX of the Education Amendments of 1972 prohibits discrimination on the basis of sex in any federally funded education program or activity. Title IX applies, with a few specific exceptions, to all aspects of education programs or activities that receive federal financial assistance, including athletics. Byrd Amendment: Educational institutions that receive federal funds must hold an annual educational program on the U.S. Constitution. 42 U.S.C. SSSS 12101-12213. Different agencies administer different aspects of the Americans with Disabilities Act, including the Equal Employment Opportunity Commission and the Department of Justice. Internal Revenue Service Form 990: Schools that have tax-exempt status generally must annually file IRS Form 990. The form requires a range of information on the organization's exempt and other activities, finances, governance, compliance with certain federal tax requirements, and compensation paid to certain persons. In addition to the contact named above, Bryon Gordon (Assistant Director), Debra Prescott (Assistant Director), Anna Bonelli, Joy Myers, and Daren Sweeney made key contributions to this report. Additionally, Deborah Bland, Kate Blumenreich, Tim Bober, Sarah Cornetto, Holly Dye, Kathleen van Gelder, and Elizabeth Wood aided in this assignment.

Postsecondary schools must comply with a variety of federal requirements to participate in student financial aid programs authorized under Title IV. While these requirements offer potential benefits to schools, students, and taxpayers, questions have been raised as to whether they may also distract schools from their primary mission of educating students. GAO examined (1) which requirements, if any, experts say create burden, (2) the types of burdens and benefits schools say requirements create, and (3) how Education solicits feedback from stakeholders on regulatory burden. GAO reviewed relevant federal regulatory and statutory requirements, and past and ongoing efforts examining postsecondary regulatory burden; interviewed Education officials and 18 experts, including officials from associations that represent postsecondary schools; and conducted eight discussion groups at two national conferences with a nongeneralizable sample of 51 school officials from public, nonprofit, and for-profit sectors. GAO also reviewed documentation associated with Education's requests for public comment on burden for proposed postsecondary information collections and its retrospective analysis of regulations. Experts GAO interviewed offered varied opinions on which student financial aid requirements under Title IV of the Higher Education Act of 1965, as amended, are the most burdensome. While no single requirement was cited as burdensome by a majority of the 18 experts, 11 cited various consumer disclosure requirements--such as those pertaining to campus safety--primarily due to the time and difficulty needed to gather the information. Beyond consumer disclosures, 4 experts cited "Return of Title IV Funds"--which requires schools to calculate and return unearned financial aid to the federal government when a recipient withdraws from school--as burdensome because schools find it difficult to calculate the precise amount of funds that should be returned. More broadly, 6 experts said that the cumulative burden of multiple requirements is a substantial challenge. Experts also noted some benefits. For example, an expert said required loan disclosures help students understand their repayment responsibilities. School officials who participated in each of the eight discussion groups GAO conducted expressed similar views about the types of burdens and benefits associated with Title IV requirements. Participants in all groups said requirements for consumer disclosures and Return of Title IV Funds are costly and complicated. Regarding consumer disclosures, participants questioned the value of disclosing data that cannot be readily compared across schools, like data on graduates' employment, which may be calculated using different methodologies. Participants in four groups found Return of Title IV Funds requirements difficult to complete within the required time frame. Participants also cited some benefits, such as how consumer disclosures can help applicants choose the right school and unearned Title IV funds can be redirected to other students. Education seeks feedback from schools on regulatory burden mainly through formal channels, such as announcements posted in the Federal Register, on its website, and on a department listserv. However, Education officials said they have received a limited number of comments about burden in response to these announcements. GAO reviewed Education's notices soliciting public comments on burden estimates for its postsecondary information collections--which require the public, including schools, to submit or publish specified data--and found that 65 of 353 notices (18 percent) received comments, of which 25 received comments related to burden. For example, 2 notices received input on the difficulties of providing data requested by the department. GAO makes no recommendations in this report. In its comments, Education sought clarification regarding types of federal requirements and additional information on its efforts to balance burden and benefits. We provided clarifications and additional information, as appropriate.

Pension plans defer compensation from working years to retirement years. There are two major types of pension plans. A defined benefit plan specifies a formula for computing benefits payable at retirement based on age, length of plan participation, and earnings history. A defined contribution plan provides a framework within which the employer and/or employees contribute to individual worker accounts. The balance in this account at retirement, reflecting contributions plus investment income, constitutes the source of retirement benefits from a defined contribution plan. Put simply, a defined benefit plan specifies benefits, and a defined contribution plan specifies contributions. The Employee Retirement Income Security Act (ERISA) of 1974 requires annual financial and actuarial reporting by most private pension plans. Public Law 95-595, 31 U.S.C. 9501-9504, enacted on November 4, 1978, extended financial and actuarial reporting requirements to federal government pension plans. The Comptroller General and the Office of Management and Budget (OMB) jointly prescribe the form and content of the annual pension plan reports under Public Law 95-595. The reports are due 210 days after the last day of each plan's fiscal year and are to be sent to the Congress and the General Accounting Office. Public Law 95-595 defines the term "government pension plan" to mean a pension, annuity, retirement, or similar plan established or maintained by an agency for any of its officers or employees, regardless of the number of participants. The plans subject to Public Law 95-595 fall into three general categories: agency plans, nonappropriated fund activity plans, and federal reserve and farm credit plans. Agency plans cover employees of executive, legislative, and judicial organizations that are generally recognized as agencies and are generally funded by annual appropriations. Nonappropriated fund activity plans cover employees of organizations, such as post exchanges and commissaries, that provide morale, welfare, and recreation services to military components. In large part, these organizations are designed to be self-sufficient and operate with revenues generated from their activities. Finally, the federal reserve and farm credit plans cover employees of federal reserve and farm credit system entities, which also operate with revenues generated from their activities. The agencies, nonappropriated fund activities, and federal reserve and farm credit entities offer 34 defined benefit pension plans, which cover more than 10 million current employees, separated employees entitled to benefits, and retirees. Fifteen of the 34 defined benefit plans are agency plans. Nonappropriated fund activities and federal reserve and farm credit entities operate the other 19. Specifically, nonappropriated fund activities have 8 defined benefit plans for civilian employees who provide services to the Army, Navy, Air Force, Marines, and Coast Guard; the Federal Reserve System has a defined benefit plan for employees of the federal reserve banks and the Board of Governors; and the Farm Credit Systemhas 10 defined benefit plans for employees of the various district banks. Approximately 5.8 million active employees participate in the 34 federal government defined benefit plans. In addition, the plans provide benefits to 4.1 million annuitants, and another 119,000 separated employees are entitled to deferred retirement benefits. The defined benefit plans range in number of participants from the Civil Service Retirement and Disability Fund (CSRDF), with 5.2 million participants, to several plans which have fewer than 25 participants. Participants in the two largest plans, CSRDF and the Military Retirement System, constitute 97 percent of participants in the 34 federal defined benefit plans. CSRDF consists of the Civil Service Retirement System (CSRS) and the Federal Employees' Retirement System (FERS). The Congress closed CSRS to new participants at the end of 1983, and employees hired since 1983 generally are covered by FERS. Appendix III, table 1, lists the number of participants for each of the defined benefit plans. The federal government also offers defined contribution plans, generally to supplement the deferred compensation employees earn under defined benefit plans. According to the most recent pension plan filings, 2.2 million individuals participate in 17 defined contribution plans sponsored by agencies, nonappropriated fund activities, and federal reserve and farm credit entities. The largest federal defined contribution plan is the Thrift Savings Plan, which has 2.1 million participants, or 97 percent of the participants enrolled in federal government defined contribution plans. Appendix III, table 5, lists the number of participants for each of the defined contribution plans. The vast majority of defined benefit plans sponsored by the federal government offer retirement, survivor, and disability benefits to their participants. As of the most recent plan filings, participants in the 34 defined benefit plans had accumulated more than $1.2 trillion in total retirement benefits, the vast majority in the 15 agency plans. The various federal government plans provide significantly different retirement benefits to their members, depending on factors such as age and salary at retirement, years of service, election of survivor annuities, and cost-of-living adjustments. In addition, some defined benefit plans are supplemented with defined contribution plans and Social Security benefits, and others are not. Certain defined benefit plans provide different levels of benefits for different employee groups. A general description of basic retirement benefits for each of the federal defined benefit plans is provided in the plan profiles in appendix I. These descriptions provide general information only and do not include details for determining or comparing actual benefit amounts. Actual benefit amounts for individual defined benefit plan participants may differ significantly as a result of early retirement, disability benefits, survivor benefit elections, and other factors applicable to specific circumstances. The majority of federal government defined contribution plans provide employer matches to employee contributions. Contribution percentages for each of the defined contribution plans are listed in the plan profiles in appendix II and are summarized in appendix III, table 5. Differences exist in the funding of federal government defined benefit plans. Of these 34 plans, 28 use trust funds, while 6 of the agency plans are referred to as pay-as-you-go plans. Trust funds are separate accounting entities established to account for government and employee contributions, investments, and benefits paid. The pay-as-you-go plans do not have trust funds to accumulate assets to pay plan benefits. For these six plans, benefits are paid to annuitants from appropriations in the year in which the benefits are due. Trust funds for agency defined benefit plans, with the exception of the Tennessee Valley Authority (TVA), invest in special issue Treasury securities, which are nonmarketable. The primary purpose of the trust funds is not to provide a source of cash for the government to pay benefits, but to provide budget authority to allow the Treasury to disburse monthly annuity checks without annual appropriations. Because these securities represent assets of the trust funds and offsetting liabilities of the Treasury, under accounting procedures, the trust fund assets are eliminated in the governmentwide financial statements. Accordingly, these trust fund assets are not included in the governmentwide financial statements, which include the federal government's $1.2 trillion liability for the benefit obligations of the 15 agency plans. The defined benefit plans of the nonappropriated fund activities and federal reserve and farm credit entities, as well as TVA, use trust funds to set aside money or marketable assets during employees' working years for the accruing cost of their retirement benefits. A defined benefit pension plan's status as fully funded or underfunded is determined by comparing its net assets to the actuarial present value of its benefit obligations. The agency defined benefit plans generally are underfunded--that is, the present value of benefit obligations exceeds plan assets. As discussed more fully in the retirement system financing section below, statutory provisions are in place for the future elimination of the unfunded benefit obligations of CSRS and the Military Retirement System. A principal effect of not fully funding most agency pension plans is that agencies' budgets have not included the full cost of the pensions. Because contributions to most agency plans, under applicable requirements, have covered less than the full accruing cost of retirement benefits to covered employees, the agencies' budgets have not reflected the full cost of government programs. The defined benefit plans of the nonappropriated fund activities and the federal reserve and farm credit entities, as well as TVA, have generally contributed amounts sufficient to set aside money or marketable assets in trust funds to fully fund their estimated accumulated benefit obligations. One measure of a defined benefit pension plan's obligation for benefits is represented by the present value of accrued benefits. This actuarial measure is referred to as the Accumulated Benefit Obligation. It applies to private sector defined benefit plans in accordance with Statement of Financial Accounting Standards No. 35 and also was used in the federal government's prototype governmentwide financial statements for fiscal year 1993. It reflects all accrued benefits due under the plan as if the entity ceased as a going concern. The Accumulated Benefit Obligation is a "static" measure because it does not consider anticipated pay increases, cost-of-living adjustments, or future contributions. Another measure of benefit obligations is represented by the present value of future benefits, net of the present value of future normal cost contributions. This actuarial measure is referred to as the Actuarial Accrued Liability. It is a "dynamic" measure because it considers estimated future service and salary changes, as well as the present value of future normal cost contributions. The Federal Accounting Standards Advisory Board issued an exposure draft entitled Accounting for Liabilities of the Federal Government (November 7, 1994). Its provisions would require that the Actuarial Accrued Liability of federal government defined benefit plans be reflected in federal government financial statements. For the most recent plan filings, 21 of the 34 federal government defined benefit plans--3 of the 15 agency plans and 18 of the 19 plans sponsored by the nonappropriated fund activities and federal reserve and farm credit entities--were fully funded under the static Accumulated Benefit Obligation measure. Those filings also indicate that 15 of the 34 plans--5 agency plans and 10 others--were fully funded under the dynamic Actuarial Accrued Liability measure. Of the largest federal pension programs, FERS is fully funded under the Accumulated Benefit Obligation measure and nearly fully funded under the Actuarial Accrued Liability measure, and statutory provisions for the future elimination of the unfunded benefit obligations of CSRS and the Military Retirement System have already been enacted. Under current law, the government will amortize its unfunded actuarial accrued liabilities by increasing the amount of special issue government securities issued by the Treasury to the trust funds. (See footnote 5.) The special issue Treasury securities represent that portion of estimated future retirement benefit obligations of the agency defined benefit plans that the government has recognized on paper by providing budget authority to cover future benefit payments. The unfunded obligation of an agency plan is that portion of estimated future benefit obligations that has no paper backing in the form of special issue Treasury securities. Therefore, because special issue Treasury securities are used, whether the obligation is funded or unfunded has no effect on current budget outlays. Also, the obligation is not a measure of the government's ability to pay retirement benefits in the future. The Treasury must obtain the necessary money through tax receipts or borrowing to pay plan benefits to annuitants when those benefits are due for plans having trust funds invested in special issue Treasury securities and for pay-as-you-go plans. This financing approach enables the federal government to defer obtaining the money until it is needed to pay the benefits. Appendix III, table 3, lists the Accumulated Benefit Obligation for each defined benefit plan. Appendix III, table 4, lists the Actuarial Accrued Liability, and the plan profiles in appendix I describe the applicable provisions for eliminating unfunded benefit obligations. By definition, because defined contribution plans do not specify the retirement benefits an individual will receive, their obligation to pay benefits is limited to the contributions made by or on behalf of each individual and any earnings on those contributions. The 15 federal agency defined benefit plans have a total of $464 billion in investments, the vast majority of which are required by law to be invested in U.S. government obligations. These investments consist primarily of nonmarketable special issue U.S. Treasury securities, as described in the preceding sections. The defined benefit plans of the nonappropriated fund activities and federal reserve and farm credit entities reported that they are not restricted to investments in government obligations. The plans of these 19 entities have a combined investment portfolio of $7 billion, of which 88 percent is invested in assets other than U.S. government obligations. The investments consist primarily of corporate stocks and bonds. Appendix III, table 2, lists the investments of each defined benefit plan. Assets in the 17 federal government defined contribution plans are primarily invested in various marketable stock, bond, and government security funds. Investments in these 17 plans totaled more than $28 billion as of the latest plan filings, of which $26 billion was held by the Thrift Savings Plan. The Thrift Savings Plan invests employee designated contributions to the plan's government securities fund in special issue Treasury securities. Under this financing approach, which is used for the agency defined benefit plans as described in the preceding section, the Treasury must obtain the necessary money through tax receipts or borrowing to pay plan benefits when those benefits are due. However, for the Thrift Savings Plan, budget outlays are recorded for employer and employee contributions as they are made each pay period. Outlays are recorded because the Thrift Savings Plan is not included in the U.S. budget, unlike agency defined benefit plans. Appendix III, table 5, lists the total investment balance for each federal government defined contribution plan. To summarize information on pension plans of the federal government, we reviewed the most recent filings by 51 federal pension plans under Public Law 95-595 received as of the end of our fieldwork, July 21, 1995, including several small plans which had not previously filed. In addition, we contacted the plan administrators to obtain additional plan data pertaining to Social Security coverage, investment restrictions, and financial statement audits. Under Public Law 95-595, the plan filings are not due until 210 days after the plan's fiscal year-end. Therefore, the most recent plan filing available for most plans was the plan year ending in 1993. Accordingly, legislative initiatives or other subsequent events not included in the information received through July 21, 1995, are not reflected in this report or accompanying appendixes. Also, we consulted with OMB to verify that it had not received filings for additional federal government pension plans. Finally, certain federal benefit programs are excluded from this report because they are not subject to the disclosure requirements of Public Law 95-595. The Central Intelligence Agency pension plan, as well as Social Security and Railroad Retirement benefits, are excluded from the requirements of Public Law 95-595. In addition, the monetary allowance provided to former Presidents is not covered. The Department of Veterans Affairs does not file reports under Public Law 95-595 for its Veterans Compensation and Pension Programs. Veterans and their dependents receive compensation benefits for service connected disabilities or death and pension benefits for nonservice connected disabilities or death. Neither the entitlement to nor the amount of compensation and pension benefits is based on age and length of service. Rather, compensation and pension benefits are based on the occurrence of specified events. In addition, benefits for nonservice connected disabilities or death are subject to specific income limitations. Thus, the Compensation and Pension Programs differ significantly from the defined benefit plans for which reports are filed under Public Law 95-595. Several limitations exist in the summary information presented in the report. The summary of pension plan data is a compilation we prepared from the plan reports and additional plan data provided by the plan administrators. We did not independently verify the information in the plan reports and additional data that the plan administrators provided to us and we do not assure their accuracy on matters of fact or law. Except where indicated in the pension plan profiles in appendixes I and II, the plan financial reports were not audited by independent auditors. In addition, where plans had multiple retirement provisions for certain specialized employees, we listed the retirement benefits provided to the majority of the plan participants. The projections in the plan profiles and tables are highly dependent on the actuarial cost method and the actuarial assumptions used. Several acceptable actuarial cost methods exist. The actuarial assumptions vary by plan because they are based on the best estimate of anticipated experience under the plan made by each plan actuary. These assumptions can have a significant impact on estimates of future costs. In addition, we found that the information provided by plan administrators often varied in the extent of details presented. For example, some plan filings described all significant economic assumptions used in the actuarial valuations, but others provided fewer details about the assumptions. In some cases, because some plans provided more extensive information than others, it might appear that such information was not applicable to the plans which provided less information. That is not always the case. For example, the provisions of the Military Retirement System are substantially the same as those of the separate Coast Guard Military Retirement System, Public Health Service Commissioned Corps Retirement System, and the National Oceanic and Atmospheric Corps Retirement System. Because the administrators of each plan described some provisions of the plan differently, the fact that the provisions are actually the same may not always be apparent. Similarly, the extent of financial and cost information provided by the plans varied. For example, the Retirement Annuity Plan for Employees of the Army and Air Force Exchange (Exchange Service plan) provides substantially the same benefits as the Civil Service Retirement System, except that Exchange Service plan benefits are reduced by a "Social Security offset." The normal cost reported for the CSRS is 25.14 percent of salary, whereas the Exchange Service plan reported normal cost of 9.81 percent of salary. Part of the difference in normal cost may be caused by differing economic assumptions used by the plans' actuaries, but the primary reason for the difference is that employees in the Exchange Service plan are also covered by Social Security while CSRS employees are not. Thus, the offset provision cuts plan benefits and reduces plan costs accordingly. However, in order to compare the total costs of all benefits provided to participants covered by these two programs, additional details would be needed. For example, an erroneous conclusion might result unless the costs of providing Social Security benefits to Exchange Service employees were added to the reported plan costs; similarly, detailed information about the Social Security benefits to Exchange Service employees would be required in order to compare the benefits under these programs. The scope of this report did not include analyzing and comparing the provisions of the various plans. However, we have been asked by the Chairman of the Senate Committee on Governmental Affairs to compare, in detail, the provisions of retirement programs for federal personnel. We will provide each of you a copy of the report on the results of that work when it is completed. We conducted our review from April 1995 through August 1995 in accordance with generally accepted government auditing standards. We requested comments on drafts of each plan profile from the applicable plan officials. We incorporated those comments in the plan profiles as appropriate. As agreed with your office, unless you announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to the Director of the Office of Management and Budget and interested congressional committees. Copies will be made available to others on request. If you or your staffs have any questions concerning this report, please contact me at (202) 512-9406 or H. Kent Bowden, Assistant Director, at (202) 512-5270. Major contributors to this report are listed in appendix IV. Civil Service Retirement and Disability Fund (CSRS and FERS) Coast Guard Military Retirement System Foreign Service Retirement and Disability Fund Public Health Service Commissioned Corps Retirement System National Oceanic and Atmospheric Administration Corps Retirement System Comptrollers' General Retirement Plan Court of Federal Claims Judges' Retirement System U.S. Court of Veterans Appeals Judges' Retirement Plan Judicial Officers' Retirement Fund Judicial Survivors' Annuities System United States Tax Court Retirement Plan United States Tax Court Survivors' Annuity Plan Tennessee Valley Authority Retirement System Retirement Annuity Plan for Employees of Army and Air Force Exchange Service Supplemental Deferred Compensation Plan for Members of the Executive Management Program (Army and Air Force Exchange Service) U.S.A.F. Nonappropriated Fund Retirement Plan for Civilian Employees United States Army Nonappropriated Fund Retirement Plan Retirement Plan for Civilian Employees of United States Marine Corps Morale, Welfare, and Recreation Activities and Miscellaneous Nonappropriated Fund Instrumentalities Navy Exchange Service Command Retirement Plan U.S. Navy Nonappropriated Fund Retirement Plan for Employees of Civilian Morale, Welfare, and Recreation Activities Norfolk Naval Shipyard Pension Plan Federal Reserve Employees' Benefits System Western Farm Credit District Employees' Retirement Plan Ninth Farm Credit District Pension Plan Farm Credit District of Springfield Group Retirement Plan Farm Credit District of Baltimore Retirement Plan Seventh Farm Credit District Retirement Plan First South Production Credit Association Retirement Plan Farm Credit District of Columbia, SC Retirement Plan Farm Credit District of Texas Pension Plan Twelfth Farm Credit District Retirement Plan National Bank for Cooperatives Retirement Plan 173 This appendix lists the principal financial, actuarial, and general terms for each of the 34 federal government defined benefit plans. The actuarial data include two presentations of the benefit obligation and the related funding status for each federal government defined benefit plan. (1) Accumulated Benefit Obligation--Statement of Financial Accounting Standards (SFAS) No. 35, Accounting and Reporting by Defined Benefit Plans, prescribes the measure by which private sector defined benefit pension plans calculate the net present value of future benefit payments. Under this actuarial measure, the obligation for future benefits is primarily based on employees' history of pay and service up to the date that the obligation information is reported. The benefit obligation determined in accordance with SFAS 35 is referred to as the Accumulated Benefit Obligation. Comparing the assets available for plan benefits to the Accumulated Benefit Obligation (the actuarial present value of accumulated benefits, less assets available for benefits) yields one measure of plan funding. In appendix I, a zero or negative total (that is, net assets available for benefits equal or exceed the Accumulated Benefit Obligation) indicates that the plan is fully funded, and, as such, the assets of the plan would satisfy the actuarial present value of accumulated plan benefits if the entity were to cease operations. (2) Actuarial Accrued Liability--Because it is assumed that the federal government will not cease as a going concern, a second actuarial measure of the obligation for future benefits is presented. It is referred to as the Actuarial Accrued Liability. The Federal Accounting Standards Advisory Board (FASAB), issued an exposure draft, Accounting for Liabilities for the Federal Government, which would require the use of the Actuarial Accrued Liability for those federal government pension plans subject to FASAB standards. The Actuarial Accrued Liability represents the present value of benefits expected to be paid in the future to current employees and annuitants, net of the present value of future normal cost contributions expected to be made for and by current employees. It includes the projected future salary increases that reflect an estimate of the compensation levels of the individual employees involved (including future changes attributable to general price level, seniority, promotion, and other factors). Comparing the plan assets to the Actuarial Accrued Liability yields a second measure of plan funding. In appendix I, a zero or negative total (that is, plan assets equal or exceed the Actuarial Accrued Liability) indicates that the plan is fully funded, and, as such, assets in the fund plus the present value of future normal cost contributions would satisfy the actuarial present value of projected benefits to current employees and annuitants, including estimated future salary increases. For both measures described above, plan asset amounts generally are based on fair value. For the Accumulated Benefit Obligation measure, the plan assets generally are valued at the amount that the plan could reasonably expect to receive in a current exchange for those assets. Most plans used the same asset amount for the Actuarial Accrued Liability measure. However, a few plans determined the actuarial value of their assets in a different manner for the Actuarial Accrued Liability measure. For example, for its Actuarial Accrued Liability measure, the Military Retirement System stated the actuarial value of its assets at amortized cost (book value). Thrift Savings Plan (CSRS and FERS) An actuarial cost method in which future service benefits are funded as they accrue. Thus, normal cost is the present value of the units of future benefits credited to employees for service in that year. Prior service cost is the present value at the valuation date of the units of future benefits credited to employees for service prior to the valuation date. Annual normal cost for an individual for an equal unit of benefits each year increases because the period to the employee's retirement continually shortens and the probability of reaching retirement increases. For a mature employee group, the normal cost would tend to be the same each year as older employees are replaced by younger ones. The actuarial present value of pension benefits attributed by the pension benefit formula to employee service rendered before a specified date and based on service and compensation prior to that date. Benefits that are attributable under the provisions of a pension plan to employees' service rendered up to the benefit information date. The portion of the present value (as of the benefit information date) of a pension plan's projected future benefit costs and administrative expenses that exceeds the present value of future normal cost contributions. Estimates of future conditions affecting pension cost; for example, mortality rate, employee turnover, compensation levels, and investment earnings. A recognized technique used in establishing the amount of annual contributions or accounting charges for pension cost under a pension plan. The current worth of amounts payable or receivable in the future. If payment or receipt is certain, the present value is determined by discounting the future amount or amounts at a predetermined rate of interest. If payment or receipt is contingent on future events (for example, survival), further discounting is necessary for the probability that payment or receipt will occur. The process by which an actuary estimates the present value of benefits to be paid under a pension plan and calculates the amounts of employer contributions or accounting charges for pension cost. An actuarial cost method in which the entire unfunded cost of future pension benefits (including benefits to be paid to employees who have retired as of the date of the valuation) is spread over the average future service lives of employees who are active as of the date of valuation. In most cases this is done by the use of a percentage of payroll. Past service cost is included in normal cost. The date as of which the actuarial present value of accumulated plan benefits is presented. A pension plan under which participants bear part of the cost. Moving average of the Social Security wage base computed when a member attains normal retirement age. Some plans offer additional retirement benefits to highly compensated employees who exceed the average Social Security wage base. Assumptions as to rates of plan participants' withdrawal from the plan, retirement, disability, and death used in making actuarial projections. A pension plan that specifies a determinable pension benefit, usually based on factors such as age, years of service, and salary. A pension plan that specifies the amount of contribution to be made to the plan for each employee. Benefits at retirement are those contributions plus whatever has been earned on them. An actuary enrolled under 29 U.S.C. 1242 by a Joint Board for the Enrollment of Actuaries established by the Secretaries of Labor and the Treasury. An actuarial cost method which assigns a "level normal cost" to each year of service for each participant. The assumption is made under this method that every employee entered the plan (entry age) at the time of initial employment or at the earliest eligibility date, if the plan had been in existence, and that contributions have been made from the entry age to the date of the actuarial valuation. A variation of the entry-age normal actuarial cost method which maintains the initial unfunded liability rather than recomputing it each year, adjusting it only for plan amendments or changes in actuarial assumptions. An estimate of the total benefits payable at retirement, including benefits anticipated to accrue in the future as well as those accruing before the benefit information date. Future benefits may depend on total length of service but with pay averaged over only a limited number of years (often the final 3 years of service). An actuarial cost method which assigns the cost of each employee's pension in level annual amounts, or as a level percentage of the employee's compensation, over the period from the inception date of a plan (or the date of his entry into the plan, if later) to his retirement date. Thus, past service cost is included in normal cost. The difference between a plan's assets and its liabilities. For purposes of this definition, a plan's liabilities do not include participants' accumulated plan benefits. A pension plan under which participants do not make contributions. The annual cost assigned, under the actuarial cost method in use, to years subsequent to the inception of a pension plan. Member of a pension plan, including active employees covered by the plan, separated employees entitled to benefits, and retiree and survivor annuitants. A method of paying pension benefits to retired employees as they come due out of appropriations. Calendar, policy, or fiscal year chosen by the plan on which the records of the plan are kept. The actuarial present value as of a date of all benefits attributed by the pension benefit formula to employee service rendered prior to that date, including recognition of changes in future compensation levels if appropriate. In the case of a pension plan established or maintained by a single employer, the employer; in the case of a plan established or maintained jointly by two or more employers, an association, committee, joint board of trustees, or other group of representatives of the parties who have established or who maintain the pension plan. A contract with an insurance company under which related payments to the insurance company are accumulated in an unallocated fund to be used to meet benefit payments, either directly or through the purchase of annuities, when employees retire. Funds in an unallocated contract may also be withdrawn and otherwise invested. 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Pursuant to a congressional request, GAO reviewed the status of public pension plan funding, focusing on federally sponsored defined benefit and contribution plans subject to reporting requirements legislation. GAO found that: (1) 34 federal government defined benefit plans have over 10 million participants and 17 defined contribution plans have 2.2 million participants; (2) the 34 defined benefit plans vary considerably and have benefits of over $1.2 trillion; (3) most of the defined benefit plans are administered as trust funds which almost exclusively invest in nonmarketable, special issue Treasury securities, while 6 plans pay benefits from their current year appropriations; (4) most agency plans, except for the Federal Employees Retirement System, are underfunded; (5) the 19 nonappropriated fund activity, federal reserve, and farm credit defined benefit plans are fully funded; (6) the use of trust funds has no effect on current budget outlays and is not a measure of the government's ability to pay future retirement benefits out of tax and other receipts; (7) agencies' budgets have not reflected the full cost of their pension plan programs; (8) the 17 defined contribution plans have more than $28 billion invested in stocks, bonds, and government securities, with the Thrift Savings Plan having about $26 billion in Treasury securities; and (9) defined contribution plan obligations are limited to the employee and employer contributions made and any earnings on them.

Ten states concentrated in the western, midwestern, and southeastern United States--all areas where the housing market had experienced strong growth in the prior decade--experienced 10 or more bank failures between 2008 and 2011 (see fig.1). Together, failures in these 10 states comprised 72 percent (298), of the 414 bank failures across all states during this time period. Within these 10 states, 86 percent (257) of the failed banks were small institutions with assets of less than $1 billion at the time of failure, and 52 percent (155), had assets of less than $250 million. Twelve percent (36) were of medium-size banks with more than $1 billion but less than $10 billion in assets, and 2 percent (5) were large banks with assets of more than $10 billion at the time of failure. In the 10 states with 10 or more failures between 2008 and 2011, failures of small and medium-size banks were largely associated with high concentrations of commercial real estate (CRE) loans, in particular the subset of acquisition, development, and construction (ADC) loans, and with inadequate management of the risks associated with these high concentrations. Our analysis of call report data found that CRE (including ADC) lending increased significantly in the years prior to the housing market downturn at the 258 small banks that failed between 2008 and 2011. This rapid growth of failed banks' CRE portfolios resulted in concentrations--that is, the ratio of total CRE loans to total risk-based capital--that exceeded regulatory thresholds for heightened scrutiny established in 2006 and increased the banks' exposure to the sustained downturn that began in 2007. Specifically, we found CRE concentrations grew from 333 percent in December 2001 to 535 percent in June 2008. At the same time, ADC concentrations grew from 104 percent to 259 percent. The trends for the 36 failed medium-size banks were similar over this time period. In contrast, small and medium-sized banks that did not fail exhibited substantially lower levels and markedly slower growth rates of CRE loans and as a result had significantly lower concentrations of them, reducing the banks' exposure. With the onset of the financial crisis, the level of nonperforming loans began to rise, as did the level of subsequent charge-offs, leading to a decline in net interest income and regulatory capital. The rising level of nonperforming loans, particularly ADC loans, appears to have been the key factor in the failures of small and medium banks in the 10 states between 2008 and 2011. For example, in December 2001, 2 percent of ADC loans at the small failed banks were classified as nonperforming. With the onset of the financial crisis, the level of nonperforming ADC loans increased quickly to 11 percent by June 2008 and 46 percent by June 2011. As banks began to designate nonperforming loans or portions of these loans as uncollectible, the level of net charge-offs also began to rise. In December 2001, net charge-offs of ADC loans at small failed banks were less than 1 percent. By June 2008, they had risen to 2 percent and by June 2011 to 12 percent. CRE and especially ADC concentrations in small and medium-size failed banks in the 10 states were often correlated with poor risk management and risky funding sources. Our analysis showed that small failed banks in the 10 states had often pursued aggressive growth strategies using nontraditional and riskier funding sources such as brokered deposits. The IG reviews noted that in the majority of failures, management exercised poor oversight of the risks associated with high CRE and ADC concentrations and engaged in weak underwriting and credit administration practices. Further, 28 percent (84) of the failed banks had been chartered for less than 10 years at the time of failure and according to FDIC, appeared in many cases to have deviated from their approved business plans. Large bank failures in the 10 states were associated with some of the same factors as small banks--high-risk growth strategies, weak underwriting and risk controls, and excessive concentrations that increased these banks' exposure to the real estate market downturn.The primary difference was that the large banks' strategies generally relied on risky nontraditional residential mortgage products as opposed to commercial real estate. To further investigate factors associated with bank failures across the United States, we analyzed data on FDIC-insured commercial banks and state-chartered savings banks from 2006 to 2011. Our econometric analysis suggests that across the country, riskier lending and funding sources were associated with an increased likelihood of bank failures. Specifically, we found that banks with high concentrations of ADC loans and an increased use of brokered deposits were more likely to fail from 2008 to 2011, while banks with better asset quality and greater capital adequacy were less likely to fail. An FDIC IG study issued in October 2012 found that some banks with high ADC concentrations were able to weather the recent financial crisis without experiencing a corresponding decline in their overall financial condition. Among other things, the IG found that these banks exhibited strong management, sound credit administration and underwriting practices, and adequate capital. We found that losses related to bank assets and liabilities that were subject to fair value accounting contributed little to bank failures overall, largely because most banks' assets and liabilities were not recorded at fair value. Based on our analysis, fair value losses related to certain types of mortgage-related investment securities contributed to some bank failures. But in general fair value-related losses contributed little to the decline in net interest income and regulatory capital that failed banks experienced overall once the financial crisis began. We analyzed the assets and liabilities on the balance sheets of failed banks nationwide that were subject to fair value accounting between 2007 and 2011. We found that generally over two-thirds of the assets of all failed commercial banks (small, medium-size, and large) were classified as held-for-investment (HFI) loans, which were not subject to fair value accounting. For example, small failed commercial banks held an average of 77 percent of their assets as HFI loans in 2008. At the same time, small surviving (open) commercial banks held an average of 69 percent in such loans. Failed and open small thrifts, as well as medium- size and large commercial banks, had similar percentages. Some assets and liabilities, such as securities designated for trading, are measured at fair value on a recurring basis (at each reporting period), where unrealized gains or losses flow through the bank's earnings in the income statement and affect regulatory capital. However, for certain other assets and liabilities that are measured at fair value on a recurring basis, such as AFS securities, unrealized fair value gains and losses generally do not impact earnings and thus generally are not included in regulatory capital calculations. Instead, these gains or losses are recorded through other comprehensive income, unless the institution determines that a decline in fair value below amortized cost constitutes an other than temporary impairment, in which case the instrument is written down to its fair value, with credit losses reflected in earnings. value and impact regulatory capital, together these categories did not account for a significant percentage of total assets at either failed or open commercial banks or thrifts. For example, in 2008, trading assets, nontrading assets such as nontrading derivative contracts, and trading liabilities at small failed banks ranged from 0.00 to 0.03 percent of total assets. As discussed earlier, declines in regulatory capital at failed banks were driven by rising levels of credit losses related to nonperforming loans and charge-offs of these loans. For failed commercial banks and thrifts of all sizes nationwide, credit losses, which resulted from nonperforming HFI loans, were the largest contributors to the institutions' overall losses when compared to any other asset class. These losses had a greater negative impact on institutions' earnings and regulatory capital levels than those recorded at fair value. During the course of our work, several state regulators and community banking association officials told us that at some small failed banks, declining collateral values of impaired collateral-dependent loans-- particularly CRE and ADC loans in those areas where real estate assets prices declined severely--drove both credit losses and charge-offs and resulted in reductions to regulatory capital. Data are not publicly available to analyze the extent to which credit losses or charge-offs at the failed banks were driven by declines in the collateral values of impaired collateral-dependent CRE or ADC loans. However, state banking associations said that the magnitude of the losses was exacerbated by federal bank examiners' classification of collateral-dependent loans and evaluation of appraisals used by banks to support impairment analysis of these loans. Federal banking regulators noted that regulatory guidance in 2009 directed examiners not to require banks to write down loans to an amount less than the loan balance solely because the value of the underlying collateral had declined and that examiners were generally not expected to challenge the appraisals obtained by banks unless they found that any underlying facts or assumptions about the appraisal were inappropriate or could support alternative assumptions. A loan loss provision is the money a bank sets aside to cover potential credit losses on loans. The Department of the Treasury (Treasury) and the Financial Stability Forum's Working Group on Loss Provisioning (Working Group) observed that the current accounting model for estimating credit losses is based on historical loss rates, which were low in the years before the financial crisis. Under GAAP, the accounting model for estimating credit losses is commonly referred to as an "incurred loss model" because the timing and measurement of losses are based on estimates of losses incurred as of the balance sheet date. In a 2009 speech, the Comptroller of the Currency, who was a co-chair of the Working Group, noted that in a long period of benign economic conditions, such as the years prior to the most recent downturn, historical loan loss rates would typically be low. As a result, justifying significant loan loss provisioning to increase the loan loss allowance can be difficult under the incurred loss model. country had identified multiple concerns with examiner treatment of CRE loans and related issues. GAO, Banking Regulation: Enhanced Guidance on Commercial Real Estate Risks Needed, GAO-11-489 (Washington, D.C.: May 19, 2011). losses earlier on the loans they underwrite and could incentivize prudent risk management practices. Moreover, it is designed to help address the cycle of losses and failures that emerged in the recent crisis as banks were forced to increase loan loss allowances and raise capital when they were least able to do so (procyclicality). We plan to continue to monitor the progress of the ongoing activities of the standard setters to address concerns with the loan loss provisioning model. FDIC is required to resolve a bank failure in a manner that results in the least cost to the Deposit Insurance Fund (DIF). FDIC's preferred resolution method is to sell the failed bank to another, healthier, bank. During the most recent financial crisis, FDIC facilitated these sales by including a loss share agreement, under which FDIC absorbed a portion of the loss on specified assets purchased by the acquiring bank. From January 2008 through December 31, 2011, FDIC was appointed as receiver for the 414 failed banks, with $662 billion in book value of failed bank assets. FDIC used purchase and assumption agreements (the direct sale of a failed bank to another, healthier bank) to resolve 394 failed institutions with approximately $652 billion in assets. As such, during the period 2008 through 2011, FDIC sold 98 percent of failed bank assets using purchase and assumption agreements. However, FDIC only was able to resolve so many of these banks with purchase and assumption agreements because it offered to share in the losses incurred by the acquiring institution. According to FDIC officials, at the height of the financial crisis in 2008, FDIC sought bids for whole bank purchase and assumption agreements (where the acquiring bank assumes essentially all of the failed bank's assets and liabilities) with little success. Potential acquiring banks we interviewed told us that they did not have sufficient capital to take on the additional risks that the failed institutions' assets represented. Acquiring bank officials that we spoke to said that, because of uncertainties in the market and the value of the assets, they would not have purchased the failed banks without FDIC's shared loss agreements. Because shared loss agreements had worked well during the savings and loan crisis of the 1980s and early 1990s, FDIC decided to offer the option of having such agreements as part of the purchase and assumption of the failed bank. Shared loss agreements provide potential buyers with some protection on the purchase of failed bank assets, reduce immediate cash needs, keep assets in the private sector, and minimize disruptions to banking customers. Under the agreements, FDIC generally agrees to pay 80 percent for covered losses, and the acquiring bank covers the remaining 20 percent. From 2008 to the end of 2011, FDIC resolved 281 of the 414 failures (68 percent) by providing a shared loss agreement as part of the purchase and assumption. The need to offer shared loss agreements diminished as the market improved. For example, in 2012 FDIC had been able to resolve more than half of all failed institutions without having to offer to share in the losses. Specifically, between January and September 30, 2012, FDIC had to agree to share losses on 18 of 43 bank failures (42 percent). Additionally, some potential bidders were willing to accept shared loss agreements with lower than 80 percent coverage. As of December 31, 2011, DIF receiverships had made shared loss payments totaling $16.2 billion. In addition, future payments under DIF receiverships are estimated at an additional $26.6 billion over the duration of the shared loss agreements, resulting in total estimated lifetime losses of $42.8 billion (see fig. 2). By comparing the estimated cost of the shared loss agreements with the estimated cost of directly liquidating the failed banks' assets, FDIC has estimated that using shared loss agreements has saved the DIF over $40 billion. However, while the total estimated lifetime losses of the shared loss agreements may not change, the timing of the losses may, and payments from shared loss agreements may increase as the terms of the agreements mature. FDIC officials stated that the acquiring banks were being monitored for compliance with the terms and conditions of the shared loss agreements. FDIC is in the process of issuing guidance to the acquiring banks reminding them of these terms to prevent increased shared loss payments as these agreements approach maturity. The acquisitions of failed banks by healthy banks appear to have mitigated the potentially negative effects of bank failures on communities, although the focus of local lending and philanthropy may have shifted. First, while bank failures and failed bank acquisitions can have an impact on market concentration--an indicator of the extent to which banks in the market can exercise market power, such as raising prices or reducing the availability of some products and services--we found that a limited number of metropolitan areas and rural counties were likely to have become significantly more concentrated. We analyzed the impact of bank failures and failed bank acquisitions on local credit markets using data for the period from June 2007 to June 2012. We calculated the Herfindahl-Hirschman Index (HHI), a key statistical measure used to assess market concentration and the potential for firms to exercise their ability to influence market prices. The HHI is measured on a scale of 0 to 10,000, with values over 1,500 considered indicative of concentration. Our results suggest that a small number of the markets affected by bank failures and failed bank acquisitions were likely to have become significantly more concentrated. For example, 8 of the 188 metropolitan areas affected by bank failures and failed bank acquisitions between June 30, 2009, and June 29, 2010, met the criteria for raising significant competitive concerns. Similarly, 5 of the 68 rural counties affected by bank failures during the same time period met the criteria. The relatively limited number of areas where concentration increased was generally the result of acquisitions by institutions that were not already established in the locales that the failed banks served. However, the effects could be significant for those limited areas that were serviced by one bank or where few banks remain. Second, our econometric analysis of call report data from 2006 through 2011 found that failing small banks extended progressively less net credit as they approached failure, but that acquiring banks generally increased net credit after the acquisition, albeit more slowly. Acquiring and peer banks we interviewed in Georgia, Michigan, and Nevada agreed. However general credit conditions were generally tighter in the period following the financial crisis. For example, several noted that in the wake of the bank failures, underwriting standards had tightened, making it harder for some borrowers who might have been able to obtain loans prior to the bank failures to obtain them afterward. Several banks officials we interviewed also said that new lending for certain types of loans could be restricted in certain areas. For example, they noted that the CRE market, and in particular the ADC market, had contracted and that new lending in this area had declined significantly. Officials from regulators, banking associations, and banks we spoke with also said that involvement in local philanthropy declined as small banks approached failure but generally increased after acquisition. State banking regulators and national and state community banking associations we interviewed told us that community banks tended to be highly involved in local philanthropic activities before the recession--for example, by designating portions of their earnings for community development or other charitable activities. However, these philanthropic activities decreased as the banks approached failure and struggled to conserve capital. Acquiring bank officials we interviewed told us that they had generally increased philanthropic activities compared with the failed community banks during the economic downturn and in the months before failure. However, acquiring banks may or may not focus on the same philanthropic activities as the failed banks. For example, one large acquiring bank official told us that it made major charitable contributions to large national or statewide philanthropic organizations and causes and focused less on the local community charities to which the failed bank had contributed. Finally, we econometrically analyzed the relationships among bank failures, income, unemployment, and real estate prices for all states and the District of Columbia (states) for 1994 through 2011. Our analysis showed that bank failures in a state were more likely to affect its real estate sector than its labor market or broader economy. In particular, this analysis did not suggest that bank failures in a state--as measured by failed banks' share of deposits--were associated with a decline in personal income in that state. To the extent that there is a relationship between the unemployment rate and bank failures, the unemployment rate appears to have more bearing on failed banks' share of deposits than vice versa. In contrast, our analysis found that failed banks' share of deposits and the house price index in a state appear to be significantly related to each other. Altogether, these results suggest that the impact of bank failures on a state's economy is most likely to appear in the real estate sector and less likely to appear in the overall labor market or in the broader economy. However, we note that these results could be different at the city or county level. Chairman Capito, Ranking Member Meeks, and Members of the Subcommittee, this concludes my prepared statement. I would be happy to answer any questions that you may have at this time. If you or your staff have any questions about this testimony, please contact Lawrance Evans, Jr. at (202) 512-4802 or [email protected]. Contact points for our Offices of Public Affairs and Congressional Relations may be found on the last page of this report. GAO staff who made key contributions to this testimony include Karen Tremba, Assistant Director; William Cordrey, Assistant Director; Gary Chupka, Assistant Director; William Chatlos; Emily Chalmers, Robert Dacey; Rachel DeMarcus; M'Baye Diagne; Courtney LaFountain; Marc Molino, Patricia Moye; Lauren Nunnally; Angela Pun, Stefanie Jonkman; Akiko Ohnuma; Michael Osman; and Jay Thomas. 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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Between January 2008 and December 2011--a period of economic downturn in the United States--414 insured U.S. banks failed. Of these, 85 percent (353) had less than $1 billion in assets. These small banks often specialize in small business lending and are associated with local community development and philanthropy. These small bank failures have raised questions about the contributing factors, including the possible role of local market conditions and the application of fair value accounting under U.S. accounting standards. This statement is based on findings from the 2013 report on recent bank failures (GAO-13-71). This testimony discusses (1) the factors that contributed to the bank failures in states with the most failed institutions between 2008 and 2011 and what role, if any, fair value accounting played in these failures; (2) the use of shared loss agreements in resolving troubled banks; and (3) the effect of recent bank failures on local communities. To do this work, GAO relied on issued report GAO-13-71 and updated data where appropriate. GAO did not make recommendations in the report. Ten states concentrated in the western, midwestern, and southeastern United States--all areas where the housing market had experienced strong growth in the prior decade--experienced 10 or more commercial bank or thrift (bank) failures between 2008 and 2011. The failures of the smaller banks (those with less than $1 billion in assets) in these states were largely driven by credit losses on commercial real estate (CRE) loans. The failed banks also had often pursued aggressive growth strategies using nontraditional, riskier funding sources and exhibited weak underwriting and credit administration practices. Fair value accounting also has been cited as a potential contributor to bank failures, but between 2007 and 2011 fair value accounting losses in general did not appear to be a major contributor, as over two-thirds of small failed banks' assets were not subject to fair value accounting. During the course of our work, some state banking associations said that the magnitude of the credit losses were exacerbated by federal bank examiners' classification of collateral-dependent loans and evaluation of appraisals used by banks to support impairment analysis of these loans. Federal banking regulators noted that regulatory guidance on CRE workouts issued in October 2009 directed examiners not to require banks to write down loans to an amount less than the loan balance solely because the value of the underlying collateral had declined, and that examiners were generally not expected to challenge the appraisals obtained by banks unless they found that underlying facts or assumptions about the appraisals were inappropriate or could support alternative assumptions. The Federal Deposit Insurance Corporation (FDIC) used shared loss agreements to help resolve failed banks at the least cost during the recent financial crisis. Under a shared loss agreement, FDIC absorbs a portion of the loss on specified assets of a failed bank that are purchased by an acquiring bank. FDIC officials, state bank regulators, community banking associations, and acquiring banks of failed institutions GAO interviewed said that shared loss agreements helped to attract potential bidders for failed banks during the financial crisis. During 2008- 2011, FDIC resolved 281 of 414 failures using shared loss agreements on assets purchased by the acquiring bank. As of December 31, 2011, Deposit Insurance Fund (DIF) receiverships are estimated to pay $42.8 billion over the duration of the shared loss agreements. The acquisitions of failed banks by healthy banks appear to have mitigated the potentially negative effects of bank failures on communities, although the focus of local lending and philanthropy may have shifted. For example, GAO's analysis found limited rural and metropolitan areas where failures resulted in significant increases in market concentration. GAO's econometric analysis of call report data from 2006 through 2011 found that failing small banks extended progressively less net credit as they approached failure, and that acquiring banks generally increased net credit after the acquisition. However, acquiring bank and existing peer bank officials GAO interviewed noted that in the wake of the bank failures, underwriting standards had tightened and thus credit was generally more available for small business owners who had good credit histories and strong financials than those that did not. Moreover, the effects of bank failures could be significant for those limited areas that were serviced by one bank or where few banks remain.

USPS faces a dire financial situation and does not have sufficient revenues to cover its expenses, putting its mission of providing prompt, reliable, and efficient universal services to the public at risk. USPS continues to incur operating deficits that are unsustainable, has not made required payments of $11.1 billion to prefund retiree health benefit liabilities,USPS lacks liquidity to maintain its financial solvency or finance needed and has reached its $15 billion borrowing limit. Moreover, capital investment. As presented in table 1, since fiscal year 2006, USPS has achieved about $15 billion in savings and reduced its workforce by about 168,000, while also experiencing a 25 percent decline in total mail volume and net losses totaling $40 billion. As a result of significant declines in volume and revenue, USPS reported that it took unprecedented actions to reduce its costs by $6.1 billion in fiscal year 2009. Also in 2009, a cash shortfall necessitated congressional action to reduce USPS's mandated payment to prefund retiree health benefits from $5.4 billion to $1.4 billion. In 2011, USPS's $5.5 billion required retiree health benefit payment was delayed until August 1, 2012. USPS missed that payment as well as the $5.6 billion that was due by September 30, 2012. USPS continues to face significant decreases in mail volume and revenues as online communication and e-commerce expand. While remaining among USPS's most profitable products, both First-Class Mail and Standard Mail volumes have declined in recent years as illustrated in figure 1. First-Class Mail--which is highly profitable and generates the majority of the revenues used to cover overhead costs--declined 33 percent since it peaked in fiscal year 2001, and USPS projects a continued decline through fiscal year 2020. Standard Mail (primarily advertising) has declined 23 percent since it peaked in fiscal year 2007, and USPS projects that it will remain roughly flat through fiscal year 2020. Standard Mail is profitable overall, but it takes about three pieces of Standard Mail, on average, to equal the profit from the average piece of First-Class Mail. First-Class Mail and Standard Mail also face competition from electronic alternatives, as many businesses and consumers have moved to electronic payments over the past decade in lieu of using the mail to pay bills. For the first time, in 2010, fewer than 50 percent of all bills were paid by mail. In addition to lost mail volume and revenue, USPS also has incurred financial liabilities, that totaled $96 billion at the end of fiscal year 2012, that included unfunded pension and retiree health benefit liabilities. Table 2 shows the amounts of these liabilities over the last 6 fiscal years. One of these liabilities, USPS's debt to the U.S. Treasury, increased over this period from $4 billion to its statutory limit of $15 billion. Thus, USPS can no longer borrow to maintain its financial solvency or finance needed capital investment. USPS continues to incur unsustainable operating deficits. In this regard, the USPS Board of Governors recently directed postal management to accelerate restructuring efforts to achieve greater savings. These selected USPS liabilities increased from 83 percent of revenues in fiscal year 2007 to 147 percent of revenues in fiscal year 2012 as illustrated in figure 2. This trend demonstrates how USPS liabilities have become a large and growing financial burden. USPS's dire financial condition makes paying for these liabilities highly challenging. In addition to reaching its limit in borrowing authority in fiscal year 2012, USPS did not make required prefunding payments of $11.1 billion for fiscal year 2011 and 2012 retiree health benefits. At the end of fiscal year 2012, USPS had $48 billion in unfunded retiree health benefit liabilities. Looking forward, USPS has warned that it suffers from a severe lack of liquidity. As USPS has reported: "Even with some regulatory and legislative changes, our ability to generate sufficient cash flows from current and future management actions to increase efficiency, reduce costs, and generate revenue may not be sufficient to meet all of our financial obligations." For this reason, USPS has stated that it continues to lack the financial resources to make its annual retiree health benefit prefunding payment. USPS has also reported that in the short term, should circumstances leave it with insufficient liquidity, it may need to prioritize payments to its employees and suppliers ahead of those to the federal government. For example, near the end of fiscal year 2011, in order to maintain its liquidity, USPS temporarily halted its regular contributions for the Federal Employees Retirement System (FERS) that are supposed to cover the cost of benefits being earned by current employees. However, USPS has since made up those missed FERS payments. USPS's statements about its liquidity raise the issue of whether USPS will need additional financial help to remain solvent while it restructures and, more fundamentally, whether it can remain financially self-sustainable in the long term. USPS has also raised the concern that its ability to negotiate labor contracts is essential to maintaining financial stability and that failure to do so could have significant adverse consequences on its ability to meet its financial obligations. Most USPS employees are covered by collective bargaining agreements with four major labor unions which have established salary increases, cost-of-living adjustments, and the share of health insurance premiums paid by employees and USPS. When USPS and its unions are unable to agree, binding arbitration by a third-party panel is used to establish agreement. There is no statutory requirement for USPS's financial condition to be considered in arbitration. In 2010, we reported that the time has come to reexamine USPS's 40-year-old structure for collective bargaining, noting that wages and benefits comprise 80 percent of its costs at a time of escalating losses and a dramatically changed competitive environment.Congress should consider revising the statutory framework for collective bargaining to ensure that USPS's financial condition be considered in binding arbitration. USPS has several initiatives to reduce costs and increase its revenues to curtail future net losses. In February 2012, USPS announced a 5-year business plan with the goal of achieving $22.5 billion in annual cost savings by the end of fiscal year 2016. This plan included savings from a change in the delivery schedule; however, USPS has now put all changes in delivery service on hold, which will reduce its ability to achieve the full 5-year business plan savings. USPS has begun implementing other parts of the plan, which includes initiatives to save: $9 billion in mail processing, retail, and delivery operations, including consolidation of the mail processing network, and restructuring retail and delivery operations; $5 billion in compensation and benefits and non-personnel $8.5 billion through proposed legislative changes, such as eliminating the obligation to prefund USPS's retiree health benefits. o $2.7 billion of this $8.5 billion was estimated savings from moving to a 5-day delivery schedule for all types of mail. o USPS subsequently proposed a modified reduction in its delivery schedule, maintaining package delivery on Saturday, with estimated annual savings of $2 billion, but as noted, USPS has now put even this proposed change in service delivery on hold. Simultaneously, USPS's 5-year plan would further reduce the overall size of the postal workforce by roughly 155,000 career employees, with many of those reductions expected to result from attrition. According to the plan, half of USPS's career employees are currently eligible for full or early retirement. Reducing its workforce is vital because as noted compensation and benefits costs continue to generate about 80 percent of USPS's expenses. Compensation alone (primarily wages) exceeded $36 billion in fiscal year 2012, or close to half of its costs. Compensation costs decreased by $542 million in fiscal year 2012 as USPS offered separation incentives to postmasters and mail handlers to encourage more attrition. This fiscal year, separation incentives were offered to employees represented by the American Postal Workers Union (e.g., mail processing and retail clerks) to encourage further attrition as processing and retail operations are redesigned and consolidated to more closely correspond with workload. Another key area of potential savings included in the 5-year plan focused on reducing compensation and benefit costs. USPS's largest benefit payments in fiscal year 2012 included: $7.8 billion in current-year health insurance premiums for employees, retirees, and their survivors (USPS's health benefit payments would have been $13.4 billion if USPS had paid the required $5.6 billion retiree health prefunding payment); $3.0 billion in FERS pension funding contributions; $1.8 billion in social security contributions; $1.4 billion in workers' compensation payments; and $1.0 billion in Thrift Savings Plan contributions. USPS has proposed administering its own health care plan for its employees and retirees and withdrawing from the Federal Employee Health Benefits (FEHB) program so that it can better manage its costs and achieve significant savings, which USPS has estimated could be over $7 billion annually. About $5.5 billion of the estimated savings would come from eliminating the retiree health benefit prefunding payment and another $1.5 billion would come from reducing health care costs. We are currently reviewing USPS's proposal including its potential financial effects on participants and USPS. To increase revenue, USPS is working to increase use of shipping and package services. With the continued increase in e-commerce, USPS projects that shipping and package volume will grow by 7 percent in fiscal year 2013, after increasing 7.5 percent in fiscal year 2012. Revenue from these two product categories represented about 18 percent of USPS's fiscal year 2012 operating revenue. However, USPS does not expect that continued growth in shipping and package services will fully offset the continued decline of revenue from First-Class Mail and other products. We recently reported that USPS is pursuing 55 initiatives to generate revenue. Forty-eight initiatives are extensions of existing lines of postal products and services, such as offering Post Office Box customers a suite of service enhancements (e.g., expanded lobby hours and earlier pickup times) at selected locations and increasing public awareness of the availability of postal services at retail stores. The other seven initiatives included four involving experimental postal products, such as prepaid postage on the sale of greeting cards, and three that were extensions of nonpostal services that are not directly related to mail delivery. USPS offers 12 nonpostal services including Passport Photo Services, the sale of advertising to support change-of-address processing, and others generating a net income of $141 million in fiscal year 2011. Another area of potential revenue generation is USPS's increased use of negotiated service agreements that offer competitively priced contracts as well as promotions with temporary rate reductions that are targeted to retain mail volume. We are currently reviewing USPS's use of negotiated service agreements. As USPS attempts to reduce costs and increase revenue, its mission to provide universal service continues. USPS's network serves more than 152 million residential and business delivery points. In May 2011, we reported that many of USPS's delivery vehicles were reaching the end of their expected 24-year operational life and that USPS's financial challenges pose a significant barrier to replacing or refurbishing its fleet.As a result, USPS's approach has been to maintain the delivery fleet until USPS determines how to address longer term needs, but USPS has been increasingly incurring costs for unscheduled maintenance because of breakdowns. The eventual replacement of its vehicle delivery fleet represents yet another financial challenge facing USPS. We are currently reviewing USPS's investments in capital assets. We have issued a number of reports on strategies and options for USPS to improve its financial situation by optimizing its network and restructuring the funding of its pension and retiree health benefit liabilities. To assist Congress in addressing issues related to reducing USPS's expenses, we have issued several reports analyzing USPS's initiatives to optimize its mail processing, delivery, and retail networks. In April 2012, we issued a report related to USPS's excess capacity in its network of 461 mail processing facilities. We found that USPS's mail processing network exceeds what is needed for declining mail volume. USPS proposed consolidating its mail processing network, a plan based on proposed changes to overnight delivery service standards for First- Class Mail and Periodicals. Such a change would have enabled USPS to reduce an excess of 35,000 positions and 3,000 pieces of mail equipment, among other things. We found, however, that stakeholder issues and other challenges could prevent USPS from implementing its plan for consolidating its mail processing network. Although some business mailers and Members of Congress expressed support for consolidating mail processing facilities, other mailers, Members of Congress, affected communities, and employee organizations raised concerns. Key issues raised by business mailers were that closing facilities could increase their transportation costs and decrease service. Employee associations were concerned that reducing service could result in a greater loss of mail volume and revenue that could worsen USPS's financial condition. We reported that if Congress preferred to retain the current delivery service standards and associated network, decisions will need to be made about how USPS's costs for providing these services will be paid. Over the past several years, USPS has proposed transitioning to a new delivery schedule. Most recently, in February of this year, USPS proposed limiting its delivery of mail on Saturdays to packages--a growing area for USPS--and to Express Mail, Priority Mail, and mail addressed to Post Office Boxes. Preserving Saturday delivery for packages would address concerns previously raised by some stakeholders, such as delivery of needed medications. USPS estimated that this reduced Saturday delivery would produce $2 billion in annual savings after full implementation, which would take about two years to achieve, and result in a mail volume decline of less than one percent. Based on our 2011 work,February 2013 estimate, we note that the previous and current estimates and recent information from USPS on their are primarily based on eliminating city and rural carrier work hours on Saturdays. In our prior work, stakeholders raised a variety of concerns about these estimates, several of which are still relevant. For example, USPS's estimate assumed that most of the Saturday workload transferred to weekdays would be absorbed through more efficient delivery. USPS estimated that its current excess capacity should allow it to absorb the Saturday workload on Monday. If that is not the case, some of the projected savings may not be realized. Another concern stakeholders raised was that USPS may have underestimated the size of the potential volume loss from eliminating Saturday delivery due to the methodology used to develop its estimates. Since mail volume has declined from the prior estimate, the accuracy of the estimated additional impact of eliminating Saturday delivery is unclear. The extent to which USPS would be able to achieve its most recent estimate of $2 billion in annual savings depends on how well and how quickly it can realign its workforce and delivery operations. Nevertheless, we agree that such a change in USPS's delivery schedule would likely result in substantial savings. A change to 5-day service would be similar to changes USPS has made in the past. USPS is required by law to provide prompt, reliable, and efficient services, as nearly as practicable. The Postal Regulatory Commission (PRC) has reported that delivery frequency is a key element of universal postal service. The Postal Service's universal service obligation is broadly outlined in multiple statutes and encompasses multiple dimensions including delivery frequency. Other key dimensions include geographic scope, range of products, access to services and facilities, affordable and uniform pricing, service quality, and security of the mail. The frequency of USPS mail delivery has evolved over time to account for changes in communication, technology, transportation, and postal finances. The change to 5-day service would be a similar change. Until 1950, residential deliveries were made twice a day in most cities. Currently, while most customers receive 6-day delivery, some customers receive 5-day or even 3-day-a-week delivery, including businesses that are not open 6 days a week; resort or seasonal areas not open year- round; and areas not easily accessible, some of which require the use of boats, airplanes, or trucks. Following USPS's most recent proposed change in delivery in February 2013, we issued a legal opinion concerning the proposal in response to a congressional request. As requested, we addressed whether a requirement contained in the USPS's annual appropriations acts for the past three decades and contained in its fiscal year 2012 appropriations act--that it continue 6-day delivery of mail "at not less than the 1983 level"--was still in effect under the partial year Continuing Appropriations Resolution. We concluded that the Continuing Resolution carried forward this requirement, explaining that absent specific legislative language, a continuing resolution maintains the status quo regarding government funding and operations. Although the 6-day delivery proviso is an operational directive, not an appropriation, we saw no language in the Continuing Resolution to indicate that Congress did not expect it to continue to apply. The full-year 2013 Continuing Resolution that Congress then enacted on March 21, shortly after we issued our opinion, which provided funding through the end of fiscal year 2013, likewise has continued the effectiveness of the 6-day proviso. On April 10, 2013, the USPS Board of Governors announced that based on the language of the March 21, 2013, Continuing Resolution, it would delay implementation of USPS's proposed delivery schedule until legislation is passed that provides it with the authority "to implement a financially appropriate and responsible delivery schedule." By statute, the Board directs the exercise of the power of the Postal Service, directs and controls the Postal Service's expenditures, and reviews its policies and practices. Thus, the Board, which has the lead responsibility for taking actions within the scope of the Postal Service's existing statutory authority to maintain its financial solvency, has determined that full 6-day service will continue for the present time. In April 2012, we reported that USPS has taken several actions to restructure its retail network--which included almost 32,000 postal managed facilities in fiscal year 2012--through reducing its workforce and its footprint while expanding retail alternatives. We also reported on concerns customers and other stakeholders have expressed regarding the impact of post office closures on communities, the adequacy of retail alternatives, and access to postal services, among others. We discussed challenges USPS faces, such as legal restrictions and resistance from some Members of Congress and the public, that have limited USPS's ability to change its retail network by moving postal services to more nonpostal-operated locations (such as grocery stores), similar to what other nations have done. The report concluded that USPS cannot support its current level of services and operations from its current revenues. We noted that policy issues remain unresolved related to what level of retail services USPS should provide, how the cost of these services should be paid, and how USPS should optimize its retail network. In November 2011, we reported that USPS had expanded access to its services through alternatives to post offices in support of its goals to improve service and financial performance and recommended that USPS develop and implement a plan with a timeline to guide efforts to modernize USPS's retail network, and that addresses both traditional post offices and retail alternatives as well. We added that the plan should also include: (1) criteria for ensuring the retail network continues to provide adequate access for customers as it is restructured; (2) procedures for obtaining reliable retail revenue and cost data to measure progress and inform future decision making; and (3) a method to assess whether USPS's communications strategy is effectively reaching customers, particularly those customers in areas where post offices may close. In November 2012, we reported that although contract postal units (CPUs)--independent businesses compensated by USPS to sell most of the same products and services as post offices at the same price--have declined in number, they have supplemented 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 when they face long lines at post offices. In fiscal year 2011, after compensating CPUs, USPS retained 87 cents of every dollar of CPU revenue. We found that limited interest from potential partners, competing demands on USPS staff resources, and changes to USPS's retail network posed potential challenges to USPS's use of CPUs. To assist Congress in addressing issues related to funding USPS's liabilities, we have also issued several reports that address USPS's liabilities, including its retiree health benefits, pension, and workers' compensation. In December 2012, we reported that USPS's deteriorating financial outlook will make it difficult to continue the current schedule for prefunding postal retiree health benefits in the short term, and possibly to fully fund the remaining $48 billion unfunded liability over the remaining decades of the statutorily required actuarial funding schedule. However, we also reported that deferring funding could increase costs for future ratepayers and increase the possibility that USPS may not be able to pay for some or all of its liability. We stated that failure to prefund these benefits is a potential concern. Making affordable prefunding payments would protect the viability of USPS by not saddling it with bills later on, when employees are already retired and no longer helping it generate revenue; it can also make the promised benefits more secure. Thus, as we have previously reported, we continue to believe that it is important for USPS to prefund these benefits to the maximum extent that its finances permit. We also recognize that without congressional or further USPS actions to align revenue and costs, USPS will not have the finances needed to make annual payments and reduce its long term retiree health unfunded liability. No funding approach will be viable unless USPS can make the required payments. We reported on options with regard to the FERS surplus, noting the degree of uncertainty inherent in this estimate and reporting on the implications of alternative approaches to accessing this surplus.estimated FERS surplus decreased from 2011 to 2012, and at the end of The fiscal year 2012, USPS had an estimated FERS surplus of $3.0 billion and an estimated CSRS deficit of $18.7 billion. In 2012, we reported on workers' compensation benefits paid to both postal and nonpostal beneficiaries under the Federal Employees' Compensation Act (FECA). USPS has large FECA program costs. At the time of their injury, 43 percent of FECA beneficiaries in 2010 were employed by USPS. FECA provides benefits to federal workers who sustained injuries or illnesses while performing federal duties and benefits are not taxed or subject to age restrictions. Various proposals to modify FECA benefit levels have been advanced. At the request of Congress, we have provided information to assist them in making decisions about the FECA program. In summary, to improve its financial situation, USPS needs to reduce its expenses to close its gap between revenue and expenses, repay its outstanding debt, continue funding its retirement obligations, and increase capital for investment, such as replacing its aging vehicle fleet. In addition, as noted in prior reports, congressional action is needed to (1) modify USPS's retiree health benefit payments in a fiscally responsible manner; (2) facilitate USPS's ability to align costs with revenues based on changing workload and mail use; and (3) require that any binding arbitration resulting from collective bargaining takes USPS's financial condition into account. As we have continued to underscore, Congress and USPS need to reach agreement on a comprehensive package of actions to improve USPS's financial viability. In previous reports, we have provided strategies and options, to both reduce costs and enhance revenues, that Congress could consider to better align USPS costs with revenues and address constraints and legal restrictions that limit USPS's ability to reduce costs and improve efficiency; we have also reported on implications for addressing USPS's benefit liabilities. If Congress does not act soon, USPS could be forced to take more drastic actions that could have disruptive, negative effects on its employees, customers, and the availability of reliable and affordable postal services. Chairman Issa, Ranking Member Cummings, and Members of the Committee, this concludes my prepared statement. I would be pleased to answer any questions that you may have at this time. For further information about this statement, please contact Lorelei St. James, Director, Physical Infrastructure, at (202) 512-2834 or [email protected]. Contact points for our Congressional Relations and Public Affairs offices may be found on the last page of this statement. In addition to the contact named above, Frank Todisco, Chief Actuary; Samer Abbas, Teresa Anderson, Barbara Bovbjerg, Kyle Browning, Colin Fallon, Imoni Hampton, Kenneth John, Hannah Laufe, Kim McGatlin, Amelia Shachoy, Andrew Sherrill, and Crystal Wesco made important contributions to 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.

USPS is in a serious financial crisis as its declining mail volume has not generated sufficient revenue to cover its expenses and financial obligations. First-Class Mail--which is highly profitable and generates the majority of the revenues used to cover overhead costs--declined 33 percent since it peaked in fiscal year 2001, and USPS projects a continued decline through fiscal year 2020. Mail volume decline is putting USPS's mission of providing prompt, reliable, and efficient universal services to the public at risk. This testimony discusses (1) USPS's financial condition, (2) initiatives to reduce costs and increase revenues, and (3) actions needed to improve USPS's financial situation. The testimony is based primarily on GAO's past and ongoing work, its analysis of USPS's recent financial results, and recent information on USPS's proposal for a change in delivery service. In previous reports, GAO has provided strategies and options that USPS and Congress could consider to better align USPS costs with revenues and address constraints and legal restrictions that limit USPS's ability to reduce costs and improve efficiency. GAO has also stated that Congress and USPS need to reach agreement on a comprehensive package of actions to improve USPS's financial viability. The U.S. Postal Service (USPS) continues to incur unsustainable operating deficits, has not made required payments of $11.1 billion to prefund retiree health benefits, and has reached its $15 billion borrowing limit. Thus far, USPS has been able to operate within these constraints, but now faces a critical shortage of liquidity that threatens its financial solvency and ability to finance needed capital investment. USPS had an almost 25 percent decline in total mail volume and net losses totaling $40 billion since fiscal year 2006. While USPS achieved about $15 billion in savings and reduced its workforce by about 168,000 over this period, its debt and unfunded benefit liabilities grew to $96 billion by the end of fiscal year 2012. USPS expects mail volume and revenue to continue decreasing as online bill communication and e-commerce expand. USPS has several initiatives to reduce costs and increase its revenues. To reduce costs, USPS announced a 5-year business plan in February 2012 with the goal of achieving $22.5 billion in annual cost savings by the end of fiscal year 2016, which included a proposed change in the delivery schedule. USPS has now put all changes in delivery service on hold, which will reduce its ability to achieve the full 5-year business plan savings. USPS has begun implementing other parts of the plan, which includes needed changes to its network. To achieve greater savings, USPS's Board of Governors recently directed postal management to accelerate these efforts. To increase revenue, USPS is pursuing 55 initiatives. While USPS expects shipping and package services to continue to grow, such growth is not expected to fully offset declining mail volume. USPS needs to reduce its expenses to avoid even greater financial losses, repay its outstanding debt, continue funding its retirement obligations, and increase capital for investment, including replacing its aging vehicle fleet. Also, Congress needs to act to (1) modify USPS's retiree health benefit payments in a fiscally responsible manner; (2) facilitate USPS's ability to align costs with revenues based on changing workload and mail use; and (3) require that any binding arbitration resulting from collective bargaining takes USPS's financial condition into account. No one action in itself will address USPS's financial condition; GAO has previously recommended a comprehensive package of actions. If Congress does not act soon, USPS could be forced to take more drastic actions that could have disruptive, negative effects on its employees, customers, and the availability of postal services. USPS also reported that it may need to prioritize payments to employees and suppliers ahead of those to the federal government.

Servicemembers are entitled to Social Security benefits, just like the vast majority of U.S. workers. We reported that Social Security covers about 96 percent of all U.S. employees and about three-fourths of federal, state, and local government employees pay Social Security taxes on their earnings. Social Security's primary source of revenue is the Old Age, Survivors, and Disability Insurance portion of the payroll tax paid by employers and employees. That payroll tax amounts to 6.2 percent of earnings for both employers and employees, up to an established maximum. Regardless of whether the death occurred in the line of duty or not, survivors of deceased servicemembers, covered civilian government employees, or their estates are eligible for a lump sum payment of $255. Moreover, eligible survivors are also entitled to recurring Social Security benefit payments. Eligibility for the $255 and recurring payments is determined by whether a deceased employee was currently insured through Social Security. The amount of recurring payment is based on the deceased employee's earnings in covered employment. Deceased servicemembers' survivors are entitled to a wide range of benefits. In our September 2002 report, we noted that a survivor might be entitled to a death gratuity payment, a life insurance settlement, burial benefits, monthly payments, and various other benefits that include the use of commissaries and exchanges. Determining whether the deceased servicemember died in the line of duty is seldom a consideration when awarding survivor benefits because an active duty servicemember is considered to be on duty 24 hours a day and 7 days a week. Determination of eligibility for some benefits provided to the survivors of deceased federal and, in most cases, state and local civilian government employees is based on a more restrictive definition of line of duty. For example, survivor benefits provided through workers' compensation require that the civilian government employee die in the line of duty. The definition of line of duty for federal civilian employees includes any action that an employee is obligated or authorized to perform by rule, regulations, law, or condition of employment according to the employee's agency. The effect of an eligibility determination based on line of duty can be illustrated using the example of an employee who has a heart attack while eating lunch at a restaurant. The servicemember is probably covered, whereas the civilian government employee is typically not covered. Survivor benefits for some civilian government employees are also contingent on the employee's occupation, in addition to the circumstance of whether the employee's death occurred in the line of duty. Law enforcement officers, firefighters, and employees in some other occupations at federal, state, and city levels may receive a supplemental survivor benefit provided through the Public Safety Officers' Benefits Act, administered by the Department of Justice's Bureau of Justice Assistance. State and city governments may provide other supplemental benefits to the survivors of deceased employees who work in high-risk occupations. The military and civilian government entities offer similar types of cash and noncash survivor benefits, but the entities provide different amounts for the survivor benefits. In general, the military and civilian government entities provide cash benefits--either as a lump sum, recurring payments, or both--and noncash benefits, such as continued health insurance or education benefits. Survivors of servicemembers almost always receive higher lump sum payments. For three of the four hypothetical situations, the recurring payments for deceased servicemembers' survivors exceed the recurring payments that at least one-half of the states provide. In contrast, the recurring payments for deceased servicemembers' survivors in the same three situations are lower than those that at least one-half of the cities provide. The military provides more types of noncash benefits to survivors of deceased servicemembers than do civilian government entities provide to the survivors of deceased general government employees. Survivors of deceased servicemembers and most deceased general government employees receive lump sum payments through comparable sources--Social Security, a death gratuity, burial expenses, and life insurance; the federal government, 16 states, and the District of Columbia provide additional lump sum payments through their respective retirement plans (see table 1 for a summary and appendix II for descriptions of how the payments are calculated for each entity). Social Security provides $255 upon the death of a deceased servicemember or covered civilian government employee. The death gratuity provided to survivors is $12,000 (tax-exempt) for deceased servicemembers, up to $10,000 for deceased federal government employees, and between $25,000 and $262,405 for deceased employees of the 5 states and 1 city that provide this benefit. The military's death gratuity ranks above that paid by 55 of the 61 civilian government entities. The payment for burial expenses provided to survivors is up to $6,900 (tax-exempt) for deceased servicemembers, up to $800 (tax-exempt) for deceased federal government employees, and between $2,000 and $15,000 for deceased employees of all states and cities. The military's payment for burial expenses ranks above that paid by 49 of the 61 civilian government entities. Life insurance is another common source of benefits for the survivors of many deceased servicemembers and civilian government employees. For example, approximately 98 percent of servicemembers and 91 percent of federal employees participate in government-sponsored life insurance. Servicemembers automatically are insured for $250,000 (tax-exempt) unless they elect less or no coverage. Although the government does not contribute to the Servicemembers' Group Life Insurance, we elected to include the information in this report because the program plays a large role in the benefits provided to survivors and nearly all servicemembers participate in the program. Fifty-one of the 61 civilian government entities pay a portion of the life insurance premiums for their employees and reported that they provide this benefit to at least 80 percent of their employees. A federal employee is automatically enrolled for a payout (tax-exempt) equal to the employee's rate of basic pay, rounded to the next higher $1,000, plus $2,000. The federal government contributes one-third of the total cost (i.e., 15 cents per month for each $1,000) of the basic coverage premium. For example, the government's contribution for a federal employee who has $37,000 of basic life insurance coverage is $5.55 per month. The amount of coverage state and city governments provide varies and is determined as either a flat amount or a percentage of the employee's salary. The military and the 9 cities do not provide a lump sum survivor benefit as part of their retirement plans. In contrast, the federal government, 16 states and the District of Columbia include a survivor benefit in their retirement plans. Similar to the funding of life insurance, these 18 civilian government entities contribute a portion of the benefit. These payments are generally based on the deceased employee's annual salary, employer contributions to the retirement plan, or a flat amount. Although survivors of deceased military and civilian government employees are eligible for recurring Social Security payments, other types of recurring payments are specific to either servicemembers or civilian government employees (see table 2 for a summary and appendix II for descriptions of how the recurring payments are computed for each entity). As previously mentioned, the survivors of deceased servicemembers and survivors of three-fourths of the civilian government employees may be eligible to receive recurring Social Security payments based on the deceased employees' earnings in covered employment. This recurring payment to the survivor will be equal if the deceased servicemember's and deceased civilian government employee's earnings in covered employment are identical. Survivors of deceased servicemembers would also receive payments through the Survivor Benefit Plan (SBP), tax-exempt Dependency and Indemnity Compensation (DIC), or both. The SBP payment is calculated based on 55 percent of the member's maximum monthly retirement pay, and DIC provides $967 per month for a spouse, plus $241 per month for each child. If the spouse is the designated beneficiary for SBP, the SBP payment is reduced by the DIC payment. Additionally, if the DIC payment is greater than the SBP payment, there is no SBP payment. However, under the most recent changes to SBP, SBP benefits can be paid to the children, and the DIC payment can be paid to the spouse without causing any reduction in the SBP payment, thus providing a substantial increase in monthly payments during the years when children are still at home or in school. Similar to the military, survivors of deceased civilian government employees may receive recurring payments from multiple sources: a retirement plan, workers' compensation if the death occurred while in the line of duty, or both. Survivors of deceased federal government employees receive the higher of two options: (1) 50 percent of an employee's monthly retirement pay, if the employee had at least 10 years of creditable service, plus a lump sum payment or (2) up to 75 percent of the employee's pay rate under the Federal Employees Compensation Act. The rules for determining the recurring payments for survivors of deceased state and city employees vary widely but are summarized in table 2. For the four hypothetical situations, the lump sum payments--excluding Social Security--for survivors of deceased servicemembers are almost always higher than those for the survivors of deceased civilian government employees in general. For hypothetical situations 2, 3, and 4, the recurring payments for deceased servicemembers' survivors exceed the recurring payments that at least one-half of the states provide. In contrast, the recurring payments for deceased servicemembers' survivors are lower than those that at least one-half of the cities provide (see table 3 for a summary and appendix III for the specific amounts provided by each entity for each type of payment). Hypothetical situation 2 is used as an example to explain the findings shown in table 3. It describes the situation of a servicemember or civilian government employee who had accrued 3 years of creditable service, an income of $34,376 (what an E-3 might be paid in the military), and two dependents. The benefits--excluding Social Security--provided to such a person's survivors are outlined below. Servicemember's survivors: The survivors would receive $268,900 in a lump sum payment from a death gratuity, life insurance, and burial expenses, as well as $2,390 in recurring payments from DIC and SBP (assuming the child is the designated beneficiary). Federal government employee's survivors: The survivors would receive $121,000 in a lump sum payment from a death gratuity, which includes burial costs, and life insurance and $1,718 in recurring payments from workers' compensation. That is, the survivors would receive nearly $148,000 less in a lump sum payment and almost $700 less per month in recurring payments than would a servicemember's survivors. State or city government employee's survivors: Interpretation of the state and city amounts is more problematic because the lump sum and recurring payments shown in the same row of table 3 may represent amounts paid by a different state or city government. For hypothetical situation 2, the median--or average--lump sum payment was $55,000 for states and $40,000 for cities. The lump sum payments range from $3,500 to $311,005 for the 50 states and the District of Columbia, while the recurring payments range from $1,146 to $5,059. The lump sum payments range from $5,000 to $110,000 for the 9 cities, while the recurring payments range from $2,149 to $5,014. In most instances, it would take years of inflation-adjusted recurring payments for the survivors of those general state and city government employees to reach the total lump sum and recurring payment benefits provided to the survivors of the servicemembers. Also some states or cities limit the duration (e.g., workers' compensation benefits in Indiana and Maine are limited to 500 weeks) or total value (e.g., workers' compensation benefits in Maryland are limited to $45,000) for some types of their recurring payments. These limits further lessen the likelihood that some survivors of deceased state and city government employees will receive lifetime benefits at least equal to those provided to deceased servicemembers' survivors. The military provides more noncash survivor benefits than do the federal, state, and city governments, with some benefits being comparable in type and others differing among the entities (see table 4 for examples of the most common benefits). For example, the military, federal government, 17 states, and 7 cities provide continued health insurance that is wholly or partially subsidized. Additionally, the military and 5 of the state governments provide some education benefits. Eligible survivors of servicemembers who die while on active duty also obtain benefits such as rent-free government housing or a tax-free housing allowance for up to 180 days, relocation assistance, and lifetime access to commissaries and exchanges that are not available to other government survivors. The survivors of civilian government employees in selected high-risk occupations may receive supplemental benefits beyond those that the entities provide to government employees in general (see table 5 for a summary and appendix IV for the descriptions of how the payments are calculated for each entity). Employees in selected high-risk occupations in the 61 civilian government entities may receive an additional cash benefit through the Public Safety Officers' Benefits (PSOB) Program. Using a case-by-case determination process, the Department of Justice's Bureau of Justice Assistance provides a lump sum payment of $267,494 (for fiscal year 2004) to the eligible survivors of public safety officers whose deaths are the direct and proximate result of traumatic injury sustained in the line of duty. According to agency officials, the Bureau of Justice Assistance approved 659 death claims in fiscal year 2002 with 417 cases related to World Trade Center deaths, and 194 death claims for fiscal year 2003. Thirty-four states and 5 cities also supplement cash benefits for employees in high-risk occupations. For example, some states, such as Texas, Florida, and Arkansas, provide an additional death gratuity to survivors of government employees in high-risk occupations. Other states, such as Iowa, New Mexico, and Nevada, provide insurance benefits that are higher than those provided to general government employees. Still other states, such as Alaska, New Jersey, and Montana, provide survivor benefits through their retirement plans that are higher than those provided to general government employees. When these supplemental cash benefits are added to the benefits for general government employees, the total cash benefits that the entities provide to the survivors of deceased civilian government employees in high-risk occupations may be higher than those provided to deceased servicemembers' survivors. For example, the very limited number of survivors who receive the $267,494 from the PSOB Program would likely have total survivor benefits higher than those provided to servicemembers' survivors. In addition to the supplemental cash benefits, some of the states and cities provide supplemental noncash benefits for survivors of deceased employees in high-risk occupations. Eleven states provide survivors of employees in high-risk occupations with education benefits that are not provided to survivors of general government employees. Additionally, two states and two cities provide continued health insurance to survivors of employees in high-risk occupations that are not provided to survivors of general government employees. DOD reviewed a draft of this report and provided technical comments, which were incorporated as appropriate. We are sending copies of this report to the Secretary of Defense. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-5559 ([email protected]) or Jack E. Edwards at (202) 512- 8246 ([email protected]). Other staff members who made key contributions to this report are listed in appendix V. To assess the extent that survivor benefits provided to servicemembers' survivors differ from those provided to federal, state, and city general government employees' survivors, we gathered benefits information that covered the active duty military and the largest group of employees for each of 61 civilian government entities: the federal government, 50 states and the District of Columbia, and the 9 cities with a population of at least 1 million. While limiting the scope of our work to the 9 cities with at least 1 million people restricted the generalizability of our city findings to only those 9 cities, it allowed us to discuss with certainty (i.e., without sampling error) findings for the largest cities in the United States. Except for the Servicemembers' Group Life Insurance, all benefits addressed in this report included government contributions. We elected to include military life insurance in this report because the program plays a large role in the benefits provided to survivors; nearly all servicemembers participate in the program; and during times of war, there may be government contributions. Life insurance information was included for a civilian government entity only if at least 80 percent of the employees received the benefit. We gathered data from the military and the federal agencies shown in table 6 through personal interviews. We developed a structured telephone interview to collect data, including general descriptions of the benefits and the way the benefits are determined, from state and city agencies. The initial content for developing the interview questions came from reports issued by us and other agencies as well as from consultations with benefits personnel and staff with expertise on specific military or civilian personnel government survivor benefit programs, such as Social Security. We pretested the structured telephone interview to minimize the occurrence of nonsampling errors, which led to modification of the data gathering instrument to clarify questions and address the ordering of items and other concerns that could affect data reliability. To further ensure data reliability, we requested and reviewed survivor benefits information, including statutes and plan documents, from each entity. For some civilian government entities, especially at the state and city levels, interviews were conducted with multiple offices because the responsibility for administering the different types of survivor benefits resided in different offices. All 62 entities provided information, but 1 state elected not to provide information on its retirement benefit. Similarly, we developed and obtained feedback on an e-mail-administered survey that described four hypothetical situations and assessed cash benefits. The hypothetical situations were developed to correspond to personnel at various stages of a military or government career, describing the servicemember's or civilian government employee's years of service, income, and number of dependents. The survey was sent to the military and all general civilian government entities to obtain information on the payments that would be provided in each hypothetical situation. When our interpretations of the benefits differed from the information supplied by the military or civilian government entities, we contacted the entities and resolved the differences. The responses to the survey reflect current values and do not account for lifetime payments, which may include cost-of-living adjustments and other assumptions. All 62 entities provided information, but 1 state elected not to provide information on its retirement benefit. To assess the extent that federal, state, and city governments supplement their general survivor benefits for employees in high-risk occupations, we gathered benefits information, except for the hypothetical situations, that covered law enforcement officers and firefighters in the same manner as for government employees in general. We selected law enforcement officers and firefighters because we considered those two occupations to have higher levels of personal risk than those found for government employees in general. As with the government employees in general, we limited the scope to include the 61 civilian government entities. All 61 entities provided information, but 1 state and 1 city elected not to provide requested information regarding a benefit for high-risk employees, retirement and life insurance, respectively. For both civilian government employees in general and civilian government employees in high-risk occupations, the concept of line of duty was an important consideration in the scope of this work because the granting of some survivor benefits is contingent on whether the employee dies in the line of duty. While active duty servicemembers are considered to be on duty 24 hours a day and 7 days a week, the definition for line of duty for civilian federal employees is more restrictive. The federal government defines line of duty as any action that an employee is obligated or authorized by rule, regulations, law, or condition of employment to perform by the agency served. Similar definitions were present for the administration of survivor benefits in some states and cities. Although the civilian government entities typically provide benefits to survivors of those who die while not in the line of duty, those benefits are not separately identified from the line-of-duty benefits in this report. We conducted our review from October 2003 through May 2004 in accordance with generally accepted government auditing standards. This appendix describes the cash benefits available to eligible survivors of active duty servicemembers and civilian government employees who die in the line of duty. We obtained information on the survivor benefits for the active duty military and the largest general employee group in each of 61 civilian government entities: the federal government, 50 states and the District of Columbia, and the 9 U.S. cities with a population of at least 1 million. Types of cash benefits are listed along with descriptions of how lump sum payments, recurring payments, or both are computed for each entity. We obtained the information through structured interviews with benefits personnel for the 62 entities and verified the reliability of that data through a review of statutes, benefits plans, and other information that the benefits personnel supplied. The information presented in this appendix is summarized in tables 1 and 2 in the report. This appendix identifies the amount of cash benefits available to eligible survivors of active duty servicemembers and civilian government employees who die in the line of duty. To facilitate the comparison of cash benefits available to survivors, we constructed four hypothetical situations that each described servicemembers or civilian government employees who had identical years of creditable service, an equal amount of regular military compensation or civilian government salary, and the same number of dependents at the time of their deaths. The four hypothetical situations for military and civilian government personnel are indicative of circumstances for servicemembers at a junior enlisted level (E-3) with and without dependents, at a senior enlisted level (E-7), and at a mid-grade officer level (O-3). We gathered data from benefits personnel who completed an e-mail survey that described the four hypothetical situations and asked for the amount of cash payments (in current-month values, without cost-of-living adjustments) that survivors would receive from each source of lump sum or recurring payments. (The methods for computing the amounts were described earlier in appendix II.) We obtained such information on the survivor benefits plans for the active duty military and the largest general employee group in each of 61 civilian government entities: the federal government, 50 states and the District of Columbia, and the 9 U.S. cities with a population of at least 1 million. Types of cash benefits are listed along with lump sum payments, recurring payments, or both, for each entity. The information in this appendix is summarized in table 3 in the report. To facilitate the comparison of military findings to those for the civilian government entities, we rank ordered the total lump sum and total recurring payments for each of the 62 entities on each hypothetical situation. The ranks appear in parentheses, with "1" indicating the highest lump sum or recurring payment for the situation and "62" indicating the lowest amount. This appendix describes the cash benefits available to eligible survivors of civilian government employees who die in the line of duty while performing in the high-risk occupations of law enforcement or firefighting. We obtained information on the survivor benefits plans for these occupations from the federal government, 50 states and the District of Columbia, and the 9 U.S. cities with a population of at least 1 million. Types of cash benefits are listed along with descriptions of how the lump sum payments, recurring payments, or both are computed for each entity if these benefits are above those provided to the survivors of general government employees. We obtained the information through structured interviews with benefits personnel for the 61 civilian government entities and verified the reliability of that data through a review of statutes, benefits plans, and other information that the benefits personnel supplied. The information presented in this appendix is summarized in table 5 in the report. In addition to the individual named above, Mark B. Dowling, Joel I. Grossman, Barbara L. Joyce, Marie A. Mak, Hilary L. Murrish, Cheryl A. Weissman, and Greg H. Wilmoth 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."

The National Defense Authorization Act for Fiscal Year 2004 noted that it was the sense of the Congress that "the sacrifices made by the members of the Armed Forces are significant and are worthy of meaningful expressions of gratitude by the United States, especially in cases of sacrifice through loss of life." In addition to offering expressions of gratitude, the government offers a variety of benefits, including Social Security benefits, to survivors of servicemembers who die while on active duty. GAO was asked to address two questions: (1) To what extent are the survivor benefits provided to servicemembers different from those provided to federal, state, and city government employees in general and (2) To what extent do federal, state, and city governments supplement their general survivor benefits for employees in high-risk occupations? The military provides survivor benefits that are comparable in type but not in amount to those provided by 61 civilian government entities (federal government, 50 states and the District of Columbia, and 9 cities with populations of at least 1 million) when employees die in the line of duty. Social Security payments, a death gratuity, burial expenses, and life insurance are four types of lump sum survivor benefits provided by the military and at least some civilian government entities; the federal government and some states additionally provide a lump sum payment through their retirement plans. Recurring payments are also provided by Social Security to the survivors for deceased servicemembers and most deceased government employees in the 61 civilian government entities GAO studied. Other types of recurring payments are specific to the military or civilian government entities. GAO identified two programs with recurring payments for the military and two other types of programs for the civilian government entities. For the four hypothetical situations GAO used to examine the amount of cash payments provided to survivors, survivors of deceased servicemembers almost always obtain higher lump sums than do the survivors of the deceased employees from the 61 civilian government entities. The amount of recurring payments to deceased servicemembers' survivors in three of the four situations exceeds those provided by the federal government, typically exceeds those provided by at least one-half of the states, but are typically less than those provided by over one-half the cities. The military also provides more types of noncash survivor benefits than do civilian government entities, with some benefits being comparable in type and others differing among the entities. The survivors of civilian government employees in some high-risk occupations may receive supplemental benefits--a death gratuity, higher life insurance, higher benefits from the retirement plan, or a combination of the three--beyond those that the entities provide to civilian government employees in general. For example, survivors of federal, state, and city government law enforcement officers and firefighters who die in the line of duty may be entitled to a lump sum payment of more than $267,000 under the Public Safety Officers' Benefits Act. Further, 34 states and 5 cities provide survivors of employees in high-risk occupations with additional cash benefits that are not available to survivors of state and city employees in general. The addition of these supplemental cash benefits to those provided to the survivors of deceased general government employees can result in lump sum and recurring payments being generally higher for survivors of government employees in high-risk occupations than for servicemembers' survivors.

The next Congress and new administration will confront a set of pressing issues that will demand urgent attention and continuing oversight to ensure the nation's security and well-being. The goal of our transition planning is to look across the work we have done and across the scope and breadth of the federal government's responsibilities to offer insights into areas needing immediate attention. A few examples follow: Oversight of financial institutions and markets: As events over the past few days have underscored, oversight over the U.S. housing and financial markets will certainly be among the priority matters commanding the attention of the new administration and the 111th Congress. These sectors of our economy have been going through a period of significant instability and turmoil. Congress has taken a number of steps to address some of the immediate effects of the market turmoil including enactment of the Federal Housing Finance Regulatory Reform Act of 2008, which, among other things, strengthens regulation of the housing government- sponsored enterprises (GSE) and provides authority to the Treasury to purchase any amount of Fannie Mae and Freddie Mac securities. We are closely monitoring a range of implications of the current market turmoil including the financial condition of GSEs and the implications of the Treasury exercising this new authority to stabilize GSEs. In addition, recent bank failures and growing numbers of banks on the "Watchlist" raise questions about the impact on the banking system and future federal exposures as well as on the bank insurance fund. We have a larger body of work that involves auditing the Federal Deposit Insurance Corporation, the newly created Federal Housing Finance Agency, and the consolidated financial statements of the U.S. government, as well as evaluating ongoing developments in the housing and financial markets. We will draw on this work to provide observations and advice, as appropriate, on how best to ensure the stability of our nation's financial system. While these serious disruptions require immediate attention and careful monitoring, ongoing turmoil in the housing and financial markets has renewed concerns about whether the current system for overseeing and regulating financial institutions and markets is best suited to meet the nation's evolving needs and 21st century challenges. Later this year we plan to issue a report describing the evolution of the current regulatory structure and how market developments and changes have introduced challenges for the current system. We believe this reassessment is needed to ensure that these types of serious disruptions can be minimized in the future. As part of this work, we are also developing a framework to assist Congress in evaluating alternative regulatory reform proposals. U.S. efforts in Iraq and Afghanistan: Policy and implementation issues will remain on the horizon for these and other international challenges. Hundreds of billions of dollars have been provided to the Department of Defense (DOD) for military operations in Iraq and Afghanistan as well as U.S. efforts to help address security, stabilization and reconstruction, and capacity-building efforts in these countries. These efforts include developing security forces, rebuilding critical infrastructure, and enhancing the countries' capacity to govern. Since 2003, we have issued more than 175 reports on military operations and various aspects of U.S. efforts to achieve the goals in Iraq and Afghanistan. Our transition work will highlight the major implementation issues that need to be addressed to ensure accountability and assess progress regardless of what policies are pursued. DOD's readiness and capabilities: Extended operations in Iraq, Afghanistan, and elsewhere have had significant consequences for military readiness, particularly with regard to the Army and Marine Corps. Current operations have required the military to operate at a persistently high tempo with the added stress of lengthy and repeated deployments. In addition, because of the significant wear and tear on equipment, refocusing of training on counterinsurgency operations, and other factors, rebuilding readiness of U.S. forces is a major challenge for DOD. At the same time, DOD faces competing demands for resources given broad- based initiatives to grow, modernize, and transform its forces. We will offer our perspective on the competing demands DOD faces and the need to develop sound plans to guide investment decisions, as it reassesses the condition, size, composition, and organization of its total force, including contractor support, to protect the country from current, emerging, and future conventional and unconventional security threats. Protection at home: DHS must remain prepared and vigilant with respect to securing the homeland, particularly during the transition period when the nation can be viewed as being particularly vulnerable. In doing so, it is important that the new administration address key issues that, as we reported, have impacted and will continue to impact the nation's security and preparedness, including better securing our borders, enforcing immigration laws, and serving those applying for immigration benefits; defining key preparedness and response capabilities and building and maintaining those capabilities through effective governmental and external partnerships; and further strengthening the security and resiliency of critical infrastructure to acts of terrorism. In achieving its critical mission, we found that DHS needs to more fully integrate and strengthen its management functions, including acquisition and human capital management; more fully adopt risk-based principles in allocating resources to the areas of greatest need; and enhance the effectiveness of information sharing among federal agencies and with state and local governments and the private sector. The decennial census: The results of the 2010 census are central to apportionment, redistricting congressional boundaries, and distributing hundreds of billions of dollars in federal aid. Soon after taking office, the new administration will face decisions that will shape the outcome of this central effort. Next spring the first nationwide field operation of the 2010 decennial census will begin. During address canvassing, the Census Bureau will rely, for the first time, on hand-held computers to verify address and map information. Earlier this year, we designated the decennial census as a high-risk area, in part, because of ongoing challenges in managing information technology--including hand-held computers--and uncertainty over the total cost of the decennial census and the Bureau's plans for rehearsing its field operations. The Bureau has taken some important steps to get the census back on track but did not rehearse its largest and most costly field operation--non-response follow- up--and has little time for further course correction as it prepares to carry out the national head count. While facing pressing issues, the next Congress and new administration also inherit the federal government's serious long-term fiscal challenge-- driven on the spending side by rising health care costs and changing demographics. This challenge is complicated by the need to timely address developments such as the recent economic pressures and troubles in the housing and financial markets. Ultimately, however, the new administration and Congress will need to develop a strategy to address the federal government's long-term unsustainable fiscal path. Planning for the transition will necessarily need to address the fact that achieving meaningful national results in many policy and program areas requires some combination of coordinated efforts among various actors across federal agencies, often with other governments (for example, internationally and at state and local levels), non-government organizations (NGO), for-profit and not for-profit contractors, and the private sector. In recognition of this fact, recent years have seen the adoption of a range of national plans and strategies to bring together decision makers and stakeholders from different locations, types of organizations, and levels of government. For example, the National Response Plan is intended to be an all-discipline, all-hazards plan that establishes a single, comprehensive framework for managing domestic incidents where involvement is necessary among many levels of government, the private sector, and nonprofit organizations. The response and recovery efforts after 9/11 and natural disasters, the nation's preparations for a possible pandemic influenza, and the need to address global food insecurity are some of the many public issues that vividly underscore the critical importance of employing broad governance perspectives to meet global and national needs. Our transition work will highlight challenges the new Congress and next administration face in devising integrated solutions to such multi-dimensional problems. Some examples follow: Care for servicemembers: Over the last several years, more than 30,000 servicemembers have been wounded in action; many with multiple serious injuries such as amputations, traumatic brain injury, and post-traumatic stress disorder. We have identified substantial weaknesses in the health care these wounded warriors are receiving as well as the complex and cumbersome DOD and VA disability systems they must navigate. While improvement efforts have started, addressing the critical continuity of care issues will require sustained attention, systematic oversight by DOD and VA, and sufficient resources. Health care in an increasingly global market and environment: The spread of severe acute respiratory syndrome (SARS) from China in 2002, recent natural disasters, and the persistent threat of an influenza pandemic all highlight the need to plan for a coordinated response to large-scale public health emergencies. Federal agencies must work with one another and with state and local governments, private organizations, and international partners to identify and assess the magnitude of threat, develop effective countermeasures (such as vaccines), and marshal the resources required for an effective public health response. Our transition work on these topics--including work related to such emergencies as SARS, Hurricane Katrina, pandemic influenza, bioterrorism, and TB--will highlight that federal agencies still face challenges such as coordinating response efforts and developing the capacity for a medical surge in mass casualty events. Food safety: The fragmented nature of the federal food oversight system undermines the government's ability to plan more strategically to inspect food production processes, identify and react more quickly to outbreaks of foodborne illnesses, and focus on promoting the safety and integrity of the nation's food supply. Fifteen federal agencies collectively administer at least 30 laws related to food safety. We have recommended, among other things, that the executive branch reconvene the President's Council on Food Safety to facilitate interagency coordination on food safety regulation and programs. Surface transportation: The nation's transportation infrastructure--its aviation, highway, transit, and rail systems--is critical to the nation's economy and affects the daily lives of most Americans. Despite large increases in federal spending on America's vital surface transportation system, this investment has not commensurately improved the performance of the system. Growing congestion has created by one estimate a $78 billion annual drain on the economy, and population growth, technological change, and the increased globalization of the economy will further strain the system. We have designated transportation finance a high-risk area and have called for a fundamental reexamination and restructured approach to our surface transportation policies, which experts have suggested need to recognize emerging national and global imperatives, such as reducing the nation's dependence on foreign fuel sources and minimizing the impact of the transportation system on the global climate change. Disaster response: Hurricane Katrina demonstrated the critical importance of the capability to implement an effective and coordinated response to catastrophes that leverages needed resources from across the nation, including all levels of government as well as nongovernmental entities. While the federal government has made progress since Katrina, as shown in the recent response to Hurricane Gustav, we have reported that the administration still does not have a comprehensive inventory of the nation's response capabilities or a systematic, comprehensive process to assess capabilities at the local, state, and federal levels based on commonly understood and accepted metrics for measuring those capabilities. We have work under way to identify the actions that DHS and the Federal Emergency Management Agency (FEMA) have taken to implement the provisions of the Post-Katrina Emergency Management Reform Act, which charged FEMA with the responsibility for leading and supporting the nation in a comprehensive risk-based emergency management system--a complex task that requires clear strategic vision, leadership, and the development of effective partnerships among governmental and nongovernmental entities. Cyber critical infrastructures: Cyber critical infrastructures are systems and assets incorporating information technology--such as the electric power grid and chemical plants--that are so vital to the nation that their incapacitation or destruction would have a debilitating impact on national security, our economy, and public health and safety. We have made numerous recommendations aimed at protecting these essential assets and addressing the many challenges that the federal government faces in working with both the private sector and state and local governments to do so--such as improving threat and vulnerability assessments, enhancing cyber analysis and warning capabilities, securing key systems, and developing recovery plans. Until these and other areas are effectively addressed, our nation's cyber critical infrastructure is at risk of the increasing threats posed by terrorists, foreign intelligence services, and others. Also, more broadly, the Government Performance and Results Act of 1993 (GPRA) calls for a governmentwide performance plan to help Congress and the executive branch address critical federal performance and management issues, including redundancy and other inefficiencies. Unfortunately, the promise of this important provision has not been realized. The agency-by-agency focus of the budget does not provide for the needed strategic, longer range, and integrated perspective of government performance. A broader performance plan would provide the President with an opportunity to assess and communicate the relationship between individual agency goals and outcomes that transcend federal agencies. Our transition work will identify opportunities to limit costs and reduce waste across a broad spectrum of programs and agencies. While these opportunities will not eliminate the need to address more fundamental long-term fiscal challenges the federal government faces, concerted attention by the new administration could conserve resources for other priorities and improve the government's image. Examples of areas we will highlight and for which we will suggest needed action follow: Improper payments: For fiscal year 2007, agencies reported improper payment estimates of about $55 billion--including programs such as Medicaid, Food Stamps, Unemployment Insurance, and Medicare. The governmentwide estimate has steadily increased over the past several years; yet even the current estimate does not reflect the full scope of improper payments. Further, major management challenges and internal control weaknesses continue to plague agency operations and programs susceptible to significant improper payments. Addressing these challenges and internal control weaknesses will better ensure the integrity of payments and minimize the waste of taxpayers' dollars. DOD cost overruns: Total acquisition cost growth on the 95 major defense programs in DOD's fiscal year 2007 portfolio is now estimated at $295 billion, and of the weapon programs we assessed this year, none had proceeded through development meeting the best practice standards for mature technologies, stable design, and mature production processes--all prerequisites for achieving planned cost and schedule outcomes. DOD expects to invest about $900 billion (fiscal year 2008 dollars) over the next 5 years on development and procurement, with more than $335 billion, or 37 percent, going specifically for new major weapon systems. Yet, much of this investment will be used to address cost overruns rooted in poor planning, execution, and oversight. By adopting best practices on individual programs and strengthening oversight and accountability for better outcomes, as we have consistently recommended, cost and schedule growth could be significantly reduced. DOD secondary inventory: DOD expends considerable resources to provide logistics support for military forces, and the availability of spare parts and other critical items provided through DOD's supply chains affects military readiness and capabilities. DOD officials have estimated that the level of investment in DOD's supply chains is more than $150 billion a year, and the value of its supply inventories has grown by tens of billions of dollars since fiscal year 2001. However, as we have reported over the years, DOD continues to have substantial amounts of secondary inventory (spare parts) that are in excess to requirements. Most recently, in 2007, we reported that more than half of the Air Force's secondary inventory, worth an average of $31.4 billion, was not needed to support required inventory levels from fiscal years 2002 through 2005, although increased demand due to ongoing military operations contributed to slight reductions in the percentage of inventory on hand and the number of years of supply it represents. In ongoing reviews of the Navy's and the Army's secondary inventory, we are finding that these services also continue to have significant amounts of inventory that exceeds current requirements. To reduce its investment in spare parts that are in excess of requirements, DOD will need to strengthen the accountability and management of its secondary inventory. Oil and gas royalties: In fiscal year 2007, the Department of Interior's Minerals Management Service collected over $9 billion in oil and gas royalties, but our work on the collection of federal royalties has found numerous problems with policies, procedures, and internal controls that raise serious doubts about the accuracy of these collections. We also found that past implementation of royalty relief offered some oil and gas companies during years of low oil and gas prices did not include provisions to remove the royalty relief in the event that oil and gas prices rose as they have, and this failure to include such provisions will likely cost the federal government tens of billions of dollars over the working lives of the affected leases. Finally, we have found that the federal government ranks lowest among the nations in terms of the percentage of total oil and gas revenue accruing to the government. We have ongoing reviews of Interior's oil and gas leasing and royalty policies and procedures and reports based on this work should be publicly released within the next few months. The tax gap: The tax gap--the difference between taxes legally owed and taxes paid on time--is a long-standing problem in spite of many efforts by Congress and the Internal Revenue Service (IRS) to reduce it. Recently, IRS estimated a net tax gap for tax year 2001 of about $290 billion. We have identified the need to take multiple approaches to reduce the tax gap, and specifically have recommended ways for IRS to improve its administration of the tax laws in many areas, including payroll taxes, rental real estate income, the tax preparation industry, income sent offshore, collecting tax debts, and the usefulness of third-party information reporting. Ultimately, long-term fiscal pressures and other emerging forces will test the capacity of the policy process to reexamine and update priorities and portfolios of federal entitlement programs, policies, programs, commitments, and revenue approaches. In that regard, the "base" of government--spending and revenue--also must be reassessed so that emerging needs can be addressed while outdated and unsustainable efforts can be either reformed or eliminated. Tax expenditures should be part of that reassessment. Spending channeled through the tax code results in forgone federal revenue that summed to an estimated $844 billion in 2007 and has approximated the size of total discretionary spending in some years. Yet, little is known about the performance of credits, deductions, and other tax preferences, statutorily defined as tax expenditures, which are often aimed at policy goals similar to those of federal spending programs. Because tax expenditures represent a significant investment of resources, and in some program areas are the main tool used to accomplish federal goals, this is a significant gap in the information available to decision makers. While some progress has been made in recent years, agencies still all too often lack the basic management capabilities needed to address current and emerging demands. As a result, any new administration will face challenges in implementing its policy and program agendas because of shortcomings in agencies' management capabilities. Accordingly, our transition effort will synthesize our wide range of work and identify the key management challenges unique to individual departments and major agencies. Additionally, our transition work will emphasize five key themes common to virtually every government agency. Select a senior leadership team that has the experience needed to run large, complex organizations: It is vitally important that leadership skills, abilities, and experience be among the key criteria the new President uses to select his leadership teams in the agencies. The Senate's interest in leveraging its role in confirmation hearings as evidenced by Senator Voinovich's request to us to suggest management-related confirmation questions and your interest in hearings such as this one will send a strong message that nominees should have the requisite skills to deal effectively with the broad array of complex management challenges they will face. It is also critical that they work effectively with career executives and agency staff. Given that management improvements and transformations can take years to achieve, steps are needed to ensure a continuous focus on those efforts. Agencies need to develop executive succession and transition-planning strategies that seek to sustain commitment as individual leaders depart and new ones arrive. For example, in creating a Chief Management Officer (CMO) position for DHS, Congress has required the DHS CMO to develop a transition and succession plan to guide the transition of management functions with a new administration. More broadly speaking, though, the creation of a chief operating officer (COO)/CMO position in selected federal agencies can help elevate, integrate, and institutionalize responsibility for key management functions and transformation efforts and provide continuity of leadership over a long term. For example, because of its long-standing management weaknesses and high-risk operations, we have long advocated the need for a COO/CMO for DOD to advance management integration and business transformation in the department. In the fiscal year 2008 National Defense Authorization Act, Congress designated the Deputy Secretary of Defense as the department's CMO. Strengthen the capacity to manage contractors and recognize related risks and challenges: Enhancing acquisition and contracting capability will be a critical challenge for many agencies in the next administration in part because many agencies (for example, DOD, DHS, the Department of Energy, and the Centers for Disease Control and Prevention) are increasingly reliant on contractors to carry out their basic operations. In fiscal year 2007, federal agencies spent $436 billion on contracts for products and services. At the same time, our high-risk list areas include acquisition and contract management issues that collectively expose hundreds of billions of taxpayer dollars to potential waste and misuse. To improve acquisition outcomes, we have stated that agencies need a concentrated effort to address existing problems while facilitating a reexamination of the rules and regulations that govern the government- contractor relationship in an increasingly blended workforce. For example, since agencies have turned to contractor support to augment their capabilities, they need to ensure that contractors are playing appropriate roles and that the agencies have retained sufficient in-house workforce capacity to monitor contractor cost, quality, and performance. Better manage information technology (IT) to achieve benefits and control costs: A major challenge for the federal government is managing its massive investment in IT--currently more than $70 billion annually. Our reports have repeatedly shown that agencies and the government as a whole face challenges in prudently managing major modernization efforts, ensuring that executives are accountable for IT investments, instituting key controls to help manage such projects, and ensuring that computer systems and information have adequate security and privacy protections. The Office of Management and Budget (OMB) identifies major projects that are poorly planned by placing them on a Management Watch List and requires agencies to identify high-risk projects that are performing poorly. OMB and federal agencies have identified approximately 413 IT projects-- totaling at least $25.2 billion in expenditures for fiscal year 2008--as being poorly planned, poorly performing, or both. OMB has taken steps to improve the identification of the Management Watch List and high-risk projects since GAO testified last September, including publicly disclosing reasons for placement on the Management Watch List and clarifying high- risk project criteria. However, more needs to be done by both OMB and the agencies to address recommendations GAO has previously made to improve the planning, management, and oversight of poorly planned and performing projects so that potentially billions in taxpayer dollars are not wasted. Address human capital challenges: Governmentwide, about one-third of federal employees on board at the end of fiscal year 2007 will become eligible to retire on the new administration's watch. Certain occupations-- air traffic controllers and customs and border protection personnel among them--are projected to have particularly high rates of retirement eligibility come 2012. As experienced employees retire, they leave behind critical gaps in leadership and institutional knowledge, which could adversely affect the government's ability to carry out its diverse responsibilities. Agencies must recruit and retain employees able to create, sustain, and thrive in organizations that are flatter, results-oriented, and externally focused, and who can collaborate with other governmental entities as well as with the private and nonprofit sectors to achieve desired outcomes. The Office of Personnel Management needs to continue to ensure that its own workforce has the skills needed to successfully guide agency human capital improvements and agencies must make appropriate use of available authorities to acquire, develop, motivate, and retain talent. Build on the progress of the statutory management framework: Over the last 2 decades, Congress has put in place a legislative framework for federal management that includes results-based management, information technology, and financial management reforms. As a result of this framework and the efforts of Congress and the Bush and Clinton administrations, there has been substantial progress in establishing the basic infrastructure needed to create high-performing organizations across the federal government. However, work still remains and sustained attention by Congress and the incoming administration will be a critical factor in ensuring the continuing and effective implementation of the statutory management reforms. Initiated in 1990, GAO's high-risk program has brought a much greater focus to areas in need of broad-based transformations and those vulnerable to waste, fraud, abuse, and mismanagement. It also has provided the impetus for the creation of several statutory management reforms. GAO's current high-risk list covers 28 areas. Our updates to the list, issued every 2 years at the start of each new incoming Congress, have helped in setting congressional oversight agendas. The support of this Subcommittee and others in Congress has been especially important to the success of this program. Further, administrations have consistently turned to the high-risk list in framing their management improvement initiatives. The current administration in particular, working with this Subcommittee, has provided a valuable and focused effort in requiring agencies to develop meaningful corrective action plans for each area that we have designated as high-risk. As a consequence of efforts by Congress, the agencies, OMB, and others, much progress has been made in many high-risk areas, but key issues need continuing attention. Sustained efforts in these areas by the next Congress and administration will help improve service to the American public, strengthen public confidence in the government's performance and accountability, potentially save billions of dollars, and ensure the ability of government to deliver on its promises. The world has obviously changed a great deal since the Presidential Transition Act of 1963. And while there have been periodic amendments to the Act, neither the Act nor the transition process itself has been subject to a comprehensive or systematic assessment of whether the Act is setting transitions up to be as effective as they might be. We will be monitoring the transition and reaching out to the new administration, Congress, and outside experts to identify lessons learned and any needed improvements in the Act's provisions for future transitions. In summary, our goal will continue to be to provide congressional and executive branch policy makers with a comprehensive snapshot of how things are working across government and to emphasize the need to update some federal activities to better align them with 21st century realities and bring about government transformation. In keeping with our role, we will be providing Congress and the executive branch with clear facts and constructive options and suggestions that our elected officials can use to make policy choices in this pivotal transition year. The nation's new and returning leaders will be able to use such information to help address both the nation's urgent issues and long-term challenges so that our nation stays strong and secure now and for the next generation. Chairman Akaka, Senator Voinovich, and Members of the Subcommittee, this concludes my prepared statement. I would be happy to respond to any questions you may have. Housing Government-Sponsored Enterprises: A Single Regulator Will Better Ensure Safety and Soundness and Mission Achievement (GAO-08-563T, Mar. 6, 2008). Financial Regulation: Industry Trends Continue to Challenge the Federal Regulatory Structure (GAO-08-32, Oct. 12, 2007). Securing, Stabilizing, and Reconstructing Afghanistan: Key Issues for Congressional Oversight (GAO-07-801SP, May 24, 2007). Securing, Stabilizing and Rebuilding Iraq: Progress Report: Some Gains Made, Updated Strategy Needed (GAO-08-837, June 23, 2008). Military Readiness: Impact of Current Operations and Actions Needed to Rebuild Readiness of U.S. Ground Forces (GAO-08-497T, Feb. 14, 2008). Force Structure: Restructuring and Rebuilding the Army Will Cost Billions of Dollars for Equipment but the Total Cost Is Uncertain (GAO-08-669T, Apr. 10, 2008). Department of Homeland Security: Progress Report on Implementation of Mission and Management Functions (GAO-07-454, Aug. 17, 2007). Department of Homeland Security: Progress Made in Implementation of Management Functions, but More Work Remains (GAO-08-646T, Apr. 9, 2008). 2010 Census: Census Bureau's Decision to Continue with Handheld Computers for Address Canvassing Makes Planning and Testing Critical (GAO-08-936, July 31, 2008). Information Technology: Significant Problems of Critical Automation Program Contribute to Risks Facing 2010 Census (GAO-08-550T, Mar. 5, 2008). The Nation's Long-Term Fiscal Outlook: April 2008 Update (GAO-08- 783R, May 16, 2008). Budget Issues: Accrual Budgeting Useful in Certain Areas but Does Not Provide Sufficient Information for Reporting on Our Nation's Longer- Term Fiscal Challenge (GAO-08-206, Dec. 20, 2007). Fiscal Exposures: Improving the Budgetary Focus on Long-Term Costs and Uncertainties (GAO-03-213 (Jan. 24, 2003). Long-Term Fiscal Outlook: Long-Term Federal Fiscal Challenge Driven Primarily by Health Care (GAO-08-912T, June 17, 2008). DOD and VA: Preliminary Observations on Efforts to Improve Care Management and Disability Evaluations for Servicemembers (GAO-08-514T, Feb. 27, 2008). DOD and VA: Preliminary Observations on Efforts to Improve Health Care and Disability Evaluations for Returning Servicemembers (GAO- 07-1256T, Sept. 26, 2007). Emergency Preparedness: States are Planning for Medical Surge, but Could Benefit from Shared Guidance for Allocating Scarce Medical Resources (GAO-08-668, June 13, 2008). Influenza Pandemic: Efforts Under Way to Address Constraints on Using Antivirals and Vaccines to Forestall a Pandemic (GAO-08-92, Dec. 21, 2007). Federal Oversight of Food Safety: High-Risk Designation Can Bring Needed Attention to Fragmented System (GAO-07-449T, Feb. 8, 2007). Federal Oversight of Food Safety: FDA's Food Protection Plan Proposes Positive First Steps, but Capacity to Carry Them Out Is Critical (GAO- 08-435T, Jan. 29, 2008). Surface Transportation Programs: Proposals Highlight Key Issues and Challenges in Restructuring the Programs (GAO-08-843R, July 29, 2008). Surface Transportation: Restructured Federal Approach Needed for More Focused, Performance-Based, and Sustainable Programs (GAO-08-400, Mar. 6, 2008). Catastrophic Disasters: Enhanced Leadership, Capabilities, and Accountability Controls Will Improve the Effectiveness of the Nation's Preparedness, Response, and Recovery System (GAO-06-618, Sept. 6, 2006). Emergency Management: Observations on DHS's Preparedness for Catastrophic Disasters (GAO-08-868T, June 11, 2008). Critical Infrastructure Protection: Sector-Specific Plans' Coverage of Key Cyber Security Elements Varies (GAO-08-113, Oct. 31, 2007). Critical Infrastructure Protection: Multiple Efforts to Secure Control Systems Are Under Way, but Challenges Remain (GAO-07-1036, Sept. 10, 2007). Improper Payments: Status of Agencies' Efforts to Address Improper Payment and Recovery Auditing Requirements (GAO-08-438T, Jan. 31, 2008). Fiscal Year 2007 U.S. Government Financial Statements: Sustained Improvement in Financial Management Is Crucial to Improving Accountability and Addressing the Long-Term Fiscal Challenges (GAO-08-847T, June 5, 2008). Defense Acquisitions: Better Weapon Program Outcomes Require Discipline, Accountability, and Fundamental Changes in the Acquisition Environment (GAO-08-782T, June 3, 2008). Defense Acquisitions: Assessments of Selected Weapon Programs. (GAO-08-467SP, Mar. 31, 2008). DOD's High-Risk Areas: Efforts to Improve Supply Chain Can Be Enhanced by Linkage to Outcomes, Progress in Transforming Business Operations, and Reexamination of Logistics Governance and Strategy (GAO-07-1064T, July 10, 2007). Defense Inventory: Opportunities Exist to Save Billions by Reducing Air Force's Unneeded Spare Parts Inventory (GAO-07-232, Apr. 27, 2007). Oil and Gas Royalties: A Comparison of the Share of Revenue Received from Oil and Gas Production by the Federal Government and Other Resource Owners (GAO-07-676R, May 1, 2007). Oil and Gas Royalties: Litigation over Royalty Relief Could Cost the Federal Government Billions of Dollars (GAO-08-792R, June 5, 2008). Highlights of the Joint Forum on Tax Compliance: Options for Improvement and Their Budgetary Potential (GAO-08-703SP, June 2008). Tax Compliance: Multiple Approaches Are Needed to Reduce the Tax Gap (GAO-07-488T, Feb. 16, 2007). Government Performance and Accountability: Tax Expenditures Represent a Substantial Federal Commitment and Need to Be Reexamined (GAO-05-690, Sept. 23, 2005). Higher Education: Multiple Higher Education Tax Incentives Create Opportunities for Taxpayers to Make Costly Mistakes (GAO-08-717T, May 1, 2008). Organizational Transformation: Implementing Chief Operating Officer/Chief Management Officer Positions in Federal Agencies (GAO-08-34, Nov. 1, 2007). Defense Management: DOD Needs to Reexamine Its Extensive Reliance on Contractors and Continue to Improve Management and Oversight (GAO-08-572T, Mar. 11, 2008). Federal Acquisitions and Contracting: Systemic Challenges Need Attention (GAO-07-1098T, July 17, 2007). Information Technology: OMB and Agencies Need to Improve Planning, Management, and Oversight of Projects Totaling Billions of Dollars (GAO-08-1051T, July 31, 2008). Information Security: Progress Reported, but Weaknesses at Federal Agencies Persist (GAO-08-571T, Mar. 12, 2008). Office of Personnel Management: Opportunities Exist to Build on Recent Progress in Internal Human Capital Capacity (GAO-08-11, Oct. 31, 2007). Human Capital: Transforming Federal Recruiting and Hiring Efforts (GAO-08-762T, May 8, 2008). High-Risk Series: An Update (GAO-07-310, Jan. 31, 2007). Suggested Areas for Oversight for the 110th Congress (GAO-07-235R, Nov. 17, 2006). 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The upcoming 2009 transition will be a unique and critical period for the U.S. government. It marks the first wartime presidential transition in 40 years. It will also be the first administration change for the relatively new Department of Homeland Security operating in the post 9/11 environment. The next administration will fill thousands of positions across government; there will be a number of new faces in Congress as well. Making these transitions as seamlessly as possible is pivotal to effectively and efficiently help accomplish the federal government's many essential missions. While the Government Accountability Office (GAO), as a legislative branch agency, has extensive experience helping each new Congress, the Presidential Transition Act points to GAO as a resource to incoming administrations as well. The Act specifically identifies GAO as a source of briefings and other materials to help presidential appointees make the leap from campaigning to governing by informing them of the major management issues, risks, and challenges they will face. GAO has traditionally played an important role as a resource for new Congresses and administrations, providing insight into the issues where GAO has done work. This testimony provides an overview of GAO's objectives for assisting the 111th Congress and the next administration in their all-important transition efforts. GAO will highlight issues that the new President, his appointees, and the Congress will confront from day one. These include immediate challenges ranging from national and homeland security to oversight of financial institutions and markets to a range of public health and safety issues. GAO will synthesize the hundreds of reports and testimonies it issues every year so that new policy makers can quickly zero in on critical issues during the first days of the new administration and Congress. GAO's analysis, incorporating its institutional memory across numerous administrations, will be ready by the time the election results are in and transition teams begin to move out. GAO will provide congressional and executive branch policy makers with a comprehensive snapshot of how things are working across government and emphasize the need to update some federal activities to better align them with 21st century realities and bring about government transformation. In keeping with its mission, GAO will be providing Congress and the executive branch with clear facts and constructive options and suggestions that elected officials can use to make policy choices in this pivotal transition year. GAO believes the nation's new and returning leaders will be able to use such information to help meet both the nation's urgent issues and long-term challenges so that our nation stays strong and secure now and for the next generation. GAO's transition work also will highlight the need to modernize the machinery of government through better application of information technology, financial management, human capital, and contracting practices. GAO also will underscore the need to develop strategies for addressing the government's serious long-term fiscal sustainability challenges, driven on the spending side primarily by escalating health care costs and changing demographics.

The federal financial regulators are responsible for examining and monitoring the safety and soundness of approximately 22,000 financial institutions, which, together, manage more than $6 trillion in assets and hold over $3 trillion in deposits. Specifically, The Federal Reserve System supervises about 992 state-chartered, member banks and bank holding companies, which are responsible for $1.2 trillion in assets. The Office of the Comptroller of the Currency (OCC) supervises approximately 2,600 federally-chartered, national banks, which comprise about $2.9 trillion in assets--about 58 percent of the total $5 trillion assets of the FDIC-insured commercial banks. OCC also supervises federal branches and agencies of foreign banks. FDIC supervises about 6,200 state-chartered, nonmember banks, which are responsible for $1 trillion in assets. It is also the deposit insurer of approximately 11,000 banks and savings institutions that have insured deposits totaling upwards of $2.7 trillion. OTS oversees about 1,200 savings and loan associations (thrifts), which primarily emphasize residential mortgage lending and are an important source of housing credit. These institutions hold approximately $770 billion in assets. NCUA supervises and insures more than 11,000 federally- and state-chartered credit unions whose assets total about $345 billion. Credit unions are nonprofit financial cooperatives organized to provide their members with low-cost financial services. As part of their goal of maintaining safety and soundness, these regulators are responsible for assessing whether the institutions they supervise are adequately mitigating the risks associated with the century date change. To ensure consistent and uniform supervision on Year 2000 issues, the five regulators are coordinating their supervisory efforts through FFIEC. For example, they jointly prepared and issued Year 2000-related guidance and letters to banks, thrifts, and credit unions. They also worked together to develop and issue, in May 1997, Year 2000 examination procedures and guidance for all examiners to use in performing their work at the institutions. Additionally, the regulators--under the auspices of FFIEC--are jointly examining the major data service providers and software vendors that support the financial institutions. According to the regulators, virtually every insured financial institution relies on computers--either their own or those of a third-party contractor--to provide for processing and updating of records and a variety of other functions. Because computers are essential to their survival, the regulators believe that all institutions are vulnerable to the problems associated with the year 2000. Failure to address Year 2000 computer issues could lead, for example, to errors in calculating interest and amortization schedules. Moreover, automated teller machines may malfunction, performing erroneous transactions or refusing to process transactions. In addition, errors caused by Year 2000 miscalculations may expose institutions and data centers to financial liability and loss of customer confidence. Other supporting systems critical to the day-to-day business of financial institutions may be affected as well. For example, telephone systems, vaults, and security and alarm systems could malfunction. In addressing the Year 2000 problem, financial institutions must also consider the computer systems that interface with, or connect to, their own systems. These systems may belong to payment system partners, such as wire transfer systems, automated clearinghouses, check clearing providers, credit card merchant and issuing systems, automated teller machine networks, electronic data interchange systems, and electronic benefits transfer systems. Because these systems are also vulnerable to the Year 2000 problem, they can introduce errors into bank, thrift, and credit union systems. In addition to these computer system risks, many financial institutions also face business risks from the Year 2000: exposure from their corporate customers' inability to manage their own Year 2000 compliance efforts successfully. Consequently, in addition to correcting their computer systems, these institutions have to periodically assess the Year 2000 efforts of large corporate customers to determine whether they are sufficient to avoid significant disruptions to operations. FFIEC established a working group to develop guidance on assessing the risk corporate customers pose to financial institutions and the group issued guidance on March 17, 1998. The Year 2000 efforts of the five regulators began in June 1996, when, through FFIEC, they formally alerted banks, thrifts, and credit unions to the potential dangers of the Year 2000 problem by issuing an awareness letter to chief executive officers. This letter described the Year 2000 problem and highlighted concerns about the industry's Year 2000 readiness. It also called on institutions to perform a risk assessment of how systems are affected and develop a detailed action plan to fix them. In May 1997, the regulators issued a second, more detailed awareness letter that described the five-phase approach to planning and managing an effective Year 2000 program and highlighted external issues requiring management attention, such as reliance on vendors, risks posed by exchanging data with external parties, and the potential effect of Year 2000 noncompliance on corporate borrowers. The letter also related regulatory plans to facilitate Year 2000 evaluations by using uniform examination procedures. It directed institutions to inventory their core computer functions and set priorities for Year 2000 goals by September 30, 1997. It also directed them to complete programming changes and to have testing of mission-critical systems underway by December 31, 1998. As regulators alerted institutions to the Year 2000 problem, they began assessing whether banks, thrifts, and credit unions had established a structured process for correcting the problem; estimated the costs of remediation; prioritized systems for correction; and determined the Year 2000 impact on other internal systems important to day-to-day operations, such as vaults, security and alarm systems, elevators, and telephones. This initial assessment was completed during November and December 1997. Among other things, it revealed that most institutions were aware of Year 2000 and taking actions to correct their systems. However, the three regulators we reviewed reported--based on the initial assessment--that in total, over 5,000 institutions were not adequately addressing the problem. For example, OTS designated about 170 thrifts as being at high risk due to poor performance in conducting awareness and assessment phase activities. Additionally, FDIC identified over 200 banks that were not adequately addressing Year 2000 risks and 500 banks that were very reliant on third-party servicers and software providers but had not followed up with them to determine their Year 2000 readiness. Furthermore, NCUA reported that it had formal agreements for corrective action with 4,862 credit unions deemed not to be making sufficient progress in at least one awareness or assessment phase activity. The regulators are now conducting a more detailed assessment of Year 2000 readiness. This assessment will involve on-site examinations of institutions and their major data processing services and software vendors. These visits are expected to be completed by the end of June 1998. The results of the servicer assessments will be provided to the banks, thrifts, and credit unions that use these services. Once the on-site assessments are completed, the regulators expect to have a better idea of where the industry stands, which institutions need close attention, and, thus, where to focus supervisory efforts. As noted in our summary, the regulators must successfully address a number of problems to provide adequate assurance that financial institutions will meet the Year 2000 challenge. First, all were behind in assessing individual institution's readiness due to the fact that they got a late start. For example, the regulators did not complete their initial institution assessments until November and December 1997. According to OMB guidance and GAO's Assessment Guide, these activities should have occurred by the summer of 1997. Because the regulators are behind the recommended timelines, the time available for assessing institutions' progress during renovation, validation, and implementation phases and for taking needed corrective actions is compressed. Second, we also found that the FFIEC-developed examination work program and guidance for the initial and follow-on assessments were not designed to collect all the data needed to determine where (i.e., in which phase) the institutions are in the Year 2000 correction process. For example, the guidance for the work program does not contain questions that ask whether specific phases have been completed. In addition, the work program used to perform the on-site assessments is not organized by the 5 phases of the Year 2000 correction process. Furthermore, the terms used in the guidance to describe progress are vague. For example, it notes that banks should be well into assessment by the end of the third quarter of 1997, that renovation for mission-critical systems should largely be completed, and testing should be well underway by December 31, 1998. Without defining any of these terms, it would be very hard to deliver uniform assessments on the status of institutions' Year 2000 efforts. At the time of our reviews, OTS had issued additional examination guidance and procedures to supplement those of FFIEC. This supplemental guidance, if implemented correctly, will address the FFIEC examination procedure's shortcomings. However, although we reviewed FDIC and NCUA earlier in the process, we found that both were using or planning to use the FFIEC guidance for their initial and follow-on assessments. We were concerned at the time that by using the FFIEC guidance, FDIC and NCUA would not be able to develop an accurate picture of their institutions' Year 2000 readiness. In the case of FDIC, this problem was compounded by the fact that the tracking questionnaire FDIC examiners were to complete after their on-site assessment also did not ask enough questions to determine whether the bank had fully addressed the phases. Since our work, FDIC and NCUA have responded to our findings by providing examiners with supplemental guidance, which we think is a positive development. FDIC officials told us that they are also in the process of going back to institutions and asking more detailed questions to provide added assurance that the corporation can tell precisely where each bank is in the Year 2000 correction process. Third, FFIEC is still developing key Year 2000 guidance. For example, as of the time of our review, the regulators had not yet completed critical guidance related to (1) developing contingency plans to mitigate the risk of Year 2000-related disruptions and (2) ensuring that their data processing services, software vendors, and large corporate customers are making adequate Year 2000 progress. In May 1997, the regulators--through FFIEC--recommended that institutions begin these actions. FFIEC recently issued the servicer/vendor and corporate customer guidance on March 17, 1998, but does not plan to provide contingency planning guidance until the end of April 1998. This time lag has increased the risk that institutions have taken little or no action on contingency planning and dealing with servicers, vendors, and corporate customers in anticipation of pending regulator guidance. Moreover, in the absence of guidance, institutions may have initiated action that does not effectively mitigate risk of Year 2000 failures. Finally, although the regulators have been working hard to assess industrywide compliance, it is not clear all have an adequate level of technical resources needed to adequately evaluate the Year 2000 conversion efforts of the institutions and the service providers and software vendors that service them. As institutions and vendors progress in their Year 2000 efforts, we are concerned that the evaluations of the examiners will increase in length and technical complexity, and put a strain on an already small pool of technical resources. Without sufficient resources, the regulators could be forced to slip their schedules for completing the current on-site exams or, worse, reduce the scope of their exams in order to meet deadlines. In the first case, institutions would be left with less time to remediate any deficiencies. In the second, regulators might overlook issues that could lead to failures. In either case, the risk of noncompliance by institutions and service bureaus--and the government's exposure to losses--is significantly increased. OTS and NCUA have responded to this concern by adding more technical staff or augmenting it with contractors. It will be important for regulators to quickly address problems associated with their late start since the challenge for them is certain to grow as banks progress into the later and more complex stages of their Year 2000 efforts. For example, regulators will soon have to pinpoint which, if any, of the thousands of banks, thrifts, and credit unions are not going to meet their Year 2000 deadline. In doing so, they will have to weigh a range of factors, including the financial condition of the institution, the resources it has to address the problem, how far behind it is in correcting its systems, whether its service provider's systems are Year 2000 compliant, etc. Once these decisions are made, regulators will have to then determine which enforcement actions--which include increased on-site supervision, directives to institution boards of directors, written supervisory agreements, cease-and-desist orders, civil monetary penalties--are appropriate. All of this needs to be done before the Year 2000 deadline, which is less than 21 months away. In addition, as institutions and vendors progress in their Year 2000 efforts, regulatory evaluations will increase in length and technical complexity and put a strain on an already small pool of technical resources. Thus, the regulators will need to ensure that they have the technical capacity to complete their Year 2000 examinations as well as their routine safety and soundness examinations. Already, some are finding this to be a difficult task. OTS officials, for example, expressed the concern that even if they could hire more technical examiners, it is very hard to find and hire staff with these skills. The regulators will be better prepared to handle these challenges once the on-site assessments are completed. This information should provide good definition as to the size and magnitude of the problem, that is, how many institutions are at high risk of not being ready for the millennium and require immediate attention and which service providers are likely to be problematic. Further, by carefully analyzing available data, the regulators should be able to identify common problems or issues that are generic to institutions that are of similar size, use specific service providers, etc. This in turn will allow regulators to develop a much better understanding of which areas require attention and where to focus limited resources. In short, regulators have an opportunity to regroup, develop specific strategies, and have a more defined sense of the risks and the actions required to mitigate those risks. In conclusion, Mr. Chairman, we believe that the financial regulators have a good appreciation for the Year 2000 problem and have made significant progress in assessing the readiness of banks, thrifts, and credit unions. However, the regulators are facing a finite deadline that offers no flexibility. They need to take several actions to improve their ability to enhance the ability of financial institutions to meet the century deadline with minimal problems and to enhance their own ability to monitor the industry's efforts and to take appropriate and swift measures against institutions that are neglecting their Year 2000 responsibilities. Accordingly, we have made recommendations to the regulators individually, and collectively via FFIEC, to work together to, among other things, (1) improve their Year 2000 examination and reporting processes, (2) provide additional guidance to the institutions on contingency planning and the latter phases of the Year 2000 correction process, (3) develop a tactical plan that details the results of their on-site assessments, provides a more explicit road map of the actions to be taken based on those results, and includes an assessment of the adequacy of technical resources to evaluate the Year 2000 efforts of institutions and the servicers and vendors that support them, and (4) improve the regulators' internal system mitigation programs. So far, we have been generally pleased with the regulators' responsiveness to implementing our recommendations. Mr. Chairman, that concludes my statement. We welcome any questions that you or Members of the Committee may have. 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GAO discussed the progress of the federal regulatory agencies in ensuring that the thousands of financial institutions they oversee are ready for the upcoming century date change. GAO noted that: (1) because financial institutions are heavily dependent on information technology, their viability hinges on whether they can successfully remediate systems before the Year 2000 deadline; (2) given this possibility, regulators must take every measure possible to assist banks, thrifts, and credit unions in their Year 2000 efforts as well as to identify and take swift enforcement measures against those in danger of failing; (3) regulators have recognized this responsibility and have begun an intense effort to raise awareness of the problem, develop guidance to facilitate remediation efforts, and determine where individual institutions stand in correcting their systems; (4) in doing so, regulators have initially identified several hundred institutions at high risk of missing the deadline due to their poor performance in conducting awareness and assessment phase activities; (5) despite aggressive efforts, the regulators still face significant challenges in providing a high level of assurance that individual institutions will be ready; (6) they were late in addressing the problem and consequently, are behind in the Year 2000 schedule recommended by both GAO and the Office of Management and Budget; (7) they are also late in developing key guidance on contingency planning and dealing with servicers, vendors, and corporate customers; (8) this guidance is needed by financial institutions to complete their own preparations; (9) in addition, their follow-on assessments to be completed by June 1998 were not in all cases, designed to collect the data required to be defective about the status of individual institutions; (10) furthermore, it is questionable whether all regulators have an adequate level of technical staff to completely evaluate industry readiness; (11) with regard to their own systems, the regulators have generally done much to mitigate the risk to their mission critical systems; and (12) in some areas such as contingency planning, the regulators can do more to provide added assurance that they will be ready for the century date change and any unexpected problems.

DOD has a long history of troubled space systems acquisitions. Over the past decade, most of the large DOD space systems acquisition programs collectively experienced billions of dollars in cost increases and delayed schedules. In particular, a long-standing problem in DOD space systems acquisitions is that program costs have tended to go up significantly from initial cost estimates. As shown in figure 1, estimated costs for selected major space systems acquisition programs have increased by about $22.6 billion--nearly 230 percent--from fiscal years 2012 through 2017. The gap between original and current estimates shows that DOD has fewer dollars available to invest in new programs or add to existing ones. DOD's overall level of investment over the five year period decreases until fiscal year 2014, at which point it levels off. The declining investment in the later years is the result of mature programs that have planned lower out-year funding, cancellation of a major space system acquisition program and several development efforts, and the exclusion of several space systems acquisition efforts for which total cost data were unavailable. These efforts include the Joint Space Operations Center Mission System (JMS), Space Fence, Space Based Space Surveillance (SBSS) Follow-on, Precision Tracking Space System (PTSS), and Weather Satellite Follow-on. We have previously reported that programs have experienced cost increases and schedule delays that have resulted in potential capability gaps in missile warning, military communications, and weather monitoring. For instance, unit costs for one of the most troubled programs, the Space Based Infrared System (SBIRS) have climbed about 230 percent to over $3 billion per satellite, with the launch of the first satellite about 9 years later than predicted. Similarly, 8 years after a development contract for the National Polar-orbiting Operational Environmental Satellite System (NPOESS) program was awarded in 2002, the cost estimate had more than doubled--to about $15 billion, launch dates had been delayed by over 5 years, significant functionality had been removed from the program, and the program's tri-agency management structure had proven to be ineffective. In February 2010, it was announced that the National Oceanic and Atmospheric Agency (NOAA) and DOD would no longer jointly procure the NPOESS satellite system and, instead, each agency would undertake separate acquisitions. Consequently, the risks of gaps in weather satellite monitoring data have increased. Other programs, such as the Transformational Satellite Communications System, were canceled several years earlier because they were found to be too ambitious and not affordable at a time when the DOD was struggling to address critical acquisition problems elsewhere in the space systems portfolio. Our past work has identified a number of causes of acquisition problems, but several consistently stand out. At a higher level, DOD tended to start more weapon programs than was affordable, creating a competition for funding that focused on advocacy at the expense of realism and sound management. DOD also tended to start its space systems programs before it had the assurance that the capabilities it was pursuing could be achieved within available resources and time constraints. For example, when critical technologies planned for a satellite system are still in relatively early stages of discovery and invention, there is no way to accurately estimate how long it would take to design, develop, and build the system. Finally, programs typically attempted to satisfy all requirements in a single step, regardless of the design challenges or the maturity of the technologies necessary to achieve the full capability. DOD's preference to make larger, complex satellites that perform a multitude of missions stretched technology challenges beyond current capabilities in some cases. In the past, funding instability, poor contractor oversight, and relaxed quality standards have also contributed to acquisition problems. We have also reported that fragmented leadership and lack of a single authority in overseeing the acquisition of space programs have created challenges for optimally acquiring, developing, and deploying new space systems. Past studies and reviews have found that responsibilities for acquiring space systems are diffused across various DOD organizations, even though many of the larger programs, such as the Global Positioning System (GPS) and those to acquire imagery and environmental satellites, are integral to the execution of multiple agencies' missions. We reported that with multiagency space programs, success is often only possible with cooperation and coordination; however, successful and productive coordination appears to be the exception and not the rule. This fragmentation is problematic not only because of a lack of coordination that has led to delays in fielding systems, but also because no one person or organization is held accountable for balancing governmentwide needs against wants, resolving conflicts and ensuring coordination among the many organizations involved with space systems acquisitions, and ensuring that resources are directed where they are most needed. Over the past 5 years, our work 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 could benefit space programs. DOD has generally concurred with our recommendations, and has undertaken a number of actions to establish a better foundation for acquisition success. For newer satellite acquisition efforts, DOD has attempted to incorporate lessons learned from its experiences with earlier efforts. For example, the GPS III program, which began product development in 2008, is using a "back to basics" approach, emphasizing rigorous systems engineering, use of military specifications and standards, and an incremental approach to providing capability. Thus far, the work performed on the development of the first two satellites is costing more than expected--but not on the scale of earlier programs-- and its schedule remains on track. Our prior testimonies have cited an array of actions as well. the Office of the Secretary of Defense created a new office under the Undersecretary of Defense for Acquisition, Technology and Logistics to oversee all major DOD space and intelligence related acquisitions and it began applying its broader weapon system acquisition policy (DOD Instruction 5000.02, Operation of the Defense Acquisition System (Dec. 8, 2008)) to space systems, instead of allowing a tailored policy for space that enabled DOD to commit to major investments before knowing what resources will be required to deliver promised capability. Among other initiatives, the Air Force undertook efforts to improve cost estimating and revitalize its acquisition workforce and program management assistance programs. Further, in 2009, for major weapons programs, Congress enacted the Weapon Systems Acquisition Reform Act of 2009, which required greater emphasis on front-end planning and, for example, refining concepts through early systems engineering, strengthening cost estimating, building prototypes, holding early milestone reviews, and developing preliminary designs before starting system development. Most of DOD's major satellite programs are in mature phases of acquisition and cost and schedule growth is not as widespread as it was in prior years. However, the satellites, ground systems, and user terminals are not optimally aligned and the cost of launching satellites continues to be expensive. GAO, Space Acquisitions: DOD Faces Challenges in Fully Realizing Benefits of Satellite Acquisition Improvements, GAO-12-563T (Washington, D.C.: Mar. 21, 2012); and Space Acquisitions: DOD Delivering New Generations of Satellites, but Space System Acquisition Challenges Remain, GAO-11-590T (Washington, D.C.: May 11, 2011). Most of DOD's major satellite programs are in mature phases of acquisition, that is, the initial satellites have been designed, fabricated and launched into orbit while additional satellites of the same design are being produced. Only two major satellite programs are in earlier phases of acquisition--the GPS III program and the PTSS program. For the portfolio of major satellite programs, new cost and schedule growth is not as widespread as it was in prior years, but DOD is still experiencing problems in these programs. For example, though the first two SBIRS satellites have launched, program officials are predicting a 14 month delay on the production of the third and fourth geosynchronous earth orbit (GEO) satellites due in part to technical challenges, parts obsolescence, and test failures. As we reported in March 2013, program officials are predicting about a $440 million cost overrun for these satellites. Also, the work performed to date for development of the first two GPS III satellites continues to cost more than DOD expected. Since the program entered system development, total program costs have increased approximately $180 million. The GPS III program office has attributed this to a variety of factors, such as inefficiencies in the development of the satellite bus and the navigation payload. Program officials stated that the cost growth was partially due to the program's use of a back to basics approach, which they stated shifted costs to earlier in the acquisition as a result of more stringent parts and materials requirements. They anticipate these requirements will result in fewer problems later in the acquisition. Table 1 describes the status of the satellite programs we have been tracking in more detail. Though satellite programs are not experiencing cost and schedule problems as widespread as in years past, we have reported that ground control systems and user terminals in most of DOD's major space systems acquisitions are not optimally aligned, leading to underutilized on-orbit satellite resources and limited capability provided to the warfighter. For example: Over 90 percent of the MUOS's planned capability is dependent on the development of compatible user terminals. Although the first MUOS satellite was launched over a year ago, operational testing of MUOS with production-representative user terminals is not expected to occur until the second quarter of fiscal year 2014. The SBIRS program revised its delivery schedule of ground capabilities to add increments that will provide the warfighter some capabilities sooner than 2018, but complete and usable data from a critical sensor will not be available until about 7 years after the satellite is on orbit. The Family of Advanced Beyond Line-of-Sight Terminals (FAB-T) program, which is developing user terminals intended to communicate with AEHF satellites, has experienced numerous cost and schedule delays and is currently not synchronized with the AEHF program, which launched its second satellite last year while the FAB-T program has yet to deliver any capabilities. Current estimates show that FAB-T will reach initial operational capability for some requirements in 2019, about 5 years after AEHF is scheduled to reach its initial operational capability. GPS OCX is required for the launch of the first GPS III satellite because the existing ground control software is not compatible with the new GPS satellites. Realizing that the new ground control system would not be delivered in time to launch the first GPS III satellite, the Air Force added funding to the contract to accelerate development of the software that can launch and checkout the GPS III satellite, leaving the other capabilities--like the ability to command and control the satellite--to be delivered in late 2016. Subsequently, the launch of the first GPS III satellite has been delayed to May 2015 to better synchronize with the availability of the launch software. Though there are inherent difficulties in aligning delivery of satellites, ground control systems, and user terminals, we reported in 2009 that the lack of synchronization between segments of space acquisition programs is largely the result of the same core issues that hamper acquisitions in general--requirements instability, funding instability, insufficient technology maturity, underestimation of complexity, and poor contractor oversight, among other issues. In addition, user terminals are not optimally aligned because of a lack of coordination and effective oversight over the many military organizations that either develop user terminals or have some hand in development. We recommended that the Secretary of Defense take a variety of actions to help ensure that DOD space systems provide more capability to the warfighter through better alignment and increased commonality, and to provide increased insight into ground asset costs. DOD generally agreed with these recommendations. Another acquisition challenge facing DOD is the cost of launching satellites into space. DOD has benefited from a long string of successful launches, including three military and four intelligence community satellites this year. However, each launch can range from $100 million to over $200 million. Additional money is spent to support launch infrastructure. An analysis we performed this year showed that from fiscal years 2013 through 2017, the government can expect to spend approximately $46 billion on launch activities. Meanwhile, we reported in prior years that too little was known about the factors that were behind cost and price increases. The Air Force has developed a new launch acquisition strategy which includes a block buy approach for future launches. At the same time, it is implementing an effort to introduce new launch providers. Both efforts are designed to help lower costs for launch, but they face challenges, which are discussed further in the next section. Over the past year, we have reported on DOD's progress in closing knowledge gaps in its new Evolved Expendable Launch Vehicle (EELV) acquisition strategy, DOD's efforts to introduce new launch providers, opportunities to help reduce satellite program costs, and the Air Force's satellite control operations and modernization efforts with comparisons to commercial practices. These reports further highlight the successes and challenges that have faced the space community as it has sought to mitigate rising costs and deliver modernized capabilities. We reported in September 2011 that DOD needed to ensure the new acquisition strategy was based on sufficient information, as there were significant uncertainties relating to the health of the launch industrial base, contractor cost or pricing data, mission assurance costs and activities, numbers of launch vehicles needed, and future engine prices which were expected to double or triple in the near term. As a result, DOD was at risk of committing to an acquisition strategy--including an expensive, multi-billion dollar block buy of launch vehicle booster cores-- before it had information essential to ensuring business decisions contained in the strategy were sound. Among other things, we recommended DOD assess engine costs and mission assurance activities, reassess the length of the proposed block buy, and consider how to address broader launch acquisition and technology development issues. DOD generally concurred with the recommendations. The Air Force issued its new EELV acquisition strategy in November 2011. Following our review, the National Defense Authorization Act for Fiscal Year 2012 required that DOD report to congressional committees a description of how it implemented the recommendations contained in our report and for GAO to assess that information. We reported in July 2012 that DOD had numerous efforts in progress to address the knowledge gaps and data deficiencies identified in our September 2011 report, such as completing or obtaining independent cost estimates for two EELV engines and completing a study of the liquid rocket engine industrial base. We reported that officials from DOD, NASA, and NRO had initiated several assessments to obtain needed information, and had worked closely to finalize new launch provider certification criteria for national security space launches. However, we found that more action was needed to ensure that launch mission assurance activities were not excessive, to identify opportunities to leverage the government's buying power through increased efficiencies in launch acquisitions, and to strategically address longer-term technology investments. We reported that some information DOD was gathering could set the stage for longer-term strategic planning for the program, especially in critical launch technology research and development decisions and that investing in a longer-term perspective for launch acquisitions was important to fully leverage the government's buying power and maintain a healthy industrial base. In 2011, the Air Force, National Aeronautics and Space Administration (NASA), and National Reconnaissance Office (NRO) began implementing a coordinated strategy--called the Air Force Launch Services New Entrant Certification Guide (Guide)--to certify new entrants to provide launch capability on EELV-class launch vehicles. New entrants are launch companies that are working toward certifying their launch vehicle capabilities so that they may be allowed to compete with the current sole- source contractor for government launches. Launch vehicle certification is necessary to ensure that only proven, reliable launch vehicles will be used to launch government satellites. The House Armed Services Committee Report accompanying the National Defense Authorization Act for Fiscal Year 2013 directed GAO to review and analyze the implementation of the Guide. In February 2013, we reported that the Air Force based its Guide on existing NASA policy and procedures with respect to payload risk classification and launch vehicle certification.Force, NASA, and NRO were working to coordinate and share information to facilitate launch vehicle certification efforts, but that each agency would determine for itself when certification had been achieved. As a result, some duplication and overlap of efforts could occur. We also found that the Air Force had added other prerequisites to certification for new entrants that were not captured within the Guide. In our April 2013 report on reducing duplication, overlap, and fragmentation within the federal government, we found that government agencies, including DOD, could achieve considerable cost savings on some missions by leveraging commercial spacecraft through innovative mechanisms. These mechanisms include hosted payload arrangements where government instruments are placed on commercial satellites, and ride sharing arrangements where multiple satellites share the same launch vehicle. We reported that DOD is among the agencies that are actively using or beginning to look at these approaches in order to save costs. For instance, DOD has two ongoing hosted payload pilot missions and has taken preliminary steps to develop a follow-on effort.that the Commercially Hosted Infrared Payload Flight Demonstration Program answered the majority of the government's technical questions through its commercial partnership, while saving it over $200 million over a dedicated technical demonstration mission. In addition, DOD is investigating ride sharing to launch GPS satellites beginning in fiscal year 2017, which could save well over $60 million per launch. While hosted payloads and ride sharing hold promise for providing lower- cost access to space in the future, we found that there are a variety of challenges. For instance, government agencies that have traditionally managed their own space missions face cultural challenges in using hosted payload arrangements and in November 2010, we found that the DOD space community is highly risk averse to adopting technologies from commercial providers that are new to DOD. expressed concerns about using a commercial host for their payloads, noting that they would lose some control over their missions. DOD officials noted that their security and mission assurance requirements and processes may make integrating hosted payloads on commercial satellites more complicated to manage. Further, agency officials expressed concerns about scheduling launches and noted that commercial providers may not be flexible about changing launch dates if the instruments or satellites experience delays. See GAO, Space Acquisitions: Challenges in Commercializing Technologies Developed under the Small Business Innovation Research Program, GAO-11-21 (Washington, D.C.: Nov. 10, 2010). hosted payloads, actual data on cost savings and cost avoidances should be more readily available. DOD manages the nation's defense satellites, which are worth at least $13.7 billion, via ground stations located around the world. These ground stations and supporting infrastructure perform, in part, the function of maintaining the health of the satellite and ensuring it stays in its proper orbit (activities collectively known as satellite control operations). Some of DOD's ground stations are linked together to form networks. The Air Force Satellite Control Network (AFSCN) is the largest of these networks. Based on the direction in a House Armed Services Committee Report for our review and discussions with defense committee staff, we reviewed the Air Force's satellite control operations and modernization efforts. We reported this month that DOD's satellite control networks are fragmented and potentially duplicative. increasingly deployed standalone satellite control operations networks, which are designed to operate a single satellite system, as opposed to shared systems that can operate multiple kinds of satellites. Dedicated networks can offer many benefits to programs, including possible lower risks and customization for a particular program's needs. However, they can also be more costly and have led to a fragmented, and potentially duplicative, approach which requires more infrastructure and personnel than shared operations. We reported that, according to Air Force officials, DOD has not worked to move its current dedicated operations towards a shared satellite control network, which could better leverage DOD investments. We also reported that the AFSCN was undergoing modernization efforts, but these would not increase the network's capabilities. The efforts--budgeted at about $400 million over the next 5 years--primarily focus on sustaining the network at its current level of capability and do not apply a decade of research recommending more significant improvements to the AFSCN that would increase its capabilities. GAO, Satellite Control: Long-Term Planning and Adoption of Commercial Practices Could Improve DOD's Operations, GAO-13-315 (Washington, D.C.: Apr. 18, 2013). Additionally, we found that commercial practices like network interoperability, automation, and use of commercial off-the-shelf products have the potential to increase the efficiency and decrease costs of DOD satellite control operations. Both DOD and commercial officials we spoke to agreed that there were opportunities for DOD to increase efficiencies and lower costs through these practices. Numerous studies by DOD and other government groups have recommended implementing or considering these practices, but DOD has generally not incorporated them into DOD satellite control operations networks. Finally, we found that DOD faced barriers that complicate its ability to make improvements to its satellite control networks and adopt commercial practices. For example, DOD did not have a long-term plan for satellite control operations; DOD lacked reliable data on the costs of its current control networks and was unable to isolate satellite control costs from other expenses; there was no requirement for satellite programs to establish a business case for their chosen satellite control operations approach; and even if program managers wanted to make satellite control operations improvements, they did not have the autonomy to implement changes at the program level. We concluded that until DOD begins addressing these barriers, the department's ability to achieve significant improvements in satellite control operations capabilities would be hindered. We recommended that the Secretary of Defense direct future DOD satellite acquisition programs to determine a business case for proceeding with either a dedicated or shared network for that program's satellite control operations and develop a department-wide long-term plan for modernizing its AFSCN and any future shared networks and implementing commercial practices to improve DOD satellite control networks. DOD agreed with our recommendations. Congress and DOD continue to take steps towards reforming the defense acquisition system to increase the likelihood that acquisition programs will succeed in meeting planned cost and schedule objectives. For example, in December 2012, we reported that the DOD had taken steps to implement fundamental Weapon Systems Acquisition Reform Act of 2009 (the Reform Act) provisions, including those for approving acquisition strategies and better monitoring weapon acquisition programs., The offices established by the Reform Act are in the process of developing, issuing, and implementing policies in response to the Reform Act's provisions. We reported that DOD has taken steps to: develop policy and guidance to the military services for conducting work in their respective areas, approve acquisition documents prior to milestone reviews, monitor and assess weapon acquisition program activities on a develop performance measures to assess acquisition program activities. Fundamentally, these Reform Act provisions should help (1) programs replace cost and schedule risk with knowledge and (2) set up more executable programs. Additionally, as part of its Better Buying Power initiative, DOD in November 2012 issued descriptions of 36 initiatives aimed at increasing productivity and efficiency in DOD acquisitions. DOD plans to solicit industry and stakeholder comments on these initiatives and plans to ultimately provide detailed requirements on implementing these initiatives to the acquisition workforce. Further, in January 2013, the Congress passed the National Defense Authorization Act of 2013, which required that DOD's Under Secretary of Defense for Acquisition, Technology and Logistics submit a report on schedule integration and funding for each major satellite acquisition program. The report must include information on the segments of the programs; the amount of funding approved for the program and for each segment that is necessary for full operational capability of the program; and the dates by which the program and each segment are anticipated to reach initial and full operational capability, among other items. If the program is considered to be non-integrated, DOD must submit the required report to Congress annually. Tracking the schedules of major satellite programs and the ground systems and user equipment necessary to utilize the satellites may help DOD synchronize its systems. Additionally, officials from the Space and Intelligence Office, within the Office of Secretary of Defense, told us that DOD has undertaken additional actions to improve space systems acquisitions since we last reported on its efforts in March 2012. These actions include chartering Defense Space Council architecture reviews in key space mission areas that are ongoing or completed, such as resilient protected, narrowband, and wideband satellite communications; environmental monitoring; overhead persistent infrared; and space control, according to these officials. The architecture reviews are to inform DOD's programming, budgeting, and prioritization for the space mission area. According to the officials, the Defense Space Council has brought a high-level focus on space issues through active senior-level participation in monthly meetings. DOD also participates in the newly re-formed Space Industrial Base Council, which is made up of senior level personnel at agencies across the federal government that develop space systems. The purpose of the council is to understand how DOD's and other agencies' acquisition strategies impact the space industrial base. Additionally, according to the officials, the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics completed a major study on space acquisition reform to assess the root causes of poor performance in the space acquisition enterprise, focusing on the largest areas of cost growth. Furthermore, the officials stated that they are continuing efforts to buy blocks of AEHF and SBIRS satellites to realize savings that will be reinvested in high-priority research and development for space programs to mitigate the challenges associated with planned use of critical technologies when a satellite system is in the early stages of development. The officials stated that these block buys will also encourage stable production and help to achieve affordability targets DOD has set for the majority of the large, critical space programs. While these actions are encouraging, we have not evaluated their effectiveness. The changes DOD has been making to leadership and oversight appear to be increasing senior management attention on space programs, but it is unclear whether the changes will be enough to overcome the problems we identified with fragmented leadership in the past. We have consistently found that the lack of a single authority for cross cutting missions, such as GPS or space situational awareness, has contributed to disconnects in the delivery of related systems as well as delays in the development of architectures and other tools important to balancing wants versus needs. Fragmented leadership has also been a contributing factor to other challenges we have noted in this statement--increasing launch service costs, synchronizing ground and satellite systems, and improving satellite operations. This condition persists. As part of our April 2013 annual report on reducing duplication, overlap, and fragmentation within the federal government, we reported that the administration has taken an initial step to improve interagency coordination, but has not fully addressed the issues of fragmented leadership and a lack of a single authority in overseeing the acquisition of space programs. Lastly, the Air Force and other offices within DOD are also considering different acquisition models for the future, including the use of hosted payloads as well as developing larger constellations of smaller, less- complex satellites that would require small, less-costly launch vehicles and offer more resilience in the face of growing threats to space assets. However, such a transition could also have risk and require significant changes in acquisition processes, requirements setting, organizational structures, and culture. The long-standing condition of fragmented leadership and the risk-averse culture of space could stand in the way of making such a change. In conclusion, DOD has made credible progress in stabilizing space programs. However, there are challenges still to be dealt with, such as disconnects between the delivery of satellites and their corresponding ground control systems and user equipment and the rising cost of launch. The ultimate challenge, however, will be preparing for the future, as budget constraints will require DOD to make tough tradeoff decisions in an environment where leadership is fragmented. We look forward to continuing to work with the Congress and DOD in assessing both today and tomorrow's challenges in space acquisition and identifying actions that can be taken to help meet these challenges. Chairman Udall, Ranking Member Sessions, this completes my prepared statement. I would be happy to respond to any questions you and 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 Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this statement include Art Gallegos, Assistant Director; Erin Cohen; Rich Horiuchi; Jeff Sanders; Roxanna Sun; Bob Swierczek; and Marie Ahearn. Satellite Control: Long-Term Planning and Adoption of Commercial Practices Could Improve DOD's Operations. GAO-13-315. (Washington, D.C.: April 18, 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). Defense Acquisitions: Assessments of Selected Weapon Programs. GAO-13-294SP. (Washington, D.C.: March 28, 2013). High-Risk Series: An Update. GAO-13-283. (Washington, D.C.: February 2013). Launch Services New Entrant Certification Guide. GAO-13-317R. (Washington, D.C.: February 7, 2013). Evolved Expendable Launch Vehicle: DOD Is Addressing Knowledge Gaps in Its New Acquisition Strategy. GAO-12-822. (Washington, D.C.: July 26, 2012). Environmental Satellites: Focused Attention Needed to Mitigate Program Risks. GAO-12-841T. (Washington, D.C.: June 27, 2012). Polar-Orbiting Environmental Satellites: Changing Requirements, Technical Issues, and Looming Data Gaps Require Focused Attention. GAO-12-604. (Washington, D.C.: June 15, 2012). Missile Defense: Opportunities Exist to Strengthen Acquisitions by Reducing Concurrency and Improving Parts Quality. GAO-12-600T. (Washington, D.C.: April 25, 2012). Missile Defense: Opportunity Exists to Strengthen Acquisitions by Reducing Concurrency. GAO-12-486. (Washington, D.C.: April 20, 2012). Defense Acquisitions: Assessments of Selected Weapon Programs. GAO-12-400SP. (Washington, D.C.: March 29, 2012). Space Acquisitions: DOD Faces Challenges in Fully Realizing Benefits of Satellite Acquisition Improvements. GAO-12-563T. (Washington, D.C.: March 21, 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). Evolved Expendable Launch Vehicle: DOD Needs to Ensure New Acquisition Strategy Is Based on Sufficient Information. GAO-11-641. (Washington, D.C.: September 15, 2011). Space Research: Content and Coordination of Space Science and Technology Strategy Need to Be More Robust. GAO-11-722. (Washington, D.C.: July 19, 2011). Space and Missile Defense Acquisitions: Periodic Assessment Needed to Correct Parts Quality Problems in Major Programs. GAO-11-404. (Washington, D.C.: June 24, 2011). Space Acquisitions: DOD Delivering New Generations of Satellites, but Space System Acquisition Challenges Remain. GAO-11-590T. (Washington, D.C.: May 11, 2011). Space Acquisitions: Challenges in Commercializing Technologies Developed under the Small Business Innovation Research Program. GAO-11-21. (Washington, D.C.: November 10, 2010). Global Positioning System: Challenges in Sustaining and Upgrading Capabilities Persist. GAO-10-636. (Washington, D.C.: September 15, 2010). Space Acquisitions: DOD Poised to Enhance Space Capabilities but, Persistent Challenges Remain in Developing Space Systems. GAO-10-447T. (Washington, D.C.: March 10, 2010). Defense Acquisitions: Challenges in Aligning Space System Components. GAO-10-55. (Washington, D.C.: October 29, 2009). Space Acquisitions: Uncertainties in the Evolved Expendable Launch Vehicle Program Pose Management and Oversight Challenges. GAO-08-1039. (Washington, D.C.: September 26, 2008). 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.

Each year, DOD spends billions of dollars to acquire space-based capabilities that support military and other government operations. Just a few years ago, the majority of DOD's space programs were characterized by significant cost and schedule growth. In 2012, GAO reported that the worst of those space acquisition problems now appear to be behind the department. While new major satellite acquisitions are facing potential cost growth and schedule slips, they are not as widespread and significant as they were several years ago. However, the department still faces serious challenges, such as the high cost of launching satellites, fragmented satellite control operations, as well as disconnects between fielding satellites and synchronizing ground systems. To address the progress DOD has made this year, this testimony focuses on (1) the current status and cost of DOD space systems acquisitions, (2) the results of GAO's space system-related reviews this past year, and (3) recent actions taken to address acquisition problems. This testimony is based on previously issued GAO products over the past 5 years, interviews with DOD officials, and an analysis of DOD funding estimates. GAO is not making recommendations in this testimony. However, in previous reports, GAO has generally recommended that DOD adopt best practices for developing space systems. DOD agreed and is in the process of implementing such practices. DOD agreed with GAO's characterization of recent actions it has taken to improve space acquisitions. Most of the Department of Defense's (DOD) major satellite programs are in mature phases of development, that is, the initial satellites have been designed, fabricated, and launched into orbit while additional satellites of the same design are being produced. For the portfolio of major satellite programs, new cost and schedule growth is not as widespread as it was in prior years, but DOD is still experiencing problems. For example, total program costs have increased approximately $180 million from a baseline of $4.1 billion for one of two satellite programs that are in the earlier phases of acquisition. Though satellite programs are not experiencing problems as widespread as in years past, ground control systems and user terminals in most of DOD's major space system acquisitions are not optimally aligned, leading to underutilized satellites and limited capability provided to the warfighter. For example, the development and fielding of user terminals for a Navy communications satellite program lag behind the launch of new satellites by more than a year. Additionally, the development of ground software needed to extract capabilities of new missile warning satellites is not expected to be complete until at least 2018, even though satellites are being launched. Another acquisition challenge facing DOD is the cost of launching satellites into space, which range from around $100 million to over $200 million per launch. Recent GAO space system-related reviews highlight other difficulties facing the space community as it has sought to mitigate rising costs and deliver modernized capabilities. For instance, in July 2012 GAO reported that DOD had numerous efforts in progress to address knowledge gaps and data deficiencies in its Evolved Expendable Launch Vehicle acquisition strategy. However, GAO also reported that more action was needed to identify opportunities to leverage the government's buying power through increased efficiencies in launch acquisitions. In April 2013 GAO reported that satellite control networks are fragmented and potentially duplicative. Moreover, GAO found that DOD faced barriers--such as lacking long-term plans and reliable cost data--that complicate its ability to make improvements to its satellite control networks and adopt commercial practices. GAO recommendations included determining business cases for proceeding with either dedicated or shared satellite control networks for future satellite programs and implementing commercial practices to improve DOD satellite control networks. Congress and DOD continue to take steps towards reforming the defense acquisition system to increase the likelihood that acquisition programs will succeed in meeting planned cost and schedule objectives. For instance, in response to legislation passed in 2009, DOD has taken steps that should help improve the department's acquisition process and create more executable programs, such as developing performance measures to assess acquisition program activities. DOD has also undertaken actions such as chartering senior-level reviews of space programs and participating in governmentwide space councils. The changes DOD has been making to leadership and oversight appear to be increasing senior management attention on space programs, but it is unclear whether the changes will overcome the problems GAO has identified with fragmented leadership in the past.

Created in 2008, CPP was the primary initiative under TARP to help stabilize the financial markets and banking system by providing capital to qualifying regulated financial institutions through the purchase of senior preferred shares and subordinated debt. Rather than purchasing troubled mortgage-backed securities and whole loans, as initially envisioned under TARP, Treasury used CPP investments to strengthen financial institutions' capital levels. Treasury determined that strengthening capital levels was the more effective mechanism to help stabilize financial markets, encourage interbank lending, and increase confidence in lenders and investors. Treasury believed that strengthening the capital positions of viable financial institutions would enhance confidence in the institutions themselves and the financial system overall and increase the institutions' capacity to undertake new lending and support the economy. On October 14, 2008, Treasury allocated $250 billion of the original $700 billion in overall TARP funds for CPP. The allocation was subsequently reduced in March 2009 to reflect lower estimated funding needs, as evidenced by actual participation rates, and the program was closed to new investments on December 31, 2009. Under CPP, qualified financial institutions were eligible to receive an investment of between 1 and 3 percent of their risk-weighted assets, up to a maximum of $25 billion. In exchange for the investment, Treasury generally received senior preferred shares that would pay dividends at a rate of 5 percent annually for the first 5 years and 9 percent annually CPP investments made in late 2008 began paying the higher thereafter.dividend or interest rate in late 2013 whereas the remaining investments will see the increase begin sometime in 2014. EESA required that Treasury also receive warrants to purchase shares of common or preferred stock or a senior debt instrument to further protect taxpayers and help ensure returns on the investments. Institutions are allowed to repay CPP investments with the approval of their primary federal bank regulator and afterward to repurchase warrants. As of January 31, 2014, a total of 624 of the 707 institutions that originally participated in CPP, about 88 percent, had exited the program. Of the 624 institutions that exited CPP, 239 institutions repurchased their preferred shares or subordinated debentures in full (see fig. 1). Another 165 institutions refinanced their shares through other federal programs: 28 through the Community Development Capital Initiative (CDCI) and 137 An additional 162 through the Small Business Lending Fund (SBLF).institutions had their investments sold through auction and 29 institutions went into bankruptcy or receivership. The remaining 29 had their investments sold by Treasury (25), or merged with another institution (4). Repayments and income from dividends, interest, and warrants from CPP investments have exceeded the amounts originally disbursed. Treasury disbursed $204.9 billion to 707 financial institutions nationwide from October 2008 through December 2009. As of January 31, 2014, Treasury had received $225 billion in repayments and income from its CPP investments, exceeding the amount originally disbursed by $20.1 billion (see fig. 2).in repayments and $2.8 billion in auction sales of original CPP investments as well as $18.9 billion in dividends, interest, and other income and $8.0 billion in warrants sold. After accounting for write-offs and realized losses totaling $4.7 billion, CPP had $2.1 billion in The repayments and income amount include $195.3 billion outstanding investments as of January 31, 2014. Treasury estimated a lifetime gain of $16.1 billion for CPP as of November 30, 2013. About half of the institutions (37 of 72) that responded to our questionnaire about the impact of the upcoming or recent increase in the dividend or interest rate on CPP securities stated that it impacted or is impacting their efforts to exit the CPP program and/or retire any outstanding CPP securities.that the institutions are taking a range of actions. Some institutions indicated that the increase led them to raise alternative capital. For example, one institution completed a public offering of common stock and used the proceeds to redeem its CPP shares. Others indicated that they are working with Treasury to participate in a future auction or attempting to negotiate with Treasury to restructure the CPP debt. Still others commented that the increase in the interest or dividend rate will increase the burden on the institution, make it more difficult to raise alternative capital, and further reduce their ability to exit the program. Thirty-three institutions responded that the increase did not or is not impacting their efforts to exit the program or retire CPP securities. As of January 31, 2014, the 83 remaining institutions accounted for the $2.1 billion in outstanding investments or about 1 percent of the original investment. The outstanding investments were concentrated in a relatively small number of institutions. Specifically, the 10 largest remaining CPP investments accounted for $1.5 billion (73 percent) of outstanding investments and 2 institutions accounted for more than half of this amount (see fig. 3). In contrast, the remaining $557 million (24 percent) was spread among the other 73 institutions. As of January 31, 2014, the number of states with at least one institution with CPP investments outstanding was 28, and the number of states with at least 5 such institutions was 7 (see fig. 4). California had the highest number of remaining CPP institutions with 8, followed by Illinois with 7. In terms of total CPP investments outstanding, Puerto Rico had the largest amount ($1.2 billion), followed by North Carolina ($108 million), Virginia ($91 million), and Florida ($74 million). Treasury began selling its investments in banks through auctions beginning in March 2012 as a way to balance the speed of exiting the investments with maximizing returns for taxpayers. As of January 31, 2014, Treasury had conducted a total of 23 auctions and received a total of about 80 percent of the principal amount (see fig. 5). As figure 5 shows, the total proceeds from selling securities do not include any income received from repurchases, dividends, or other sources or any missed dividend or interest payments, the rights to which are sold with the securities. For example, if an institution whose securities were being sold by Treasury at auction had missed $100,000 worth of dividend payments, the purchaser of the securities would own the right to receive those past- due dividends if the institution can pay them. As of January 31, 2014, Treasury has sold all or part of its investments in 162 institutions, through the auction process, including the rights to approximately $207 million in missed dividends and interest payments. In 2013, we reported that according to Treasury officials, the auction results reflected the potential risk associated with the liquidity of the investments, the credit quality of the financial institutions (including their ability to make future dividend or interest payments), and the prospect of receiving previous missed payments that had accrued. For example, later auctions have tended to include smaller institutions with more cumulative missed payments. In a few cases, the prospect of recouping these missed payments made the institutions particularly attractive to investors and helped raise the sale price of those securities above their par value. Although Treasury has not generally recouped its full investment in individual institutions through the auctions, in 2013, Treasury officials told us that accepting a discount and transferring ownership of these institutions to the private sector was in the best interest of the taxpayer. Because of the inherent risk factors of these institutions, Treasury officials did not anticipate that they would be able to make full repayments in the near future. The officials added that had they chosen not to auction these positions, their values could have decreased later. Treasury officials also said that while auctions were generally priced at a discount to the principal amount, the prices were generally equal to or above Treasury's internal valuations. Institutions that remain in CPP tend to be financially weaker than institutions that have exited the program and institutions that did not receive CPP capital. Our analysis considered various measures that describe banking institutions' profitability, asset quality, capital adequacy, and ability to cover losses. We analyzed financial data on the 83 institutions remaining in CPP as of January 31, 2014, and 482 former CPP institutions, which we split into three groups: (1) those that repaid their investments, (2) those that exited through an auction, and (3) those that refinanced their investments through SBLF. The current and former CPP institutions in our analysis accounted for 565 of the 707 institutions that participated in CPP. We compared the 565 institutions to a non-CPP group (i.e., institutions that have not participated in CPP) of 7,177 active financial institutions for which financial information was available. All financial information generally reflects quarterly regulatory filings on December 31, 2013. Table 1 provides the results of our analysis of these measures, including the following. Mostly smaller institutions remain in the program and larger institutions tended to exit through repayment. For example, institutions that exited through repayment had a median asset size of $1.7 billion, compared with $548 million for those that refinanced through SBLF and $385 million for those that exited through an auction. In the aggregate, the remaining institutions were noticeably less financially healthy than each of the groups of former CPP participants. As a group, institutions that exited through auctions were significantly less financially healthy than the group of institutions that repaid their investments or refinanced through SBLF. Overall, the institutions that remain in CPP are less financially healthy than both the group of institutions that never participated in CPP and the aggregate group that had exited CPP. In particular, remaining CPP institutions had noticeably higher median Texas Ratios than each group of former CPP institutions as well as the non-CPP group. The Texas Ratio helps determine a bank's likelihood of failure by comparing its troubled loans to its capital. The higher the ratio, the more likely the institution is to fail. As of December 31, 2013, remaining CPP institutions had a median Texas Ratio of 53.21, compared with 19.58 for former CPP institutions and 12.37 for the non-CPP group. Further, of the institutions that exited CPP, those that exited through auctions had the highest median Texas Ratio (33.90), compared with those that exited through full repayments (17.18) or by refinancing to SBLF (15.03). Profitability measures for remaining CPP institutions were lower than those for former CPP participants and the non-CPP group. For example, the median return on average assets measure shows how profitable a company is relative to its total assets and how efficient management is at using its assets to generate earnings. For the quarter ending December 31, 2013, remaining CPP institutions had a median return on average assets of 0.30, compared with 0.77 for former CPP institutions and 0.75 for the non-CPP group. Further, among the institutions that had exited CPP, those that participated in Treasury's auctions had the lowest return on average assets at 0.56, compared with 0.86 for those that repaid their investments and 0.76 for those that refinanced to SBLF. Remaining CPP institutions also held relatively more poorly performing assets. For example, remaining CPP institutions had a higher median percentage of noncurrent loans than former CPP institutions and the non- CPP group. As of December 31, 2013, a median of 2.83 percent of loans for remaining CPP institutions were noncurrent, compared with 1.33 percent for former CPP institutions and 1.05 percent for the non-CPP group. Remaining CPP institutions had a median ratio of net charge-offs to average loans (0.18) about equal to that of former CPP institutions (0.20), but a higher median ratio than the non-CPP group (0.09), as of December 31, 2013.had higher values than institutions that made full repayments or refinanced to SBLF. For both of these ratios, the auction participants Compared with former CPP institutions and the non-CPP group, remaining CPP institutions held less regulatory capital as a percentage of assets. Regulators require minimum amounts of capital to lessen an institution's risk of default and improve its ability to sustain operating losses. Regulatory capital can be measured in several ways, but we focused on Tier 1 capital, which includes both a common-equity capital ratio and a Tier 1 capital ratio, because it is the most stable form of regulatory capital.capital as a share of risk-weighted assets, and the common equity Tier 1 ratio measures common equity Tier 1 as a share of risk-weighted assets, which generally does not include TARP funds. Using these measures, the remaining CPP institutions had lower median Tier 1 capital levels than former CPP institutions and the non-CPP group. The remaining CPP institutions also had a median common equity Tier 1 capital ratio below that of the former CPP institutions and the non-CPP group. As of December 31, 2013, the median common equity Tier 1 capital ratio for remaining CPP institutions was 10.48 percent of risk-weighted assets, compared with 11.76 percent for former CPP institutions and 15.48 percent for the non-CPP group. The Tier 1 risk-based capital ratio measures Tier 1 Finally, remaining CPP institutions had significantly lower reserves for covering losses compared with former CPP institutions and the non-CPP group. As of December 31, 2013, the median ratio of reserves to nonperforming loans was lower for remaining CPP institutions (41.92) than for former CPP participants (70.37) and the non-CPP group (76.16). Of those institutions that have exited the program, auction participants had the lowest ratio (55.35), compared with 77.34 for those that repaid their investments and 84.06 for those that refinanced to SBLF. The number of CPP participating institutions missing dividend or interest payments in a given quarter increased steadily from 8 in February 2009 to 159 in August 2011 and has since declined each quarter to 60 in November 2013 (see fig. 6). Almost 84 percent, or 75 of the 89 financial institutions remaining in CPP as of November 30, 2013, have missed a dividend payment. Most of the institutions with missed payments have missed them in several quarters. In particular, all but one of the institutions that missed payments in November 2013 had also missed payments in each of the previous three quarters. Moreover, the 60 institutions that missed payments in November 2013 had an average of 13 missed payments. Institutions can elect whether to pay dividends and may choose not to pay for a variety of reasons, including decisions that they or their federal and state regulators make to conserve cash and maintain (or increase) capital levels. Institutions are required to pay dividends only if they declare dividends, although unpaid cumulative dividends generally accrue and the institution must pay them before making payments to other types of shareholders, such as holders of common stock. However, investors view a company's ability to pay dividends as an indicator of its financial strength and may see failure to pay full dividends as a sign of financial weakness. Showing a similar trend to missed dividend or interest payments, the number of CPP institutions on the Federal Deposit Insurance Corporation's (FDIC) "problem bank list" has decreased in recent months after months of steady increases. This list is a compilation of banks with demonstrated financial, operational, or managerial weaknesses that threaten their continued financial viability and is publicly reported on a quarterly basis. As of December 31, 2013, 47 CPP institutions were on the problem bank list (see fig. 7). The number of these institutions increased every quarter beginning in March 2009, hitting a high of 134 in June 2011, even as the number of institutions participating in CPP declined. As figure 7 shows, the number of problem banks fell slightly for the first time in the third quarter of 2011 and has declined to 47 as of December 31, 2013. Federal and state bank regulators may not allow institutions on the problem bank list to make dividend payments in an effort to preserve their capital and promote safety and soundness. These observations are consistent with the analysis in our May 2013 and March 2012 reports, which also showed that the remaining CPP institutions were financially weaker than institutions that had exited the program and institutions that did not receive CPP capital. We provided a draft of this report to Treasury for its review and comment. Treasury provided written comments that we have reprinted in appendix II. In its written comments, Treasury generally concurred with our findings. Treasury noted that it had realized a positive return of $20.19 billion as of April1, 2014, and that 71 institutions remained in the program representing a remaining investment of $1.96 billion. Treasury also emphasized its commitment to keeping the public informed of its progress in winding down CPP. We are sending copies of this report to the Special Inspector General for TARP, interested congressional committees and members, and Treasury. The report also is available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact A. Nicole Clowers at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. The objectives of our report were to examine (1) the status of the Capital Purchase Program (CPP), including repayments and other proceeds, as well as investments outstanding; and (2) the financial condition of institutions remaining in CPP. To assess the status of CPP at the program level, we analyzed data from the Department of the Treasury (Treasury). In particular, we used Treasury's January 2014 Monthly Report to Congress to determine the dollar amounts of outstanding investments, the number of remaining and former participants, and the geographical distribution of each as of January 31, 2014. To assess the financial condition of institutions that received investments under CPP, we used data from Treasury's Dividends and Interest reports from February 2009 through November 2013 to determine the extent to which participants had missed payments throughout the life of the program. To assess whether the upcoming 2014 increase in the dividend or interest rate on CPP securities was impacting CPP participants' efforts to exit the program and/or retire CPP securities, we sent an email containing two questions to all current CPP participants (89) and any past CPP participants that raised capital in calendar year 2013. The first question asked if the increase had impacted them (Yes or No) and, if yes, to describe actions taken. We sent the questionnaire to 104 institutions and received responses from 72. We used the "actions taken" responses to provide examples of how the increase in the dividend or interest rate on CPP securities is impacting CPP participants. We defined current CPP participants to be those institutions that Treasury classifies as "full investment outstanding; warrants outstanding," "full investment outstanding; warrants not outstanding," and "sold in part, warrants outstanding" in its November 20, 2013 TARP transaction report. We identified those CPP participants that raised capital in calendar year 2013 using the SNL database. We also obtained from the Federal Deposit Insurance Corporation (FDIC) summary information on its quarterly problem bank list to show the trend of CPP institutions appearing on the list from December 2008 through December 2013. We used financial measures for depository institutions that we had identified in our previous reporting on CPP. These measures help demonstrate an institution's financial health as it relates to a number of categories, including profitability, asset quality, capital adequacy, and loss coverage. We obtained such financial data for depository institutions using a private financial database provided by SNL Financial that contains publicly filed regulatory and financial reports. We merged the data with SNL Financial's CPP participant list to create the three comparison groups--remaining CPP institutions, former CPP institutions, and a non-CPP group comprised of all institutions that did not participate in CPP. We analyzed financial data on the 83 institutions remaining in CPP as of January 31, 2014, and 482 former CPP institutions that exited CPP through full repayments, conversion to the Small Business Lending Fund, or Treasury's sale of its investments through an auction, accounting for 565 of the 707 CPP participants. We identified the 83 institutions remaining in CPP as of January 31, 2014, using Treasury's January 2014 Monthly Report to Congress. The 142 CPP institutions our analysis excluded had no data available in SNL Financial, had been acquired, or were defunct. We compared the remaining and former CPP institutions to a non-CPP group of 7,177 active financial institutions for which financial information was available. We chose to present median values. Financial data were available from SNL Financial for 440 of the 565 CPP institutions, and we accounted for the remaining 125 institutions using SNL Financial information for the holding company or its largest subsidiary. Although this approach has limitations such as excluding other financial subsidiaries, we deemed it to be sufficient for the purpose of our work. All financial information reflects quarterly regulatory filings on December 31, 2013, unless otherwise noted. We downloaded all financial data from SNL Financial on March 4, 2014. Finally, we leveraged our past reporting on the Troubled Asset Relief Program (TARP), as well as that of the Special Inspector General for TARP, as appropriate. We determined that the financial information used in this report, including CPP program data from Treasury and financial data on institutions from SNL Financial, was sufficiently reliable to assess the condition and status of CPP and institutions that participated in the program. For example, we tested the Office of Financial Stability's internal controls over financial reporting as they relate to our annual audit of the office's financial statements and found the information to be sufficiently reliable based on the results of our audits of fiscal years 2009, 2010, 2011, and 2012 financial statements for TARP. We have assessed the reliability of SNL Financial data--which are obtained from financial statements submitted to the banking regulators--as part of previous studies and found the data to be reliable for the purposes of our review. We verified that no changes had been made that would affect the data's reliability. We conducted this performance audit from December 2013 to April 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Karen Tremba (Assistant Director), Emily Chalmers, William Chatlos, Chris Forys, Matthew Keeler, Risto Laboski, Marc Molino, and Patricia Moye made significant contributions to this report.

CPP was established as the primary means of restoring stability to the financial system under the Troubled Asset Relief Program (TARP). Under CPP, Treasury invested almost $205 billion in 707 eligible financial institutions between October 2008 and December 2009. CPP recipients have made dividend and interest payments to Treasury on the investments. TARP's authorizing legislation requires GAO to report every 60 days on TARP activities. This report examines (1) the status of CPP and (2) the financial condition of institutions remaining in the program. To assess the program's status, GAO reviewed Treasury reports on the status of CPP. GAO also used financial and regulatory data to compare the financial condition of institutions remaining in CPP with those that had exited the program and those that did not participate. GAO also obtained information through a questionnaire from CPP participants as of November 20, 2013, and former CPP participants that raised capital in calendar year 2013. GAO received completed questionnaires from 72 of the 104 institutions. GAO provided a draft of this report to Treasury for its review and comment. Treasury generally concurred with GAO's findings. The Department of Treasury (Treasury) continues to make progress in winding down the Capital Purchase Program (CPP). As of January 31, 2014, Treasury's data showed that 624 of the original 707 institutions, or about 88 percent, had exited CPP. Treasury had received about $225 billion from its CPP investments, exceeding the approximately $205 billion it had disbursed. Most institutions exited by repurchasing their preferred shares in full or by refinancing their investments through other federal programs. Treasury also continues to sell its investments in the institutions through auctions; a strategy first implemented in March 2012 to expedite the exit of a number of CPP participants. As of January 31, 2014, Treasury has sold all or part of its CPP investment in 162 institutions through auctions, receiving a total of about 80 percent of the principal amount. A relatively small number of the remaining 83 institutions accounted for most of the outstanding investments. Specifically, 10 institutions accounted for $1.5 billion or about 73 percent of the $2.1 billion in outstanding investments. Treasury estimated a lifetime gain of $16.1 billion for CPP as of November 30, 2013. GAO's analysis of financial data found that the institutions remaining in CPP were generally less financially healthy than those that have exited or that never participated. In particular, the remaining CPP institutions tended to be less profitable, hold riskier assets, and have lower capital levels and reserves. Most remaining participants also have missed scheduled dividend or interest payments, with 60 missing their November 2013 payment. Further, 47 of the remaining CPP institutions were on the Federal Deposit Insurance Corporation's problem bank list in December 2013--that is, they demonstrated financial, operational, or managerial weaknesses that threatened their continued financial viability. Institutions that continue to miss dividend payments or find themselves on the problem bank list may have difficulty fully repaying their CPP investments because federal and state bank regulators may not allow these institutions to make dividend payments or repurchase outstanding CPP shares in an effort to preserve their capital and promote safety and soundness.

States and localities play the principal role in educating all students, including those with limited English proficiency, with most states providing supplemental aid specifically to address the special needs of these students. According to a November 1997 report (the latest available) by the Institute for Research in English Acquisition and Development, 39 states have some form of regulations targeting these students, ranging from a mandate in Texas that school districts provide bilingual instruction in at least some grades to a mandate in California that school districts provide instruction only in English. For the past 30 years, the federal government has served students with limited English proficiency primarily through title I of the Elementary and Secondary Education Act. The Bilingual Education Act, enacted in 1968, also serves a small percentage of these students under a supplemental grant program that assists local school districts in teaching students who do not know English. Other programs that may address, at least in part, the educational needs of children with limited English proficiency include the Emergency Immigrant Education Program, the Migrant Education Program, the Carl D. Perkins Vocational and Applied Technology Education Act programs, and the Individuals With Disabilities Education Act programs (see table 1). The only programs that serve primarily children with limited English proficiency are those associated with the Bilingual Education Act. Federal policy for ensuring equal educational opportunity for children with limited English proficiency has been largely shaped by title VI of the Civil Rights Act of 1964, the Equal Educational Opportunities Act (EEOA), and related court decisions. Title VI bans discrimination on the basis of race, color, or national origin in any program or activity receiving federal financial assistance. In Lau v. Nichols, the Supreme Court held that a school district's failure to provide English-language instruction to non- English-speakers violated title VI. Like title VI, the EEOA also protects the civil rights of students with limited English proficiency. Under the EEOA, it is unlawful for an educational agency to fail to take "appropriate action to overcome language barriers that impede equal participation by its students in instructional programs." In 1981, a federal court of appeals decision, Castaneda v. Pickard, created a test for evaluating the adequacy of a school district's approach to addressing the needs of its non-English- speaking students and limited-English-speaking students. The Department of Education uses the test set forth in the Castaneda decision as the basis for determining whether a school district program for serving students with limited English proficiency is complying with title VI. Headquartered in Washington, D.C., Education's OCR has 12 regional offices that enforce title VI and other civil rights statutes. In the five cases we reviewed, OCR initiated investigations independently or after deciding that a complaint brought by an individual or group met certain criteria. To determine which school districts had potential problems with their programs and therefore warranted a compliance review, OCR gathered and analyzed statistical data and other information from state education agencies, advocacy groups, parents, and OCR surveys. Once OCR selected a school district for review, it requested data from the school district and, if necessary, conducted on-site visits to schools in the district. If OCR found a school district was not in compliance with civil rights laws, it worked with the district to negotiate an agreement on the problems and the steps required to address those problems (the corrective action plan). During the period in which OCR monitored the implementation of the corrective action plan, school districts periodically submitted information to OCR regarding their programs for children with limited English proficiency. Figure 1 shows the title VI investigative process used by OCR in the five cases we reviewed in depth. In November 1994, OCR changed the procedural guidance it followed from the Investigation Procedures Manual to the Case Resolution Manual. OCR officials told us that since about 1995 they have implemented a more cooperative approach to their reviews. Under this approach, OCR has focused on finding early resolutions to problems and working cooperatively throughout the process with school district and state officials. Also, under this approach, a letter of findings is issued only when problems remain unresolved. No clear consensus exists among researchers and educators on the length of time needed for children with limited English proficiency to become proficient in English. Four factors make generalizations difficult: (1) differences in instructional approaches used to teach children English and the quality of that instruction, (2) differences in the ways states measure proficiency, (3) differences in student characteristics, and (4) the lack of definitive research on this issue. Two basic approaches are used to instruct students with limited English skills. One uses English and makes little use of a student's native language (English-based approach), while the other makes much more extensive use of a student's native language, often for a number of years (bilingual approach). Proponents of an English-based approach expect children to learn English fairly quickly, in 2 to 3 years. For example, in Monroe County, Florida, one of the districts we visited, elementary school children with limited English proficiency receive all formal content area instruction in English, alongside their English-fluent peers. District officials told us they chose this English-based approach in part because they believe children learn English more quickly when they are immersed in it. On average, elementary school students enrolled in the district's English-language acquisition programs receive services for 3 years. The bilingual approach is designed to take much longer--often 5 years or more. While bilingual programs vary in both their goals and length, those programs that promote native-language literacy as well as English-language literacy may take 5 to 7 years to complete. For example, the San Antonio School District develops early literacy in Spanish, beginning with prekindergarten instruction. The program is designed to simultaneously develop English literacy, with a full transition to English-only instruction by the sixth grade. District officials said they believe it is important to develop bilingual citizens in a city that has a long bilingual tradition. Most of the city's population is Hispanic, and a large proportion of the city's residents speak both Spanish and English. The National Research Council has determined that there is "little value in conducting evaluations to conclude which type of program is best. The key issue is not finding a program that works for all children and all localities, but rather finding a set of program components that works for the children in the community of interest, given that community's goals, demographics, and resources." Whether a school district chooses an English-based or bilingual approach to teaching students with limited English proficiency, instructional quality will ultimately affect children's academic achievement. Characteristics that contribute to high-quality programs, according to some educators, include adequately trained teachers, clearly articulated goals, systematic assessments, and opportunities for children to practice their English. In our site visits, for example, we visited one classroom in Cicero, Illinois, in which a bilingual education teacher who had been recruited from a Spanish-speaking country was using audiotapes to teach students English during the daily period dedicated to learning English. The students listened and followed along in their workbooks as a speaker on the tape read them a children's story in English. There was no interaction between the teacher and the students. In contrast, in a Key West, Florida, classroom we visited, the bilingual education classroom teacher did not use audiotapes but instead read aloud a children's story to his students. This teacher paused frequently to quiz the students on what they had heard. This activity not only gave the teacher an opportunity to see what his students understood of the story but also gave the students an opportunity to speak and practice English. No clear consensus exists about how proficiency should be defined or measured. Educators and researchers have observed that children who speak little or no English may develop "verbal proficiency"--that is, conversational skills on a par with those of their English-speaking peers-- in 2 years or less. Broader "academic proficiency," such as the reading and communicating of abstract ideas required for grade-level academic performance, can take several more years to acquire. Little agreement exists on an appropriate standard against which English proficiency should be measured. Some educators and language experts believe that a child should perform at age- or grade-appropriate levels in reading and other core academic subjects on standardized tests performed in English before the child can be considered English-proficient. This means that the child should score at or above the 50th percentile on a standardized achievement test. In contrast, some states consider students English-proficient when they score at the 40th percentile or even at the 32nd. Some critics question the validity of using these types of standardized achievement tests to measure whether a student's achievement in English is better than, the same as, or worse than that of other children in his or her age group. These critics argue that a student's performance on these tests does not necessarily reflect mastery or lack of mastery of certain English skills because the tests are designed to assess a student's mastery of other subjects. Performance on standardized achievement tests is just one of several criteria states and districts may use to determine if a child is proficient in English. We found that in Rockford, Illinois, officials combined the results of an academic achievement test, English proficiency tests, and an academic review conducted by school and district officials to determine a child's English proficiency level. In contrast, we found that in Texas students could be considered proficient by scoring at or above the 40th percentile on both the English reading and language arts sections of a state- approved norm-referenced academic assessment. Research indicates that the length of time needed to become proficient in English can vary from child to child. It can be affected by such factors as the child's age, socioeconomic background, and amount of formal schooling already received in another language. For example, a 1997 study concluded that the most striking feature about learning a second language is the variability in outcomes. A frequently cited factor is a child's age. Older children generally make faster initial progress than very young children do. For example, a study of students with limited English proficiency attending school in Fairfax County, Virginia, found that students who arrived in this country between ages 8 and 11 needed 5 to 7 years to compete with native speakers in all subject areas, while children who arrived when they were aged 4 to 7 needed 7 to 10 years. Researchers have proposed that this difference perhaps reflects the fact that older learners have developed more sophisticated language and thinking skills before beginning to learn English. Educators have also observed that students with prior formal schooling and higher socioeconomic backgrounds tend to learn a second language more easily. Other characteristics tied to differences in success rates include the amount of exposure students have already had to English; the level of parental support they have at home; and their classroom, school, and community environments. Any of these factors could affect how long students need to catch up with native speakers. While many evaluations of programs serving children with limited English proficiency have been conducted, we identified very few that focused specifically on the length of time students need to become proficient in English. Our review of existing research yielded three studies that met the following criteria: (1) they addressed the acquisition of English rather than other languages, (2) they focused specifically on the length of time required to become proficient, (3) they reached a specific conclusion about the length of time needed to become proficient in English (as described in app. I), and (4) they had been published. Two of these studies were carried out in Canada and one in the United States (see table 2). The students in each of these studies were schooled primarily in English. In general, the studies concluded that children with limited English proficiency need 4 years or more to develop the language skills needed to perform in academic subject areas on a par with native English-speakers. However, with so few studies available, the results should not be viewed as definitive, and other researchers in the field have challenged some of the results. The three studies we identified examined students' progress in English with respect to two different sets of skills. The two Canadian studies focused on language skills alone, examining the point at which students' scores on tests of vocabulary, auditory perception, and other language skills approached those of native English-speakers. The Fairfax County study focused on students' academic achievement in English, measuring the point at which students' performance on tests in reading, mathematics, and other subjects, given in English, began to approach that of native- English-speaking students. The Fairfax study showed that children took longer to reach grade norms in reading than in other subjects. For example, even among the highest performing subgroup of children (those who arrived in this county between ages 8 and 11), the performance in different subject areas varied widely, averaging 2 years to reach national norms in mathematics, 3 years in language arts, and 5 years or more in reading. English-based instruction is more commonly found in the nation's public schools than bilingual instruction is. However, most students with limited English proficiency attend schools in which both approaches are used. In the six states we reviewed, most children received services for 4 years or less. More children with limited English proficiency receive instruction through an English-based approach than through an approach that makes use of their native language, according to data from the Department of Education's most recent survey on the subject. About 76 percent of students with limited proficiency in English receive English-based instruction (such as English as a second language ); 40 percent receive bilingual instruction aimed at teaching subject matter in the student's home language (such as teaching math in Spanish); and slightly fewer, 37 percent, receive instruction aimed at maintaining or improving fluency in their home language (such as Spanish language lessons for Spanish speakers.) The Education survey, which covered the 1993-94 school year, also asked schools about the types of instructional programs they offer and found that more schools offer English-based programs than bilingual programs. For example, about 85 percent of schools enrolling students with limited English proficiency offer ESL programs, and about 36 percent offer bilingual programs in which the student's native language is used to varying degrees. Nearly three-fourths of all children with limited English proficiency attend schools with both types of programs. We visited 10 school districts in Arizona, Florida, Illinois, North Carolina, and Texas and found that 6 of the 10 used both English-based and bilingual instruction. The survey also found that students often receive more than one type of instruction during a school day. For example, ESL is often a component of programs classified as bilingual education programs--that is, although explanations and some content areas may be taught in the student's native language, ESL techniques may be used to teach English. However, the study's data were not collected in a way that would allow accurate estimates of the proportion of students who received a combination of services. Determining the type of instruction students actually receive is more complicated than these results would indicate for two reasons. First, the instructional approaches used to teach children with limited English proficiency are far more varied than the categories typically used to capture this information. For example, a program model called "structured immersion" uses simplified English to teach subject matter and sometimes allows for the teacher's use of students' native language for clarification. While clearly not a bilingual approach, some might classify this approach with English-based approaches, such as ESL; others might classify it as a distinct third approach that makes limited use of students' native language. Second, the broad program labels used by educators may not reflect actual classroom practices. For example, in the Monroe School District, Florida, we observed a language arts class designed to teach ESL to Spanish- speaking students. Normally, such an approach would involve little or no use of Spanish. In this case, however, the teacher was not only specially trained to teach English language arts to speakers of other languages, but also fluent in Spanish. She provided instruction first in English and then translated much of that instruction into Spanish. We found no national data on the length of time children with limited English proficiency actually spend in programs aimed at helping them become proficient in English. Thus, we contacted education agencies in 12 states with substantial concentrations of students with limited English proficiency to collect any available state-level data on this issue. Of the 12 states contacted, 6 had information on the length of time children with limited English proficiency spent in language assistance programs. Data from these six states--Arizona, Florida, Illinois, New Jersey, Texas, and Washington--indicate that in 1998-99 (the latest year for which data are available), the majority of children with limited English proficiency who made the transition from English-language programs spent 4 years or less in language assistance programs. As table 3 shows, at least two-thirds of the children in Florida, Illinois, New Jersey, and Washington made the transition from programs within 4 years. In Arizona and Texas, the portion that made the transition within 4 years was lower: closer to one-half. In five states, 12 percent or fewer of the children were out within 1 year. In the sixth state--New Jersey--about one-third exited within 1 year. At the other end of the scale, 10 percent of the students with limited English proficiency in New Jersey spent 5 years or more in programs, while 41 percent of such students in Arizona spent more than 5 years. California, with about 40 percent of the nation's students with limited English proficiency in 1996-97, did not have statewide data that could be used to determine how long children were spending in its programs. To provide an indication of what was happening there, we obtained data from four large school districts with large numbers of students with limited English proficiency: Los Angeles, San Francisco, Santa Ana, and San Diego (see table 4). Because of the limited number of states and school districts from which the data were drawn, these results should be interpreted cautiously. Differences in the way these states and school districts define proficiency for exiting such programs, as well as the types of tests used to measure proficiency, make direct comparisons across states and districts nearly impossible. In addition, districts may also decide on their own whether to apply additional criteria beyond the requirements set by their states. Moreover, in June 1998, California passed Proposition 227, mandating English-based instruction in California public schools (although waivers have been granted under this system, and bilingual programs still operate in some California public schools). This new requirement may have an impact on future data coming from these districts. As school districts address the various challenges associated with meeting the educational needs of children with limited English proficiency, districts are also required to provide these children equal educational opportunities under title VI of the Civil Rights Act. We now focus on the requirements that Education's OCR expects school districts to meet and how OCR interacted with school districts whose language assistance programs it investigated from 1992 to 1998. During the 6 years covered by our review, OCR relied on the three policy documents regarding children with limited English proficiency discussed below. These documents incorporate the Castaneda decision's three- pronged test for assessing the adequacy of programs for students with limited English proficiency to determine whether school districts are in compliance with title VI. OCR did not promulgate Castaneda's requirements as regulations, instead setting them forth in policy documents. OCR used compliance reviews to monitor school districts' compliance with these requirements. School districts that were found out of compliance with the title VI requirements were required to enter into negotiated agreements with OCR to correct their programs for students with limited English proficiency. Our survey and case reviews of school districts involved in negotiated agreements resulting from OCR's compliance reviews between 1992 and 1998 revealed that the interaction between OCR and school districts has been generally positive. A majority of districts indicated that OCR regional staff did not favor, or pressure them to adopt, a particular language approach, and almost all of the 245 respondents indicated that OCR was courteous and minimized disruption of daily activities when visiting school districts. However, some school officials reported problems in their interactions with OCR, most frequently related to feeling pressured to change aspects of their programs not related to the language approach used and to OCR's untimely or inadequate communication with school districts. Castaneda set forth a three-part test for determining whether a school district has adopted a satisfactory method for teaching children with limited English proficiency. The federal courts and OCR now generally accept this test as a threshold for determining compliance with title VI. The test is based on a combination of education theory, practice, and results and requires that school district programs (1) be based on sound educational principles, (2) effectively implement the educational principles, and (3) have succeeded in alleviating language barriers. OCR requirements for title VI compliance are articulated through three policy documents known as the May 1970 memorandum, the December 1985 memorandum, and the September 1991 policy update. The May 1970 memorandum required school districts to meet four basic criteria for title VI compliance: districts must take "affirmative steps" to rectify the language deficiency of students with limited English proficiency; students may not be designated as academically deficient on the basis of the school system's tracking system for students with limited English proficiency must be designed to meet their needs as soon as possible, and it must not work to lock students into a particular curriculum; and schools must notify parents of school activities in a language they can understand. The second document, the December 1985 memorandum, stipulates that OCR does not require schools to adopt any particular educational or language-teaching approach and that OCR will determine title VI compliance on a case-by-case basis. Any sound educational approach that ensures the effective participation of students with limited English proficiency is acceptable. The December memorandum also outlines steps OCR staff should take to determine whether there is a need for an alternative language program for students with limited English proficiency and whether the district's program is adequate for meeting the needs of these students. The September 1991 policy update provides additional guidance for applying the May 1970 and December 1985 memorandums. The 1991 document describes the legal standard set forth by the court in Castaneda and therefore contains more specific standards for staffing requirements, criteria for student completion of language assistance programs, and program evaluation. Policy issues related to access to special education programs and gifted/talented programs, as well as OCR's policy with regard to segregation of students with limited English proficiency, are also highlighted in this update. Over three-fourths of the school districts responding to our survey (77 percent) reported that when investigating cases OCR staff did not appear to favor bilingual instruction over English-based instruction. For example, one school district noted that OCR staff made no mention of bilingual instruction as a recommendation, but rather they emphasized meeting the needs of students with limited English proficiency. But three districts felt pressure to increase emphasis on bilingual instruction. While most school districts indicated that OCR appeared to be neutral regarding instructional approach, about 18 percent reported OCR favored the bilingual approach and about 4 percent reported that OCR favored English-based instruction (see fig. 2). The 38 districts that reported that OCR favored bilingual education were located in every OCR region except for Region 6 (the District of Columbia regional office). More than half of these districts had cases that were handled by either the San Francisco or Denver regional office, two regions that serve almost half the students with limited English proficiency. (See app. III for more detailed information on the cases related to students with limited English proficiency by district, the percentage of students in each of the regions, and the districts' views about whether OCR favored a particular approach.) In addition, in the school districts investigated by OCR, the kind of program offered after the corrective action plan had been implemented changed little. Further, some school district officials indicated that OCR did not influence the type of language assistance program implemented. Figure 3 shows the distribution of the instructional approaches school districts offered before and after OCR investigation. (See app. IV for further details.) Overall, school districts reported that their interactions with OCR staff during investigations were positive in three areas: courtesy, minimization of disruption of daily activities, and consideration of the rationale for the school district's existing program (see fig. 4). In comments written on their questionnaires, 13 school districts reported that services to students with limited English proficiency had improved as a result of OCR's investigation. For example, one respondent indicated that OCR had pointed out identification and assessment procedures that the school district had not previously implemented, and that, as a result of the OCR investigation, improved procedures were adopted. In addition, some respondents called OCR's approach "collaborative" or "professional." Similarly, during our site visits, officials in two school districts noted that their interactions with OCR staff were positive. For example, one superintendent said that OCR staff were very professional, the goal of both OCR staff and school officials during the investigation was to meet the needs of students with limited English proficiency, and the students had benefited from OCR's assistance. In another school district, officials told us that OCR staff were pleasant and cordial and that they showed an interest in how the district was delivering alternative language services to children with limited English proficiency. As part of our survey, we gave school district officials the opportunity to make suggestions on how OCR could improve its investigation procedures and to offer any additional comments about OCR's investigation of their school district. Of the 245 questionnaires returned by school districts, almost half (47 percent) contained comments on what OCR could do to be more effective or improve its investigative process, and over half (53 percent) made additional comments about OCR's investigation of their school district. Although district officials generally reported positive interactions between their school district and OCR, some respondents commented on the types of problems they encountered during OCR's investigation process. We sorted these problems into seven categories and have listed them in table 5 in descending order of the frequency of the comments. Several of the problems reported in the survey comments also surfaced in our case investigations. Some districts suggested that OCR could address some of these issues by ensuring that communications were timely, providing more feedback in response to submitted reports, understanding the constraints within which districts have to operate, attempting to minimize paperwork requirements, including educators on OCR's investigative teams, and being clear about when the monitoring period would end and the case would be closed. In addition, some districts suggested that OCR should work more closely with state education agencies and involve the state in the early stages of the investigations to deal with situations in which state guidance differs from federal guidance on meeting the needs of students with limited English proficiency. We asked OCR headquarters officials to respond to the problems school districts identified. In doing so, OCR headquarters officials indicated that OCR had also identified some of the issues and that it, in conjunction with regional office staff, was already taking the following steps to address them (see table 6). Policymakers are faced with particularly difficult decisions with regard to students with limited English proficiency because their needs are varied and experts disagree about the best methods to teach them. Moreover, there is no clear time line for acquiring English proficiency. Even though different approaches to English language instruction may be effective, many variables may influence the choice of program used by a school, such as the percentage of students with limited English proficiency, the number of languages spoken by students, and students' family backgrounds. As a result, local decisions about the amount of time needed to attain proficiency and the amount of language support that should be provided may differ. Available research does not definitively indicate the best teaching methods to use or the amount of time support should be provided. However, guidance from OCR provides the framework and standards that school districts must meet to ensure that students with limited English proficiency have a meaningful opportunity to participate in public education. School districts have the flexibility to select methods of instruction that they deem will produce the best results for their students, so long as they meet OCR requirements. We found that when OCR followed up on complaints or engaged in compliance reviews, for the most part, it worked effectively with districts. Moreover, few districts changed their approach to teaching students with limited English proficiency after OCR investigations. There have been some problems, however, with OCR's working relationships with districts, which OCR acknowledges and is taking steps to improve. In commenting on a draft of this report, the Department of Education generally agreed with its findings and said it was particularly gratified by the survey results (see app. V). Education also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Honorable Roderick R. Paige, Secretary of Education; appropriate congressional committees; and other interested parties. We will also make copies available to others upon request. If you or your staff have any questions about this report, please call me on (202) 512-7215. Other GAO contacts and staff acknowledgments are listed in appendix VI. To determine how long students with limited English proficiency need to become proficient in English, we identified potential studies for review and selected studies that met four criteria. To ensure quality and relevance, the study had to (1) focus on the length of time children need to become proficient in English, (2) reach a specific conclusion about the length of time, (3) have English as the second language learned by the students, and (4) involve original research supported by published data. We identified potential studies for review by searching two national databases for information on second-language learning--the National Clearinghouse for Bilingual Education (Department of Education) and the National Educational Resources Information Center (ERIC)--and by contacting experts to obtain both their recommendations on research regarding second-language learning and information on any research they might have conducted on second-language learning. We contacted the following. Mr. Jorge Amselle, Executive Director, Center for Equal Opportunity, Washington, D.C. Dr. Keith Baker, Education Consultant Dr. James Cummins, Ontario Institute for Studies in Education Dr. Russell Gersten, University of Oregon Dr. Kenji Hakuta, Stanford University Dr. Stephen Krashen, University of Southern California Dr. Rosalie Porter, Editor, READ Perspectives Dr. Christine Rossell, Boston University Dr. J. David Ramirez, California State University Long Beach We also reviewed research summaries, including Improving Schooling for Language-Minority Children: A Research Agenda, by the National Research Council, National Academy of Sciences (1997). We also used the bibliographies of all the studies we identified and reviewed to obtain additional relevant research. From these efforts, we obtained over 70 published articles and other reports that appeared relevant and reviewed each of them. Only three met all four of our selection criteria. To determine what approaches are used to teach children with limited English proficiency, we reviewed the literature, spoke with experts, and reviewed the results of survey data collected by the Department of Education. We also obtained information on the approaches used in 10 school districts we visited in Arizona, Florida, Illinois, North Carolina, and Texas--states with large or growing populations of students with limited English proficiency. To determine how long students remained in language assistance programs, because national data are not available, we contacted 12 states in spring 2000, each with over 40,000 students who have limited English proficiency or with populations of such students constituting over 9 percent of the student population (that is, states with substantial concentrations of students with limited English proficiency): Alaska, Arizona, California, Florida, Illinois, Massachusetts, Nevada, New Jersey, New Mexico, New York, Texas, and Washington. We obtained state-level data from the six states that had such data: Arizona, Florida, Illinois, New Jersey, Texas, and Washington. Although no state data were available for California, we did obtain data from four districts in that state: Los Angeles, San Francisco, and San Diego for school year 1998-99 and Santa Ana for school year 1999-2000 (the only data available). To determine the requirements for children with limited English proficiency that the Department of Education's Office for Civil Rights (OCR) expects school districts to meet and how they are set forth, we interviewed OCR officials, searched the Education Web site, and reviewed OCR policy documents and case law regarding students with limited English proficiency. To determine the nature of the interactions between OCR and school districts in those instances in which OCR has entered into an agreement with the school district concerning language assistance programs, we investigated 5 of the 15 cases suggested by your staff in California, Colorado, Massachusetts, Michigan, and Texas. We also surveyed 293 school districts listed by OCR as having entered into corrective action agreements with OCR for providing services to students with limited English proficiency from 1992 through 1998. Of the 293, 245 responded (84 percent). We also reviewed the transcripts of three congressional hearings before the Subcommittee on Early Childhood, Youth, and Families of the Committee on Education and the Workforce: Bilingual Education Reform, San Diego, Calif., February 18, 1998. Serial Reforming Bilingual Education, Washington, D.C., April 30, 1998. Serial The Review and Oversight of the Department of Education's Office for Civil Rights, Washington, D.C., June 22, 1999. Serial No. 106-49 We also contacted Mr. James M. Littlejohn of Jim Littlejohn Consulting, The Sea Ranch, California. Mr. Littlejohn worked for OCR for 27 years. From 1981 to 1993, he was policy director of OCR in Washington and, according to the director of the Denver Regional Office, during the years covered by our study, Mr. Littlejohn trained most of the OCR investigators in how to properly conduct a Lau investigation (those title VI investigations related to children with limited English proficiency). He retired from OCR in 1996 and now works as a consultant to school systems around the country and on several federal court cases involving bilingual education. Mr. Littlejohn was a key information source for the Committee, testifying and providing key analyses. Arizona was the only state we reviewed that had detailed breakdowns by year on how long students who had received bilingual or English-as-a- second-language (ESL) services did so before making the transition out of these services (see table 7). Illinois was the only state that had data broken down by type of program (ESL or bilingual) (see table 8). We asked school district officials to answer the following question: "Did OCR staff, as a whole, convey the impression that they favored English- only instruction, they favored bilingual education, they favored another language program, or they were neutral on the question?" Of the 225 districts responding, 77 percent replied that OCR did not convey an impression that it favored any particular type of instruction. However, 23 percent indicated that OCR did convey a preference: 18 percent indicated that, in their opinion, OCR favored bilingual 4 percent indicated that, in their opinion, OCR favored English-only 1 percent indicated that, in their opinion, OCR favored another type of language program. (See table 9.) We asked school districts a number of questions about the type of program they had that was specifically designed to meet the English-language needs of students with limited English proficiency (solely bilingual education, English-only instruction, both bilingual and English-only instruction, or another type of language program) before and after the OCR investigation. We also asked about any changes in the type of program used by the district as a result of OCR actions. Ten school districts added bilingual instruction to their English-language learning program after OCR intervention. Of these, six indicated that before OCR's investigation they had not planned to change the type of language program they used; three indicated that before the OCR investigation they had planned to change the type of program they used and that the changes that resulted from OCR's investigation were consistent with the changes they had planned to make; and one district did not indicate whether or not it had planned to change the type of language program used before the OCR investigation. One of the 10 school districts indicated that it felt pressured by OCR to change the type of language program it was using. Our analysis indicated that of the 89 school districts that indicated they had English-only programs before OCR's investigation, 10 added bilingual education to their English-only programs and no school district changed from English-only to solely bilingual. Table 10 lists these 10 school districts and their corresponding OCR regional offices and provides details about the changes made in the districts' English-language acquisition programs. In addition to those named above, Malcolm Drewery, Behn Miller, Ellen Soltow, and Virginia Vanderlinde 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. 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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Experts disagree about the best methods to teach student who speak little English. Even though different approaches to English language instruction may be effective, many variables may influence a given school's program choices. Moreover, there is no clear time line for acquiring English proficiency. Local decisions about the amount of time needed to attain proficiency and the amount of language support that should be provided may differ. Of the two main instructional approaches, English-based instruction is more common than instruction in a student's native language. Most students spent four or less years in these programs. School districts are required to ensure that English-language instruction is adequate and to provide these children with equal educational opportunities. The Office of Civil Rights (OCR) has adopted procedural requirements for criteria for judging the adequacy of local English-language instruction programs in meeting those needs. In three policy documents, OCR set forth requirements that school districts must meet to pass a three-pronged test established by the courts. When the adequacy of local English-language instruction programs is questioned, OCR investigates and, if problems are found, enters into agreement with the district specifying how the district will address the issues.

The sale or transfer of U.S. defense items to friendly nations and allies is an integral component in both U.S. national security and foreign policy. The U.S. government authorizes the sale or transfer of military equipment, including spare parts, to foreign countries either through government-to government agreements or through direct sales from U.S. manufacturers. The Arms Export Control Act and the Foreign Assistance Act of 1961, as amended, authorize the DOD foreign military sales program. The Department of State sets overall policy concerning which countries are eligible to participate in the DOD foreign military sales program. DOD identifies military technology that requires control when its transfer to potential adversaries could significantly enhance a foreign country's military or war-making capability. The transfer or release of military technology to foreign countries involves various agencies such as the Department of State and DOD, which are responsible for controlling, in part, the transfer of such technology. The Defense Security Cooperation Agency, under the direction of the Under Secretary of Defense for Policy, has overall responsibility for administering the foreign military sales program, and the military services generally execute the sales agreements with the individual countries. A foreign country representative initiates a request by sending a letter to DOD asking for such information as the price and availability of goods and services, training, technical assistance, and follow-on support. Once the foreign customer decides to proceed with the purchase, DOD prepares a Letter of Offer and Acceptance stating the terms of the sale for the items and services to be provided. After this letter has been accepted, the foreign customer is generally required to pay, in advance, the amounts necessary to cover costs associated with the services or items to be purchased from DOD and then is allowed to request spare parts through DOD's supply system. The foreign military sales policy and oversight for the Department of the Army are the responsibility of the Deputy Assistant Secretary of the Army for Defense Exports and Cooperation. The Commander, U.S. Army Materiel Command, is the Army's executive agent for implementing, administrating, and managing the foreign military sales program. The U.S. Army Security Assistance Command performs the executive agent's functions for the U.S. Army Materiel Command. The United States Army Security Assistance Command's responsibilities start with the initial negotiation of a foreign military sale and end with the transfer of items and completion of all financial aspects of the sales agreement. The command uses an automated system called the Centralized Integrated System for International Logistics to support the U.S. Army's management of the foreign military sales program. The command originally developed the system in 1976, and in October 1997, the Defense Security Cooperation Agency transferred the Army's system to the Defense Security Assistance Development Center. The command retained responsibility for defining system-user requirements, designing new processes, and directing programming modifications to the system's applications. However, the overall responsibility for providing system information technology maintenance support, such as writing and testing the programs and coordinating infrastructure support, was transferred to the Defense Security Assistance Development Center. Foreign military sales requisitions for Army spare parts and other items initially are processed through the system. For blanket orders, the system uses the security classification code to restrict the spare parts available to foreign military sales customers. Once the system validates a requisition, the requisition is sent to a supply center to be filled and shipped. The Army's requisition process for foreign military sales of parts and other items is shown in figure 1. The Army's internal controls over foreign military sales using blanket orders are not adequate, placing classified spare parts, as well as unclassified items containing military technology, at risk of being shipped to foreign countries, who are not eligible to receive them. We found that the Army (1) lacked control edits in its system and allowed the substitution and release of classified spare parts under blanket orders for shipment to foreign countries, and that a written policy does not exist to determine the actions needed to recover these items; (2) lacks adequate control edits in its system to prevent the release of some unclassified spare parts and other items containing military technology, and that a written policy does not exist to determine the actions needed to recover these items; and (3) has not conducted periodic tests to validate that its system is accurately reviewing and approving blanket orders. As a result of these inadequate internal controls, classified spare parts, as well as unclassified items containing military technology, were shipped to foreign countries that may not be eligible to receive them under blanket orders. The Army lacked control edits in its system and allowed the substitution and release of classified spare parts under blanket orders for shipment to foreign countries. The Army and DOD policies prohibit the release of classified spare parts, under blanket orders, to foreign countries. We identified 3 of the 40 requisitions in our review for the period between October 1, 1997, and April 30, 2003, where the Army item manager had released classified parts under 3 separate blanket orders. For these 3 requisitions, the original parts requested were unclassified but not in stock. The item manager substituted 11 classified digital processors for the unavailable parts and then released these parts under blanket orders for shipment to a foreign country. According to Army officials, the foreign countries were not entitled to receive these items under blanket orders. However, according to Army officials, the foreign countries would be entitled to these items because they have the equipment that these classified spare parts support and that these countries could obtain the parts under a different process such as a defined order. Therefore, according to the officials, in this particular case there is no need to retrieve the items. Based on the Army officials' response, we agree with their decision. Until we identified the problem, Army officials at the United States Army Security Assistance Command, who are responsible for implementing, administrating, and managing the Army's foreign military sales program, were not aware that these classified parts had been substituted for the originally requisitioned unclassified parts. Based on our review, the Army has modified the system to validate substituted parts selected by item managers. According to United States Army Security Assistance Command officials, they have no written policy to determine the actions the Army needs to take to recover classified spare parts or unclassified items containing military technology that were shipped to foreign countries that are not eligible to receive them. Army officials indicated that they have procedures to recover items shipped in lieu of the items ordered; however, the procedures do not address the recovery of items shipped that the foreign country was not eligible to receive. During our review, the officials did not agree with us that they should have written procedures in place to recover these items indicating that this responsibility belongs in the foreign military sales end-using monitoring program. They suggested we contact the Department of State and the Defense Security Cooperation Agency for additional information on recovering these items. While the Army may not be responsible for recovering these items, the Army would initially be aware that these items were shipped to foreign countries that may not be eligible to receive them, and could initiate recovery of these items. However, in discussions with officials on a draft of this report, officials indicated their current policies and procedures to recover items shipped in lieu of items ordered need to be modified to include items shipped to foreign countries that may not be eligible to receive them. The Army lacks control edits in its system to prevent the release of some unclassified items containing military technology to foreign countries under blanket orders. As a result, the Army has shipped some unclassified items containing military technology to foreign countries that may not be eligible to receive them. Officials from DOD's Office of the Deputy Under Secretary of Defense Technology Security Policy and Counterproliferation indicated that the Army should have control over unclassified items containing military technology. In addition, the Defense Security Cooperation Agency indicated criteria for releasing these items should be considered on a country-by-country basis prior to releasing any items to a foreign country. The agency also stated that the military departments should use the applicable codes available as a means to help identify spare parts that contain military technology to ensure that the appropriate means are taken and adequate controls are in place to prevent unauthorized releases. Within the 21,663 requisitions for unclassified items containing military technology that were shipped, we found the following requisitions were not identified and reviewed before they were released: (1) 17,175 requisitions were for 381,245 items such as circuit card assemblies, fire control units, and electron tubes that require their inherent military capability to be destroyed or demilitarized prior to their release to the public; and (2) 387 requisitions were for 2,267 items that foreign countries are prohibited from requesting using blanket orders because the spare parts require release authority from inventory control points. Based on our review, the Army had initiated action to modify its system to cancel blanket orders for parts that require release authority from inventory control points. With such a modification, these 387 requests would be canceled. However, the action to modify the system is pending based on the official interpretation of the Army regulation on spare parts that requires release authority from inventory control points. In addition, as previously mentioned, according to United States Army Security Assistance Command officials, the Army has no written policy for recovering classified spare parts and unclassified items containing military technology that were shipped to foreign countries not eligible to receive them. According to Army officials, the foreign countries were entitled to receive these items. Therefore, according to the officials, in these particular cases there is no need to retrieve the items. Based on the Army officials' response, we agree with their decision. In 1991, the Army had a control edit installed in its system that identified requisitions for parts containing military technology for manual review. This control edit caused thousands of requisitions to be referred for manual review. Army documents indicate that it removed the control edit because according to guidance from the U.S. Army Defense Systems Command and System Integration and Management Activity, the parts containing military technology do not require protected storage. Army documents also indicate that removing the control edit that identified requisitions for unclassified items containing military technology would eliminate an enormous number of labor hours required to research these parts. The system does not refer for review those requisitions for items containing military technology because Army officials stated that DOD has determined that these items are not classified, sensitive, or pilferable; consequently, the items should not be subjected to controlled physical inventory requirements. In 1992, DOD changed selected stock numbers from unclassified to a classification indicating unclassified stock containing military technology to ensure that parts requiring demilitarization could be researched if shortages were reported during depot inventory reviews and do not require protected storage. In our earlier review of the Air Force, we reported that the Air Force did not use control edits to prevent spare parts containing sensitive military technology from being released to foreign countries. The Air Force plans to develop criteria for identifying spare parts containing sensitive military technology and establish appropriate control edits in its automated system so that requisitions for spare parts containing sensitive military technology are identified and referred for review. Also, the Air Force uses criteria, such as federal supply class, to restrict the parts available to foreign military sales customers. For example, we reported that the Air Force restricts countries from requisitioning parts belonging to the 1377 federal supply class (cartridge and propellant actuated devices and components) using blanket orders. There are three codes the Army could use to identify spare parts that contain military technology. These codes are (1) the controlled inventory item code, which indicates the security classification and security risk for storage and transportation of DOD assets; (2) the demilitarization codes assigned by the item manager identifying how to dispose items; and (3) the federal supply class code. Demilitarization codes are assigned to spare parts for new aircraft, ships, weapons, supplies, and other equipment. The demilitarization codes also determine whether the items contain military technology and establish what must be done to the items before they are sold. The Army has not conducted periodic tests to validate that its system is accurately reviewing and approving blanket order requisitions and operating in accordance with the Army's foreign military sales policies. GAO's and the Office of Management and Budget's internal control standards require that a system such as the Army's be periodically validated and tested to ensure that it is working as intended and the ability to accurately review and approve requisitions is not compromised. In the Federal Information Systems Controls Audit Manual, which lists control activities for information systems, one of the control activities listed involves the testing of new and revised software to ensure that it is working correctly. Also, in the Management of Federal Information Resources, the manual requires that each agency establish an information system management oversight mechanism that provides for periodic reviews to determine how mission requirements might have changed and whether the information system continues to fulfill ongoing and anticipated mission requirements. Furthermore, the Internal Control Management and Evaluation Tool -- a tool that assists managers and evaluators in determining how well an agency's internal control is designed and functioning -- lists monitoring as one of five standards of internal controls. Internal control monitoring should assess the quality of performance over time and ensure findings from reviews are promptly resolved. Ongoing monitoring occurs during normal operations and includes regular management and supervisory activities, comparisons, reconciliations, and other actions people take in performing their duties. In our review, we found that a foreign country had requested unclassified parts using blanket orders for which the item manager substituted and shipped classified spare parts. According to DOD officials, had the system validated the substituted classified spare parts, the system would have canceled the orders. United States Army Security Assistance Command officials were unaware of this situation until we identified the problem. Also, we found spare parts where the security classification had been changed from unclassified to classified without Army officials being notified of the change. Based on our review, the Army initiated actions to add control edits to its system to (1) validate substituted spare parts before they are released to foreign countries and (2) review monthly supply catalog updates and cancel open blanket orders when spare parts' security classification changes from unclassified to classified. Defense Security Assistance Development Center officials indicated that periodic tests of the Army's system have not been conducted because, in October 1998, the Defense Security Cooperation Agency directed that no additional funds be used to expand the current system. However, Defense Security Cooperation Agency officials stated that this directive does not preclude the Army from periodically testing the system and its logic. According to DOD and Army officials, they have not tested the system's logic for restricting requisitions since 1999 when they initially modified the system to cancel requisitions for classified spare parts under blanket orders. As part of our review, we tested the system by reviewing Army restrictions applied to historical requisitions on classified spare parts and unclassified items containing military technology and found that the system did not always perform as intended. According to Army officials, there have not been any reviews to assess whether the foreign military sales requisition process for items ordered are processed correctly. The Centralized Integrated System for International Logistics system creates daily reports that identify problems with requisitions, which are then reviewed by Army case managers before continuing through the system. While officials indicated several external audits with GAO and the Army Audit Agency have been recently completed, these audits focused on the overall foreign military sales program and not the requisition process. Based on our observations, these audits do not replace a system test to determine whether the current system is in compliance with existing requisitioning policies and procedures. The Army has not maintained effective internal controls over foreign military sales sold under blanket orders. Specifically, the Army lacked control edits in its system and allowed the substitution and release of classified spare parts under blanket orders for shipment to foreign countries that may not be eligible to receive them. Also, the Army lacks control edits in its system to prevent the release of some unclassified items containing military technology to foreign countries. Moreover, the Army has no written policies to determine the actions needed to recover classified spare parts and unclassified items containing military technology that have been shipped to foreign countries not eligible to receive them. Further, the Army failed to periodically test the Centralized Integrated System for International Logistics system. If the Army had conducted tests to determine whether its system was in compliance with requisitioning policies and procedures, some classified spare parts--as well as unclassified items containing military technology--may not have been released to foreign countries under blanket orders. Without adequate internal controls, classified spare parts and unclassified items containing military technology may be released to foreign countries under blanket orders, thereby providing military technology to countries that might use it against U.S. interests. Recommendations for To improve internal controls over the Army's foreign military sales Executive Action program and to prevent foreign countries from being able to obtain classified spare parts or unclassified items containing military technology that they are not eligible to receive under blanket orders, we are recommending that the Secretary of Defense instruct the Secretary of the Army to take the following two actions: Modify existing policies and procedures, after consultation with the appropriate government officials, to cover items shipped in lieu of items ordered to also ensure the recovery of classified spare parts that have been shipped to foreign countries that may not be eligible to receive them under blanket orders. Modify existing policies and procedures covering items, after consultation with the appropriate government officials, to cover items shipped in lieu of items ordered to also ensure the recovery of unclassified items containing military technology that have been shipped to foreign countries that may not be eligible to receive them under blanket orders. To improve the Army system's internal controls aimed at preventing foreign countries from obtaining classified spare parts or unclassified items containing military technology under blanket orders, we are recommending that the Secretary of Defense direct the Under Secretary of Defense for Policy to require the appropriate officials to take the following two actions: Modify the system so that it identifies blanket order requisitions for unclassified items containing military technology that should be reviewed before they are released. Periodically test the system and its logic for restricting requisitions to ensure that the system is accurately reviewing and approving blanket order requisitions. In commenting on a draft of this report, DOD concurred with two of our recommendations and did not concur with the two other recommendations. First, with regard to our recommendation to modify the system so that it identifies blanket order requisitions for unclassified items containing military technology that should be reviewed before they are released, the department concurred. DOD's comments indicated that the Army will comply with making the specific changes to the system that the Defense Security Cooperation Agency identified as required or that the Army would conduct its own study, given the funding and guidance necessary, to identify items that should be reviewed before they are released. Second, with regard to our recommendation to periodically test the Centralized Integrated System for International Logistics, the department stated that the Army will conduct periodic testing of the system and its logic for restricting requisitions, given the funding and guidance necessary to do so. We also received technical comments and we incorporated them wherever appropriate. With regard to our two recommendations to consult with the appropriate agencies to determine what actions the Army needs to initiate in order to recover (1) classified spare parts and (2) unclassified items containing military technology that have been shipped in error, i.e., shipped in lieu of items ordered, under blanket orders, DOD did not concur. The department said that the Army already has procedures in place to recover classified spare parts and unclassified items containing military technology that have been shipped in error, i.e., shipped in lieu of items, ordered under blanket orders. The procedures include (1) systemic status codes that will advise the case manager that an incorrect item is being shipped by the supply center, at which time the error can be corrected; (2) if the item is still shipped, the case manager can begin retrieval actions by contacting the Security Assistance Office in country; and (3) the customer can initiate a Supply Discrepancy Report upon receipt of the incorrect item to return the item. We acknowledge that these procedures might address wrong items shipped. However, they do not address the intent of our recommendations to recover classified spare parts and unclassified items containing military technology shipped to foreign countries that are not eligible to receive them. If the country requested classified spare parts or unclassified items containing military technology that it is not eligible to receive under blanket orders, it will not likely submit a Supply Discrepancy Report if it had intended to order the items. In addition, we interviewed Defense Security Cooperation Agency and Army officials to determine if the procedures they cited in the agency comments are referring to items shipped in lieu of items ordered instead of shipment of items that foreign countries are not eligible to receive. According to the officials, the procedures are for items shipped in lieu of items ordered and not for the recovery of items that the foreign countries are not eligible to receive. As stated in our report, Army officials told us that they had no written procedures in place to recover classified spare parts or unclassified items containing military technology, because it is not within their responsibility to recover these items. These officials stated that this responsibility belongs to the foreign military sales end-use monitoring program, which includes the Department of State and the Defense Security Cooperation Agency. In following-up with officials on their written comments on the draft of this report, they agreed that they need to modify existing policies and procedures covering items, after consultation with the appropriate government officials, to cover items shipped in lieu of items ordered to also ensure the recovery of classified spare parts and unclassified items containing military technology that have been shipped to foreign countries that may not be eligible to receive them. As a result, we have modified our two recommendations accordingly. To assess and test whether the Army's internal controls adequately restricted blanket orders for classified spare parts sold to foreign countries, we obtained current DOD and Army guidance on the foreign military sales programs. We also held discussions with key officials from the United States Army Security Assistance Command, New Cumberland, Pennsylvania, to discuss the officials' roles and responsibilities, as well as the criteria and guidance they used in performing their duties to restrict foreign countries from requisitioning classified spare parts and other items containing military technology under blanket orders. Also, we interviewed the officials on the requisitioning and approval processes applicable to classified spare parts. In addition, we obtained written responses from officials at the Defense Security Cooperation Agency, Washington, D.C., to identify the agency's roles and responsibilities regarding the policies and procedures relevant to the foreign military sales programs. We also interviewed officials from the Defense Security Assistance Development Center, Mechanicsburg, Pennsylvania, to discuss their roles and responsibilities, as well as the criteria and the guidance they used to maintain and oversee the Army's Centralized Integrated System for International Logistics system to restrict foreign countries from requisitioning classified spare parts and other items containing military technology under blanket orders. Furthermore, we interviewed officials to determine the functional and operational controls that are used to validate requisitions entered into the system. To test the adequacy of the Army's internal controls to restrict access to certain unclassified items containing military technology, we obtained DOD and Army guidance on the foreign military sales program. We also reviewed requisitions for unclassified items containing military technology for which the system had approved the shipments under blanket orders. In addition, we interviewed Army officials to obtain their reasons for releasing these items. Also, we obtained records from the United States Army Security Assistance Command on all classified spare parts and unclassified items containing military technology that were purchased using blanket orders and approved for shipment to foreign countries from October 1, 1997, through April 30, 2003. We limited our review to blanket orders because defined orders and Cooperative Logistics Supply Support Agreements specified the parts that countries were entitled to requisition by the national stock number. The records covered 21,703 requisitions for classified spare parts and unclassified spare parts and other items that contain military technology. We tested the system by identifying the 40 requisitions for classified spare parts that were shipped under blanket orders and reviewed the restrictions applied to determine if the system was operating as intended. To assess the Army's internal controls on the release of unclassified items containing military technology, we reviewed 21,663 requisitions for which the system had approved the shipments under blanket orders. Further, we obtained written responses from DOD officials concerning whether unclassified items containing military technology should be reviewed prior to being released to foreign countries. While we identified some issues concerning the appropriate procedures for such items, in all the cases we reviewed, we found that the items had been ordered and shipped from the Army's system. To determine whether the Army periodically conducted tests to validate the system to ensure that it accurately identified for review and approval blanket order requisitions to support foreign military sales, we obtained and reviewed documentation identifying the system tests to determine how often they were conducted. Also, we interviewed Army and DOD officials to determine how periodic reviews and tests were performed on the system. We conducted our review from May 2003 through December 2003 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this report. At that time, we will send copies of this report to the Secretary of Defense; the Secretary of the Army; the Director, Office of Management and Budget; and interested congressional committees. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me on (202) 512-8365 if you or your staff have any questions concerning this report. Key contributors to this report were Lawson (Rick) Gist, Jr.; Carleen Bennett; Latrealle Lee; Elisah Matvay; Arthur James, Jr.; and Ann DuBois.

From 1993 through 2002, the Department of Defense (DOD) delivered over $150 billion in services and defense articles--including classified spare parts and unclassified items containing military technology--to countries through foreign military sales programs. GAO was asked to review whether the Army's key internal controls adequately restricted blanket orders for (1) classified spare parts and (2) unclassified items containing military technology. GAO was also asked to determine if periodic tests were conducted to validate the Army's system and its logic. The Army's internal controls over foreign military sales are not adequate, placing classified spare parts and unclassified items containing military technology at risk of being shipped to foreign countries that may not be entitled to receive such items under blanket orders. Foreign countries may request items using blanket orders, which are for a specific dollar value and are used to simplify supply actions on certain categories of items. The Army lacked control edits in its system and allowed the substitution and release of classified spare parts under blanket orders for shipment to foreign countries. The Army and DOD policies prohibit the release of classified items, under blanket orders, to foreign countries. GAO identified 3 requisitions in its review, where the item manager released 11 classified digital processors to foreign countries under blanket orders. Because the Army's system did not have control edits in place to validate the substituted parts, classified items were released to foreign countries. Also, the Army has no written policy to determine the actions needed to recover classified items that have been shipped to countries not eligible to receive them. Army officials indicated that the countries were not entitled to receive these items under blanket orders but they could obtain them under a different process; so there is no need to retrieve them, and GAO agreed with their decision. Also, the Army has modified the system to validate substituted parts selected by item managers. The Army lacks control edits in its system to prevent the release of some unclassified items containing military technology requisitioned under blanket orders. Within the 21,663 requisitions that were shipped without a review, GAO found that 387 requisitions were for 2,267 restricted items that foreign countries are prohibited from requesting using blanket orders because the parts require release authority from inventory control points. Also, the Army has no written policies to recover items that have been shipped to countries not eligible to receive them. Army officials said the countries were entitled to request these items, so there is no need to recover the items. The Army has not conducted periodic tests, as required, to validate that its system is accurately reviewing and approving blanket order requisitions. GAO's and the Office of Management and Budget's internal control standards require that a system such as the Army's be periodically tested to ensure that it is working as intended. According to DOD and Army officials, they have not tested the system's logic for restricting requisitions since 1999. Also, the officials stated that the Defense Security Cooperation Agency, in October 1998, directed that no additional funds be used to expand the current system. However, according to the agency, the Army is not prohibited from periodically testing the system.

The Trust Fund provides the primary source of funding for FAA and receives revenues principally from a variety of excise taxes paid by users of the national airspace system. The excise taxes are imposed on airline ticket purchases and aviation fuel, as well as the shipment of cargo. Revenues deposited in the Trust Fund are subject to congressional appropriations. In addition to Trust Fund revenues, in most years, General Fund revenues have been used to help fund FAA operations. As figure 1 shows, Trust Fund revenues have fluctuated since fiscal year 2000. A number of factors, such as external events and general economic conditions, contributed to this fluctuation in revenues because they affect the number of tickets purchased, the fares paid by passengers, the amount of fuel purchased, and the value of air cargo shipped. For example, revenues declined early in the decade because of a series of largely unforeseen events, including the September 11, 2001, terrorist attacks, that reduced the demand for air travel, resulting in a steep decline in airline industry revenue. Similarly, during the recent recession, Trust Fund revenues declined from $12.4 billion in fiscal year 2008 to $10.9 billion in fiscal year 2009, in part because of the 7 percent decline in domestic stic passenger traffic during that period. passenger traffic during that period. The Trust Fund is the primary source of funding for FAA's capital programs and also provides funds for FAA's Operations account. The capital accounts include (1) the Facilities and Equipment (F&E) account, which funds technological improvements to the air traffic control system, including the modernization of the air traffic control system, called the Next Generation Air Transportation System (NextGen); (2) the Research, Engineering, and Development (RE&D) account, which funds research on issues related to aviation safety, mobility, and NextGen technologies; and (3) the Airport Improvement Program (AIP), which provides grants for airport planning and development. In addition, the Trust Fund has provided all or some portion of the funding for FAA's Operations account, which funds the operation of the air traffic control system and safety inspections, among other activities. Finally, the Trust Fund is used to pay for the Essential Air Service (EAS) program. In fiscal year 2010, FAA's expenditures totaled about $15.5 billion, with Trust Fund revenues covering about $10.2 billion, or 66 percent, of those expenditures. As figure 2 shows, while total FAA expenditures grew about 60 percent from fiscal year 2000 through fiscal year 2010, the Trust Fund's revenue contribution only increased 12 percent, while the contribution of general revenues from the U.S. Treasury has increased to cover a larger share of FAA's operations expenditures. We discuss this change in more detail in the next section of this statement. Since the Trust Fund's creation in 1970, revenues have in the aggregate generally exceeded spending commitments from FAA's appropriations, resulting in a surplus. This surplus is referred to as the Trust Fund's uncommitted balance--the balance in the Trust Fund that remains after funds have been appropriated from the Trust Fund and contract authority has been authorized. As of the end of fiscal year 2010, the Trust Fund's uncommitted balance was about $770 million (see fig. 3). As figure 3 shows, the Trust Fund's uncommitted balance has declined since reaching $7.35 billion in fiscal year 2001. This decline is largely a result of how Congress determines the amount of appropriations that should be made from the Trust Fund. Starting with the Wendell H. Ford Aviation Investment and Reform Act of the 21st Century (AIR-21) in 2000 and continuing with Vision 100, Congress has based FAA's fiscal year appropriation from the Trust Fund on the forecasted level of Trust Fund revenues, including interest on Trust Fund balances, as set forth in the President's baseline budget projection for the coming fiscal year. Each year's forecast, and accordingly FAA's appropriation, is based on information available in the first quarter of the preceding fiscal year. For example, the revenue forecast for fiscal year 2011 is prepared in the first quarter of fiscal year 2010. These revenue forecasts can be uncertain because it is difficult to anticipate, a year in advance, events that may significantly affect the demand for air travel or fuel usage, the fares that passengers pay, and other variables that affect Trust Fund revenues. In fact, as figure 4 shows, FAA's forecasts of Trust Fund revenues (including both tax revenues and interest earned by the Trust Fund's cash balance) have exceeded actual Trust Fund revenues (including interest) in 9 of 11 years, and in aggregate, these forecasted revenues have exceeded actual tax revenues by over $9 billion over that period. Accordingly, appropriations from the Trust Fund, which are based on these revenue forecasts, have also exceeded actual revenues, thus drawing the us drawing the uncommitted balance lower over the course of the last decade. uncommitted balance lower over the course of the last decade. Until recently, FAA generated a forecast for the President's budget using models based on historical relationships between key economic variables, such as the growth rate of the economy, and aviation measures, such as passenger traffic levels and passenger fares, that affect Trust Fund revenues. The responsibility for forecasting Trust Fund revenues shifted from FAA to the U.S. Department of the Treasury (Treasury), which already had responsibility for other federal excise tax revenue forecasts, in fiscal year 2010. We have recently been asked by the Senate Commerce, Science, and Transportation Committee to examine the Trust Fund revenue forecasting process and how it might be improved; we expect to begin our review this year. The Trust Fund's uncommitted balance, which exceeded $7.3 billion at the end of fiscal year 2001, dropped to $299 million at the end of fiscal year 2009--the lowest balance over the past decade. One of the greatest declines in the uncommitted balance occurred in 2002 following the sudden drop-off in aviation activity after the terrorist attacks of September 11. In addition, the declines in passenger traffic and aircraft operations and reduced fuel consumption in 2009 resulted in actual revenues to the Trust Fund that fell significantly below forecasted levels in fiscal year 2009 and an uncommitted Trust Fund balance that approached zero. In response, the fiscal year 2009 omnibus appropriation increased the general revenue contributions to FAA's operations and decreased FAA's appropriation from the Trust Fund by approximately $1 billion compared with what was originally outlined in the President's fiscal year 2009 proposed budget for FAA. These additional general revenues kept the Trust Fund's uncommitted balance from going negative, thereby avoiding budgetary challenges for FAA. As a result, general revenues accounted for 24 percent of FAA's expenditures in fiscal year 2009 and reached 34 percent in fiscal year 2010 (see fig. 2). If the uncommitted balance is nearly depleted and actual Trust Fund revenues continue to fall below forecasted levels, there is a risk of overcommitting available resources from the Trust Fund--meaning revenues could be insufficient to cover all of the obligations that FAA has the authority to incur. A low uncommitted balance signals to FAA that limited revenues are available to incur new obligations while still covering expenditures on existing obligations and increases FAA's challenge in moving forward with planned projects and programs. FAA officials have noted that they closely monitor the Trust Fund's available cash and FAA's obligations to ensure that enough cash and budget authority are available to cover FAA's expenditures and obligations. In the short term, if there were a risk of overcommitting Trust Fund resources, FAA officials noted that they might delay obligations for capital programs if the Trust Fund did not have adequate revenues to cover those obligations without additional funding authorized and appropriated from the General Fund. According to FAA officials, they would first defer some capital program obligations so they could continue to fund operations, such as air traffic control and safety inspections. These actions would ensure that the agency did not incur obligations or expenditures in excess of the Trust Fund's cash balance, which could potentially lead to a violation of the Antideficiency Act. Later this month, in the President's budget, the administration will release its newest estimate of the Trust Fund's fiscal year 2011 year-end uncommitted balance. Congress may choose to increase FAA's authorized funding level in the near term to allow FAA to further develop NextGen, the new satellite- based air traffic management system that is designed to replace the current radar-based system. NextGen improvements include new integrated systems, procedures, aircraft performance capabilities, and supporting infrastructure needed for a performance-based air transportation system that uses satellite-based surveillance and navigation and network-centric operations. These improvements are intended to improve the efficiency and capacity of the air transportation system while maintaining its safety so that it can accommodate anticipated future growth. FAA has generally identified the NextGen capabilities that it plans to implement in the near term to midterm, through 2018. FAA's capital investment is expected to be $11 billion to $12 billion through 2018. This cost does not include research, the airport and associated airfield improvements, or the aircraft equipage that is necessary to realize all benefits. In addition to FAA's capital investment costs, FAA estimates that the equipage necessary to realize significant capabilities implemented through 2018 will cost in the range of $5 billion to $7 billion. Decisions about the long-term direction for NextGen (beyond 2018) have yet to be made, and two key planning documents--the NextGen Integrated Work Plan and Enterprise Architecture--contain a wide variety of possible ideas and approaches. Therefore, the costs of the system over the long term are uncertain, but have been estimated to be in the $40 billion range (combined public and private investment in ground infrastructure and avionics). FAA's proposed budget for NextGen activities is $1.14 billion in fiscal year 2011, up from the $700 million spent in fiscal year 2009 and the $868 million spent in fiscal year 2010. In addition, as we have previously reported, NextGen's ability to enhance capacity will partly depend on how well airports can handle greater capacity. FAA's plans call for building or expanding runways at the nation's 35 busiest airports to help meet the expected increases. However, even with these planned runway improvements and the additional capacity gained through NextGen technologies and procedures, FAA analyses indicate that 14 more airports will still need additional capacity, which could require additional Trust Fund resources. Additionally, the Future of Aviation Advisory Committee recently proposed to the Secretary of Transportation that the federal government undertake a significant financial investment to accelerate efforts to equip aircraft and train staff to use key NextGen technologies and operational capabilities, including performance-based navigation (PBN), automatic dependent surveillance--broadcast (ADS-B), ground-based augmentation system (GBAS) and data communications. The amount of investment required will depend on how any financial incentives are structured. Financial assistance can come in a variety of forms, including grants, cost- sharing arrangements, loans, loan guarantees, tax incentives, and other innovative financing arrangements. One financing option proposed by the NextGen Midterm Implementation Task Force to encourage the purchase of aircraft equipment is the use of equipage banks, which would provide federal loans to operators to equip their aircraft. Another financing option, proposed in various forms by a variety of stakeholders, would involve setting up an equipage fund using private equity backed by federal loan guarantees. While the details of different proposals vary, they would all allow operators who purchase equipment through the fund to defer payments on the equipment until FAA makes improvements required for the operators to benefit from the equipment. As we have previously reported, prudent use of taxpayer dollars is always important; therefore, any financial incentives should be applied carefully and in accordance with key principles. For example, mechanisms for financial assistance should be designed so as to effectively target parts of the fleet and geographical locations where benefits are deemed to be greatest, avoid unnecessarily equipping aircraft (e.g., those that are about to be retired), and not displace private investment that would otherwise occur. Furthermore, it is preferable that the mechanism used for federal financial assistance result in minimizing the use of government resources (e.g., some mechanisms may cost the government more to implement or may place the government at greater risk than others). Given the uncertainty inherent in forecasting revenues and the decline in the uncommitted balance of the Trust Fund, we have suggested that Congress should work with FAA to develop alternative ways to reduce the risk of overcommitting budgetary resources from the Trust Fund. Better matching of actual revenues to the appropriation from the Trust Fund would help to ensure that Trust Fund revenues are sufficient to cover all the obligations that FAA has the authority to incur, thereby reducing the risk of disruptions in funding for aviation projects and programs. One approach would be to appropriate less than 100 percent of the forecasted revenues, especially until a sufficient surplus is established to protect against potential disruptions in revenue collection. This change would reduce the likelihood that FAA would incur obligations in excess of the cash needed to liquidate these obligations and thus reduce the risk of delaying or terminating projects. The House of Representatives' FAA reauthorization bill proposed in the 111th Congress includes a provision that would limit the budgetary resources initially made available each fiscal year from the Trust Fund to 90 percent, rather than 100 percent, of forecasted revenues for that year; then 2 fiscal years later, when actual revenues would be known, any amount that exceeded 90 percent of forecasted revenues in the second previous year would be appropriated from the Trust Fund to FAA. Congress would need to provide additional general revenues in the first 2 years to make up the difference. Another approach would be to target a minimum level for the Trust Fund's uncommitted balance and base appropriations on the goal of maintaining that target level. This change would make it more likely that uncommitted resources would be available to FAA in the event that actual revenues fell short of forecasted revenues in a future year. Either approach would result in fewer Trust Fund resources available for FAA for some period of time, requiring additional general revenues to make up the difference, unless FAA's overall resources are reduced. In the longer term, future Trust Fund revenues under the current tax structure may be lower than previously anticipated. For example, in January 2011, the Congressional Budget Office forecast about $25 billion less in Trust Fund revenues over the next 6 years (through fiscal year 2017) than it forecast in 2007 for that same time period. Given the decline in expected future revenues, appropriations from the Trust Fund under current law will be lower in future years than previously projected unless new revenue sources are found. To maintain appropriations consistent with what earlier revenue forecasts would have afforded, Congress could take action such as increasing general revenue contributions or increasing Trust Fund revenues. For example, we suggested that if Congress determines that the benefit of added revenue to the Trust Fund warrants taxation of optional airline service fees, such as baggage fees, then it should consider amending the Internal Revenue Code to make mandatory the taxation of certain or all airline-imposed fees and require that the revenue be deposited in the Trust Fund. The Future of Aviation Advisory Committee also recommended that the Secretary of Transportation commission an independent study of the federal aviation tax burden on passengers, airlines, and general aviation to determine if existing levels of taxes and fees sufficiently balance the Department's statutory mandates to "encourage efficient and well- managed air carriers to earn adequate profits and attract capital...;" "promot, encourag, and develop civil aeronautics and a viable, privately-owned United States air transport industry;" and "ensur that consumers in all regions of the United States, including those in small communities and rural remote areas, have access to affordable, regularly scheduled air service." The committee recommended that the study address the following questions: How do the federal taxes imposed on the U.S. aviation industry compare to those imposed on other modes of transportation? Is the existing level of aviation taxes and fees levied efficiently and effectively for the services provided by the federal government? Are there more efficient ways to collect and administer existing aviation taxes and fees that would save taxpayer and aviation industry dollars? Would regular consultation between those departments and agencies that administer aviation taxes and fees prior to implementing any changes to tax rates and policies result in (1) a more efficient and rational aviation tax system and (2) the desired industry and social outcome? What is the appropriate balance between General Fund financing and Trust Fund financing of capital and operating costs of the national aviation system, recognizing the significant role commercial and general aviation play in fostering economic growth and development? Based on the results of the study, the committee recommends that the Secretary pursue appropriate legislative and regulatory actions that may be needed to ensure that existing and any new aviation taxes and fees applied to passengers, airlines, and general aviation are effective and collected efficiently, appropriately recognizing the role commercial and general aviation play in fostering economic growth and development. Thank you, Mr. Chairman, that concludes my statement. I will be pleased to answer any questions that you or other Members of the Committee might have. For future questions about this statement, please contact me at (202) 512- 2834 or [email protected]. Individuals making key contributions to this report were Paul Aussendorf, Assistant Director; Amy Abramowitz; Jessica Bryant-Bertail; Lauren Calhoun; Carol Henn; Bess Eisenstadt; Heather Krause; Hannah Laufe; Maureen Luna-Long; and Andrew Von Ah. 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This testimony discusses the status of the Airport and Airway Trust Fund (Trust Fund). Established in 1970, the Trust Fund helps finance the Federal Aviation Administration's (FAA) investments in the airport and airway system, such as construction and safety improvements at airports and technological upgrades to the air traffic control system, as well as FAA operations, such as providing air traffic control and conducting safety inspections. FAA, the Trust Fund, and the excise taxes that support the Trust Fund (which are discussed later in this statement) must all be periodically reauthorized. The most recent reauthorization expired at the end of fiscal year 2007. Proposed reauthorization legislation was considered but not enacted in the 110th and 111th Congresses, although several short-term measures were passed to extend the authorization of aviation programs, funding, and Trust Fund revenue collections. The latest of these extensions--the Airport and Airway Extension Act of 2010, Part IV--was enacted on December 22, 2010, extending FAA programs, expenditure authority, and aviation trust fund revenue collections through March 31, 2011. The financial health of the Trust Fund is important to ensure sustainable funding for a safe and efficient aviation system without increasing demands on general revenues. This testimony provides an update on the status of the Airport and Airway Trust Fund, including the current financial condition of the Trust Fund, anticipated Trust Fund expenditures for planning and implementing improvements in the nation's air traffic management system that are expected to enhance the safety and capacity of the air transport system, and options for ensuring a sustainable Trust Fund. This statement draws on our body of work on these issues, supplemented with updated information on the Trust Fund from FAA and the Congressional Budget Office. All dollars reported in this statement are nominal, unless otherwise noted. The Trust Fund is the primary source of funding for FAA's capital programs and also provides funds for FAA's Operations account. The capital accounts include (1) the Facilities and Equipment (F&E) account, which funds technological improvements to the air traffic control system, including the modernization of the air traffic control system, called the Next Generation Air Transportation System (NextGen); (2) the Research, Engineering, and Development (RE&D) account, which funds research on issues related to aviation safety, mobility, and NextGen technologies; and (3) the Airport Improvement Program (AIP), which provides grants for airport planning and development. In addition, the Trust Fund has provided all or some portion of the funding for FAA's Operations account, which funds the operation of the air traffic control system and safety inspections, among other activities. Finally, the Trust Fund is used to pay for the Essential Air Service (EAS) program. In fiscal year 2010, FAA's expenditures totaled about $15.5 billion, with Trust Fund revenues covering about $10.2 billion, or 66 percent, of those expenditures. While total FAA expenditures grew about 60 percent from fiscal year 2000 through fiscal year 2010, the Trust Fund's revenue contribution only increased 12 percent, while the contribution of general revenues from the U.S. Treasury has increased to cover a larger share of FAA's operations expenditures. Since the Trust Fund's creation in 1970, revenues have in the aggregate generally exceeded spending commitments from FAA's appropriations, resulting in a surplus. This surplus is referred to as the Trust Fund's uncommitted balance--the balance in the Trust Fund that remains after funds have been appropriated from the Trust Fund and contract authority has been authorized. As of the end of fiscal year 2010, the Trust Fund's uncommitted balance was about $770 million. the Trust Fund's uncommitted balance has declined since reaching $7.35 billion in fiscal year 2001. This decline is largely a result of how Congress determines the amount of appropriations that should be made from the Trust Fund. Starting with the Wendell H. Ford Aviation Investment and Reform Act of the 21st Century (AIR-21) in 2000 and continuing with Vision 100,10 Congress has based FAA's fiscal year appropriation from the Trust Fund on the forecasted level of Trust Fund revenues, including interest on Trust Fund balances, as set forth in the President's baseline budget projection for the coming fiscal year. Each year's forecast, and accordingly FAA's appropriation, is based on information available in the first quarter of the preceding fiscal year. For example, the revenue forecast for fiscal year 2011 is prepared in the first quarter of fiscal year 2010. These revenue forecasts can be uncertain because it is difficult to anticipate, a year in advance, events that may significantly affect the demand for air travel or fuel usage, the fares that passengers pay, and other variables that affect Trust Fund revenues.

Since 1989, DOE has spent about $23 billion cleaning up the environmental contamination resulting from over 50 years of nuclear weapons production. During this time, the agency has completed the restoration of less than 20 percent of the total number of contaminated sites. One reason DOE cites for the slow progress is that it has an insufficient workforce to manage and oversee what it calls "the largest environmental cleanup program in the world." In 1993, the Environmental Management Program had a contractor-to-federal-worker ratio of 21 to 1--one of the highest ratios in the federal government--and the highest funding per FTE in the federal government, $3.3 million per FTE. In September 1993, DOE requested that OMB designate the Environmental Management Program as a pilot project under GPRA and authorize additional employees as part of that project. The agency asserted that it did not have sufficient staff with the skills needed to oversee contractors and review their cost estimates. To support its position, DOE cited our reports and reports by the Congressional Budget Office, which supported the need for additional federal staff to manage the cleanup program. The reports noted the impact of FTE ceilings that restricted the agency from hiring enough federal employees to manage the cleanup program, the use of support service contractors at substantially greater cost, limitations in staff skills for adequate contract management, and the lack of federal expertise. In addition, a study conducted for DOE in 1993 concluded that federal staff have minimal supervision of agency cleanup projects, and as a result, the cleanup is costing significantly more than comparable private sector and government projects. DOE said that it wanted to increase its oversight of contractors and involve federal employees more in contract management. DOE proposed to hire 1,600 new employees by (1) converting 1,050 support service contractor positions to federal positions and (2) adding 550 federal employees to help manage the environmental program. The agency estimated that the new staff would save $188 million through fiscal year 1996 by better managing contractors' operations and would produce more tangible environmental results. OMB authorized DOE to hire 1,200 of the 1,600 additional staff requested during fiscal years 1994 and 1995 and the additional 400 in fiscal year 1996. As of May 31, 1995, the agency had hired about 700 new employees. Those hired to date have included project engineers, cost analysts, estimators, and environmental safety and health specialists. However, DOE is considering not hiring all of the approved FTEs because of budget constraints, according to the leader of the Office of Environmental Management's evaluation team. DOE required field and headquarters offices to include justifications for the initial 1,200 FTEs as part of a competitive bidding process. The offices were required to submit bids containing detailed information on their additional personnel needs and on the savings they anticipate will be achieved from the new staff. DOE evaluated the bids and allocated all 1,200 positions that OMB had approved. The additional 400 FTEs were approved by OMB in May 1995 but had not been allocated at the conclusion of our review. Both field and headquarters offices competed for the 1,200 positions, but DOE used a different process to allocate the new positions to the offices. A team of DOE analysts reviewed the bids submitted by the field offices and then submitted their recommendations to management for review. The team reviewed the bids for compliance with requirements and for the adequacy of the justifications supporting the savings. Senior Environmental Management and other headquarters officials reviewed the bids submitted by the headquarters offices and then made the determinations. The DOE senior management officials included the Assistant Secretary for Environmental Management, the Assistant Secretary for Human Resources and Administration, and the Associate Deputy Secretary for Field Management. By early March 1994, 11 field and 15 headquarters offices had submitted bids for new staff. Collectively, the offices requested 1,575 new FTEs and proposed a total of $1.235 billion in savings. In mid-March 1994, the field offices presented their bids orally to DOE management, the review team, and an OMB representative. In their presentations, field office managers explained their bids and responded to management's questions. Following the presentations, management asked the field offices to revise and resubmit their bids for final consideration. The revised bids were to respond to numerous questions raised during the presentations. In May 1994, DOE informed the field offices of their FTE allocations and the savings targets they were to achieve. The field offices were allocated 831 FTEs, with a total savings target of almost $876 million for fiscal years 1995 and 1996. The headquarters offices were provided with 369 FTEs and a savings target totaling $14.5 million. These savings do not include the FTEs' salary and benefit costs, about $70,000 per employee--$84 million annually if all 1,200 new employees are hired. Although DOE's agreement with OMB stipulated that contractor positions would be reduced in conjunction with the new hires, the offices that were allocated new positions have not received the funds that were previously paid to contractors. Instead, DOE required those offices to absorb the additional costs in existing budgets. Appendix I summarizes the initial and revised bids, the allocation of FTEs, and the decisions on the savings targets for the field and headquarters offices. Most of the cost savings and productivity improvements proposed in the field offices' bids were not adequately justified, according to DOE's evaluation team. The evaluation team concluded that the field offices had not adequately justified 87 percent of the savings that they said could be achieved. Despite finding these weaknesses in the justifications, in May 1994 DOE approved most of the savings proposed in the field offices' bids. In two separate reviews of the field offices' bids, the evaluation team expressed concerns about the quality of the supporting justifications and the likelihood of achieving the savings through improved productivity. The team concluded that most of the justifications of the savings were inadequate. As a result of the first review in March 1994, the field offices were required to revise their bids. Consequently, the overall 2-year savings target proposed in the initial bids was reduced from $1.221 billion to $1.035 billion. In its review of the field offices' revised bids, the evaluation team concluded that the justifications were not adequate for almost $900 million--87 percent--of the $1.035 billion in savings targeted for the 2 years. Despite this finding, most of the savings targets were approved. For example, DOE's Savannah River Site first proposed that it could save $121 million in fiscal years 1995 and 1996. However, $56 million of that amount--46 percent--was due to a reduction in contractor positions that had occurred in a prior year and was unrelated to the savings that would result from the new positions. DOE questioned the $56 million during its review of Savannah River's first bid but did not subtract that amount from the site's expected savings. In a similar example, about 48 percent of the Oak Ridge Site's overall proposed savings was to come from the elimination of about 500 contractor positions. The evaluation team commented that Oak Ridge had not adequately explained the proposed cuts in contractors, and in its second review, the team classified these savings as inadequately justified. However, DOE later approved the productivity savings that were to accrue from the cuts in Oak Ridge's contractor personnel. In another example, the evaluation team considered almost all of the $549 million in savings contained in the Hanford Site's first proposal to be unjustified. The team commented that most of Hanford's proposed savings were unrealistic or apparently based on productivity initiatives unrelated to the new FTEs. Hanford reduced its proposed savings in a revised bid, but the evaluation team's subsequent review concluded that only 4 percent of Hanford's revised proposed savings was fully justified. Nonetheless, according to members of the evaluation team, DOE approved almost all of Hanford's proposed savings because the bids were considered an adequate basis for allocating the FTEs and imposing budget cuts at the field offices. On the basis of the evaluation team's findings, DOE further reduced the field offices' total savings targets from $1.035 billion to about $876 million, which still included a substantial amount of savings that was not adequately justified. DOE then set savings targets for both field and headquarters offices of $442 million for fiscal year 1995 and $448 million for fiscal year 1996. DOE believed that the bids were adequate for allocating the FTEs and planned to hold office managers accountable for meeting those goals. Despite the fact that the savings targets were not fully justified, budget reductions are occurring. As shown in figure 1, DOE expects to cut the Office of Environmental Management's budget by $913 million over fiscal years 1995 and 1996, even though it considered only $136 million of that amount fully justified through the bid process. DOE is assured of lower costs because the agency is incurring major reductions in its cleanup budget--about $913 million in fiscal years 1995 and 1996. Even though these cost savings will occur, DOE has not developed a reporting system that would track and validate whether productivity improvements were a result of the new employees. DOE has developed some of the monitoring and evaluating tools required by GPRA, such as annual plans and reports that will yield broad information about the entire pilot project. By the fourth quarter of fiscal year 1995, procedures to collect, report, and validate the productivity improvements and resulting dollar savings related to the new staff are expected to be in place. DOE then plans to include these productivity improvements in its overall GPRA Environmental Management pilot project reports. GPRA requires agencies with pilot projects to prepare a strategic plan for the program, annual plans for each year of a pilot project, and an annual report that assesses the project's performance. As of March 1995, DOE had completed the strategic plan and performance plans for fiscal years 1994 and 1995 and was preparing a performance plan for fiscal year 1996. Additionally, the agency was preparing its first performance report, which will cover fiscal year 1994. The agency is reviewing the performance plan for fiscal year 1995 through a series of quarterly management reviews and is tracking field offices' savings against their savings goals. While the GPRA reports will provide an overall picture of the Environmental Management Program's performance, additional information is required to track the cost savings and productivity improvements that have resulted from the new staff. Therefore, offices are developing monitoring and evaluation systems intended to determine the success of projects that use the new staff. Some projects are easily tracked, while others are more difficult. For example, some of Oak Ridge's 77 new employees will manage three specific projects--the removal of cooling towers on the site, demolition of a power house, and cleanup of selected burial grounds. According to DOE, it will save about $16 million from these three projects during fiscal years 1995 and 1996. Since these three projects are specifically identified, measuring the savings will be straightforward. Oak Ridge is also developing baseline cost data for other environmental restoration projects and waste management activities that will use new hires--a more difficult task, according to Oak Ridge staff. The Savannah River Site is putting systems into place to track the progress of the productivity improvements and savings realized by its 128 new staff in the high-level waste program, environmental restoration program, and waste minimization program, among others. These systems were not in place at the conclusion of our review. Other sites are also developing program performance baselines to measure performance against goals. DOE provided written comments on a draft of this report. (App. III contains the full text of DOE's comments.) The agency said that our draft report fairly represented the process the Office of Environmental Management used in allocating the new positions for the Environmental Management Program. However, the agency pointed out that we emphasized the inadequacy of the justifications supporting the savings projections but did not give credit to the process that made field office managers accountable for achieving the projected savings. We believe that our report adequately addresses managers' accountability for the projected savings. Specifically, we note in our report that DOE plans to hold office managers accountable for meeting the productivity achievements tied to these savings. DOE also said that tracking the results from the additional positions will be especially difficult because the agency is now streamlining its organization and will be unable to fill all 1,600 positions. Additionally, the agency said that further budget reductions are expected to cause delays in accomplishing needed work and may result in increased life-cycle costs. To perform our work, we met with and obtained data from Environmental Management officials at DOE headquarters and at four of its field offices--the Savannah River Operations Office, Oak Ridge Operations Office, Albuquerque Operations Office, and the Ohio Field Office. We performed our work between July 1994 and June 1995 in accordance with generally accepted government auditing standards. (App. II discusses our objectives, scope, and methodology in more detail.) 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 Energy and other interested parties. We will also make copies available to others upon request. Please contact me at (202) 512-3841 if you have any questions. Major contributors to this report are listed in appendix IV. In June 1994, the then Chairman, Senate Committee on Governmental Affairs, asked to us evaluate the portion of a pilot project of the Department of Energy's (DOE) Office of Environmental Management that involves the hiring of additional federal employees (full-time equivalents, or FTEs). Our review focused on the following three major questions: What process did DOE use to justify the new hires? Did DOE's justifications support the claimed cost savings and productivity improvements? How is DOE assuring itself that the established cost savings and productivity improvements will be achieved? We selected four of the largest DOE facilities with major environmental cleanup under way: the Savannah River Site, South Carolina; Oak Ridge Operations Office, Tennessee; Ohio Field Office, Ohio; and Albuquerque Operations Office, New Mexico. At each facility, we reviewed the competitive bid proposals and discussed the proposed savings with program officials. Additionally, we reviewed the four facilities' implementation plans and performance reports that were submitted to DOE. For DOE's other seven offices, we reviewed their bid proposals, implementation plans, and performance reports. We interviewed key officials at DOE headquarters who were responsible for developing, managing, and evaluating the pilot project, including the new FTEs. We obtained evaluations of the facilities' bids and discussed them with agency officials. We also interviewed the Office of Management and Budget officials responsible for approving and overseeing the agency's pilot project. John P. Hunt, Jr., Assistant Director John M. Gates, Evaluator-in-Charge Marion S. Chastain, Site Senior Sara Bingham, Communications Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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Pursuant to a congressional request, GAO reviewed the Department of Energy's (DOE) process for hiring new employees and improving the productivity of environmental cleanup, focusing on: (1) the process DOE used to justify the new hires; (2) whether DOE justifications support the claimed cost savings and productivity improvements; and (3) how the cost savings and productivity improvements will be achieved. GAO found that: (1) DOE used a competitive bidding process to justify the allocation of 1,200 new positions in its field and headquarters offices; (2) the offices requested 1,575 new staff and estimated that the new staff could save over $1.2 billion dollars in fiscal years (FY) 1995 and 1996, resulting from increased federal oversight of contractors and greater federal involvement in contract management; (3) DOE lowered the 2-year savings estimate to about $890 million, not including the $84 million annually in compensation for the 1,200 new staff; (4) DOE did not adequately justify about $900 million in savings from productivity improvements; (5) although DOE is unsure of the justifications, it is reducing its Environmental Management Office's budget by about $300 million in FY 1995, before seeing if productivity improvements occur; and (6) DOE is developing procedures to measure productivity improvements and resulting cost savings the new staff are expected to achieve.

Within the Department of Justice, EOIR immigration judges conduct hearings to determine whether an alien is removable from the United States and whether he or she is eligible for a form of relief or protection from removal. If an immigration judge determines that an alien is removable from the United States and not eligible for relief or protection from removal, including voluntary departure, the immigration judge can issue an order of removal. The removal order becomes administratively final when all avenues for appeal with EOIR to remain in the United States have been exhausted or waived by the alien, and the alien is to be removed from the United States. Once an order of removal is final, ICE is responsible for carrying out the removal. In fiscal year 2013, ICE reported removing 368,644 aliens from the United States. While immigration judges have the authority to make custody determinations, ICE also makes the initial decision as to whether to detain aliens in ICE custody or release them to the community pending removal proceedings, subject to certain laws. The Immigration and Nationality Act, as well as other legislation, requires that under specified circumstances ICE detain certain aliens, including those arriving without documentation or with fraudulent documentation, those who are inadmissible or removable on criminal or national security grounds, and Even if not required to those aliens subject to a final order of removal.do so, ICE may detain aliens who it believes pose a threat to public safety or are flight risks, with the option for some aliens to be subsequently released. In fiscal year 2013, ICE booked 440,557 aliens into detention facilities. ICE uses one or more release options when it determines that an alien is not to be detained in ICE's custody--including bond, order of recognizance, order of supervision, parole, and on condition of participation in the ATD program. If an alien is not a threat to public safety, presents a low risk of flight, and is not required to be detained, ICE may release him or her on (1) a bond of at least $1,500 or (2) an order of recognizance that requires the alien to abide by specified release conditions but does not require the alien to post a bond. DHS may release an alien on an order of supervision, despite such alien being subject to a final order of removal, where there is no significant likelihood of removal in the reasonably foreseeable future, because, for example, travel documents are not forthcoming. An alien subject to a final order of deportation or removal may also request a stay of deportation or removal. ICE may release certain aliens on parole for urgent humanitarian reasons or significant public benefit, or for a medical emergency or legitimate law enforcement objective, on a case-by-case basis. Finally, an alien can also be placed in the ATD program, which requires that, among other things, aliens released into the community agree to appear at all hearings and report to ICE periodically. In fiscal year 2013, ICE released aliens under these various options 113,690 times, as shown in table 1. To assist ICE officers in their decisions whether to detain aliens in ICE custody or release them, ICE developed an analytical tool known as the Risk Classification Assessment (RCA). The RCA, which ICE fully deployed in February 2013, considers several factors related to an alien's public safety and flight risks--such as criminal history, prior removal data, ties to the local community, and gang affiliation--and recommends each alien for detention or release. An ICE officer reviews the RCA results along with other factors, such as an alien's final order status, and, after obtaining supervisory approval, makes a custody determination. ICE officials stated that they generally do not use the RCA for aliens that ICE must detain by law or that are likely to be removed from the United States within 5 days. ICE created the ATD program in 2004 as another condition of release to help ensure that aliens released into the community appear at their immigration proceedings. The ATD program seeks to provide an enhanced monitoring option for those aliens for whom ICE, or an immigration judge, has determined that detention is neither mandated nor appropriate, yet may need a higher level of supervision than that provided by the less restrictive release conditions.case for possible placement in ATD, officers are to consider the alien's criminal history, compliance history, community and family ties, and humanitarian concerns. ICE may require participation in the ATD program as a condition of the alien's release during immigration proceedings, or upon receipt of the alien's final order of removal or grant of voluntary departure. When reviewing an alien's For fiscal year 2003, ICE was allocated $3 million for alternatives to detention to promote community-based programs for supervised release from detention. Subsequently, ICE created the first iteration of the ATD program in 2004 across eight cities; this iteration ran until 2009 and consisted of three separate programs operated by ICE and two companies under separate contracts.varying levels of alien supervision intended to help improve alien attendance rates at scheduled immigration court proceedings. By the end of 2009, the ATD program expanded to all of the 24 ICE ERO field offices and 5 of 186 suboffices. ICE initiated the second phase of the ATD program in 2009 with a 5-year contract with a private contractor and consolidated the program into a single contract with two components--Full-service and Technology- only. Behavioral Interventions, Inc. (BI), the contractor, operates the Full-service component out of stand-alone sites or out of ICE offices-- currently in 45 cities. To be eligible for the Full-service component, aliens must be at least 18 years old and generally must reside within about 75 miles of the contractor's office, depending on the field office. The contractor maintains in-person contact with the alien, which includes requiring periodic office visits and conducting unscheduled home visits, and monitoring the alien with either Global Positioning System (GPS) equipment or a telephonic reporting system. The contractor also provides case management services, which may include helping aliens understand the legal process, acquiring travel documents, and developing travel plans; reminds aliens to attend immigration proceedings; and handles initial alerts and violations for aliens. Last, the contractor documents aliens' attendance at court hearings and compliance with electronic monitoring and in-person supervision requirements. ICE officers are ultimately responsible for removing aliens from the United States and responding to program violations. ICE officers can change the level of supervision regardless of where an alien is in his or her immigration proceedings, per a contract modification. According to contractor officials, this is typically done in special circumstances. released into the community after a post-order custody review; the level of supervision determined for these aliens depends on whether their removal from the United States is significantly likely in the reasonably foreseeable future. ICE ERO field office officials manage the Technology-only component of the ATD program, which is available in 96 locations, utilizing the contractor's systems and equipment. The Technology-only component offers a lower level of supervision at a lower contract cost than the Full- service component and allows ICE to monitor aliens' compliance with the terms of their release using either telephonic reporting or GPS equipment ICE officers are responsible for providing provided by the contractor.case management, in addition to removing aliens from the country and responding to violations. In locations where Full-service and Technology- only are available, ICE officers can de-escalate aliens from the Full- service component to the Technology-only component (or vice versa) at their discretion. For both components, ICE officers determine when an alien's participation in the program should be terminated. ICE terminates aliens from the ATD program who are removed from the United States, depart voluntarily, are arrested by ICE for removal, or receive a benefit or relief from removal. ICE may also terminate an alien from the program when aliens are arrested by another law enforcement entity, abscond, or otherwise violate the conditions of the ATD program. Further, ICE may terminate an alien from the program if ICE officers determine the alien is no longer required to participate. The program requirements for the various levels of supervision for aliens in the Full-service and Technology- only components are shown in figure 1. The number of aliens participating in the ATD program increased from fiscal year 2011 to fiscal year 2013, in part because of increases in either enrollments or the average length of time aliens spent in one of the program's components; and ICE changed the focus of the program to align with changes in agency priorities. Pursuant to ICE guidance in 2011, ICE also recommended that ERO field offices transition aliens among the two ATD program components--or levels of supervision--to help facilitate cost-effective use of the ATD program; however, ICE has not monitored the extent to which ERO field offices have consistently implemented the guidance. ICE plans to increase the average daily participation level of both ATD program components with increased funding, but ATD program officials stated that several factors affect their ability to identify future capacity and expand the program. ICE increased the number of aliens participating in the ATD program over the last 3 fiscal years with some differences between the Full-service and Technology-only components, and this increase, in part, can be attributed to increased enrollments and the increased average length of time aliens spent in the Technology-only component of the program. Specifically, the total number of unique aliens who participated in the program increased from 32,065 in fiscal year 2011 to 40,864 in fiscal year 2013, with most aliens participating in the Full-service component, as shown in figure 2. These numbers include all aliens in the ATD program for each of these years--regardless of the year in which they were initially enrolled. The increase in the number of aliens in the program over this time occurred primarily in the Technology-only component. Specifically, the overall number of aliens participating in the ATD program grew by 27 percent; the number of aliens in the Technology-only component increased by 84 percent; and the number of aliens in the Full-service component increased by 23 percent. During this time, the composition of aliens in the ATD program also changed to align with agency priorities. Specifically, ICE shifted its overall enforcement priorities with a June 2010 policy memorandum that detailed the priorities for alien apprehension, detention, and removal as follows: (1) aliens who pose a danger to national security or a risk to public safety--including aliens convicted of crimes--and (2) recent illegal entrants and aliens who are fugitives or otherwise obstruct immigration controls.memo, ICE has resources to remove only approximately 400,000 aliens per year from the country, less than 4 percent of the estimated illegal alien population in the United States. According to ICE data, about 50 percent of aliens in the ATD program met an ICE enforcement priority in ICE established such priorities because, as stated in the fiscal year 2012, such as aliens convicted of crimes. As of April 2014, ICE reported that about 90 percent of aliens in the ATD program met ICE enforcement priorities and 51 percent were criminal aliens. One factor contributing to the increase in ATD program participation was that ICE generally increased the number of aliens it enrolled in the program each year. Specifically, the total number of unique enrollments in the ATD program increased by 26 percent--from 16,252 in fiscal year 2011 to 20,441 in fiscal year 2013--although there was a slight decline in fiscal year 2012 before increasing in fiscal year 2013. As shown in figure 3, the increase from fiscal years 2011 to 2013 was due to enrollments in the Full-service component--which increased by 60 percent during this time. Information on alien enrollments showed that the extent to which ICE booked aliens into detention facilities or released them into the community varied across fiscal years 2011 through fiscal year 2013, as shown in table 2, although these enrollments were not unique. For example, these enrollments include aliens who may have been enrolled in both detention and one or more release options in the same fiscal year and aliens who may have been booked multiple times into detention facilities or released multiple times under the same option in the same fiscal year. During this time, ICE also expanded use of the ATD program across ERO field office and suboffice locations. Specifically, ICE expanded use of the Full-service component from 38 ERO field offices and suboffices in fiscal year 2011 to 44 field offices in fiscal year 2013. During this time, ICE expanded the use of the Technology-only component from 70 to 76 ERO field office and suboffice locations that were actively using the component. Another factor contributing to the increase in the number of aliens in the Technology-only component of the ATD program was an increase in the length of time these aliens were in the program. While the average length of time aliens spent in the ATD program has remained fairly constant, differences existed across the program's components. The average length of time that aliens spent in the Full-service component decreased by about 20 percent from fiscal year 2011 to fiscal year 2013, while the average length of time increased nearly 80 percent for aliens in the Technology-only component during this same time, as shown in table 3. Specifically, aliens enrolled in the Full-service component in fiscal year 2013 spent about 10 months in the component, and those enrolled in Technology-only in fiscal year 2013 spent about 18 months in this component. of guidance that directs field office officials to move compliant aliens from the more expensive Full-service component to the Technology-only component after 90 days, which is discussed later in this report. ICE increased the number of aliens terminated from the ATD program since 2011 after guidance directed ERO field offices to more cost- effectively use the ATD program; however, ICE has not monitored the extent to which field offices have implemented the guidance. Under the original ATD contract, ICE officials stated that aliens enrolled in the ATD program generally stayed in the program from the time of enrollment through completion of the immigration process (i.e., completion of a final court hearing or, if ordered removed at the final hearing, removal from the United States). However, concerned about the time it has taken for aliens to complete immigration proceedings and the subsequent impact on ATD program costs, ICE recommended in 2011 that ERO field offices help facilitate cost-effective use of the ATD program. Pursuant to this guidance, ICE officials recommended that field officials reserve more intense and costly supervision options under the Full-service component for (1) aliens who are newly enrolled in ATD who do not have an order of removal or an immediate immigration court date and (2) aliens who have already received a final order of removal from the country--the latter of which is seen as a best practice, according to ICE. Specifically, pursuant to ICE's guidance, ICE recommended that ICE ERO field office officials assess whether aliens in the Full-service component demonstrated compliance with the conditions of their release, at least every 90 days, and if so, terminate them from the Full-service component after 90 days and de-escalate them to lower levels of supervision at a lower cost by moving them to the Technology-only component of the ATD program. Conversely, ICE recommended that ERO field office officials terminate aliens from the Technology-only component who received their final order of removal or grant of voluntary departure and escalate them to the Full- service component so that ICE, along with the contractor, could more easily monitor and ensure their departure. Subsequently, ICE increased the number of terminations from the two components of the ATD program. Specifically, as shown in figure 4, ICE increased the number of terminations from the Full-service component by 82 percent and the number of terminations from the Technology-only component by 299 percent from fiscal year 2011 to fiscal year 2013. ICE does not have complete data to identify the specific reasons field officials decided to terminate aliens from the program and therefore cannot determine whether ERO field offices are implementing the guidance for changing an alien's level of supervision between the ATD program components with the goal of cost-effectively implementing the ATD program. According to ICE officials, because the individual circumstances for each alien's case can vary, the decision to terminate or change an alien's level of supervision is made by the field officer, who decides whether to keep aliens in the Full-service component, de- escalate aliens from the Full-service component to the Technology-only component, or terminate aliens from the ATD program entirely by placing them in detention or releasing them under their own recognizance or another release option. While ICE collects some data on the reasons for termination decisions made by field officials, ICE does not collect data on the specific reason why field officials would determine an alien is no longer required to participate in the program. For example, our analysis of termination data for the Full-service component showed that 13 percent of terminations from the Full-service component were made after confirmation of an alien's removal and departure from the United States or after the alien had been granted relief and benefits to remain in the country, and another 15 percent of terminations were made for reasons including that aliens had violated the terms of the ATD program, had absconded, had been arrested, were pending departure, or other reasons. However, it was unclear why ERO field office officials made most terminations--71 percent--before the completion of the aliens' immigration proceedings or removal from the United States, because the reason provided was that a field official determined that an alien was no longer required to participate in the program. As a result, ICE officials stated that they did not know if field office officials made the majority of these terminations in response to its guidance recommending changing the levels of supervision that could result in more cost-effective operation of the program, or for other reasons.Full-service terminations in fiscal years 2011 through 2013. ICE intends to increase the average daily participation level of both ATD program components with increased funding, according to ICE's fiscal year 2015 budget justification; however, ATD program officials stated that several factors affect their ability to identify future capacity and expand the program. These officials said that one of these factors was limited information for determining how many aliens who were detained or otherwise released could have been considered suitable for the ATD program. For example, ATD program officials said that ERO field office officials who manage the ATD program have the ability to see the cases that are referred to the ATD program, but not the cases that resulted in the alien being detained in ICE custody or released under other options after the RCA process is completed. Nationwide, the RCA tool recommended that 91 percent of the 168,087 aliens processed by the RCA in fiscal year 2013 be detained in ICE custody--some of whom were subsequently eligible for bond--and that the remaining 9 percent (15,162 aliens) be released under ATD or other release options. However, ICE field officials managing the ATD program may not have seen the cases that resulted in detention or release and accordingly, are limited in their ability to estimate to what extent ATD program capacity could be expanded or changed in their location. To help increase the number of cases referred for ATD program consideration, ICE has issued guidance to its ERO field offices emphasizing that all nondetained criminal aliens should be given priority consideration for ATD program enrollment. Accordingly, this guidance directs the Criminal Alien Program and Fugitive Operations teams that generate case referrals in the field to coordinate with their local ATD component for enrollment consideration, including aliens released on a bond. ICE reported that field offices coupling a bond with ATD as a condition of release have shown an increased rate of success in alien removals from the United States. Other factors that ICE officials identified as affecting their ability to identify capacity and expand the ATD program are federal and state statutes and agency guidance. For example, ICE reported that from fiscal year 2011 to fiscal year 2013, 77 percent to 80 percent of aliens in detention facilities were required to be detained under federal law, and were not eligible for In addition, federal law requires that consideration in the ATD program. ICE maintain a minimum of 34,000 detention beds each day,part of its fiscal year 2015 budget justification, ICE reported that a decrease in the number of detention beds required to be maintained would result in an increase in the number of aliens who could be enrolled in the ATD program. In regard to state statute, one state, for example, passed a law whereby law enforcement officials have the discretion to and as cooperate with federal immigration officials by detaining an individual on the basis of an immigration hold after that individual becomes eligible for release from custody, only where certain criteria are met. In regard to agency guidance, ICE has instructed ERO field offices generally not to enroll aliens who are not likely removable, as well as aliens who were brought to the United States as children and may be eligible for the Deferred Action for Childhood Arrivals program. ICE officials stated that they did not plan to expand use of the ATD program to additional ERO field office locations until after the new contract was in place; however, officials reported that several factors could affect whether a field office could be or is willing to implement the program. For example, ICE reported in May 2014 that five field offices had requested to implement the Full-service component in their office but ICE did not approve the requests because the field offices did not have the necessary resources to implement the program. Such resources include officers' time to respond to instances of alien noncompliance with the terms of the program and review ATD cases and make supervision and termination decisions. ICE established two program performance measures to assess the ATD program's effectiveness in (1) ensuring alien compliance with court appearance requirements and (2) ensuring removals from the United States, as well as performance rates to evaluate the program's performance, but limitations in data collection hinder ICE's ability to assess overall program performance. Compliance with court appearances. ICE established a program performance measure in 2004 to monitor alien compliance with requirements to appear at their immigration hearings. Data collected by ICE's ATD contractor for the Full-service component of the ATD program from fiscal years 2011 through 2013 showed that over 99 percent of aliens with a scheduled court hearing appeared at their scheduled court hearings while participating in this component of the ATD program, with the appearance rate dropping slightly to over 95 percent of aliens with a scheduled final hearing appearing at their final removal hearing, as shown in figure 6. However, ICE does not collect similar performance data or report results on the court appearance rate for aliens enrolled in the Technology-only component of the ATD program--which constituted 39 percent of the overall ATD program in fiscal year 2013. According to ICE officials, the agency did not require the contractor to capture similar data for the Technology-only component because when the ATD program was created, it was envisioned that most aliens would be in the Full-service component for the duration of the immigration process, and data for aliens in the Full-service component are collected by the contractor.officials stated that they did not have sufficient resources to collect such data for the Technology-only component, given other priorities. ICE has taken steps to address the lack of data collection for the Technology-only component. Specifically, during the course of our review, ICE initiated a pilot program with its contractor in May 2014 to establish improved data collection efforts, as well as expanded supervision options. The pilot, which is being tested in eight cities, increases the role the ATD contractor has in collecting and tracking data on aliens in the Technology- only component. Specifically, the contractor tracks compliance with release requirements, including court appearance requirements, for aliens enrolled in the Technology-only component, as it already does for aliens enrolled in the Full-service component. Under the new contract, ICE plans to implement key aspects of the pilot across all program locations, including giving ICE officers the ability to require the contractor to track data on aliens in the Technology-only component--including data on court appearances--to the contractor, according to the request for proposal for the new ATD program contract. However, ICE officials will not be required to have the contractor collect these data under the contract. While ICE's plan to expand data collection for the Technology- only component under the new contract is a positive step that will help provide more information for assessing the performance of that program component, ICE may not have complete data for assessing program performance without requirements that ICE or contractor field staff collect these data. Standards for Internal Control in the Federal Government states that agencies should employ control activities to monitor their More specifically, agencies should develop mechanisms performance.to reliably collect data that can be used to compare and assess program outcomes related to entire program populations. Requiring ERO field offices to collect, or have the contractor collect, court appearance data on the Technology-only component of the ATD program would help ensure that ICE has complete data for assessing the performance of that program component as well as the overall ATD program, particularly in light of ICE's guidance issued in fiscal year 2011 directing field offices to transition more aliens to the Technology-only component. Removals from the United States. ICE established a new program performance measure in fiscal year 2011 to assess the number of aliens removed from the country who had participated in the ATD program. ICE officials said the decision to replace the court appearance goal with the removal goal was based on the fact that the court appearance rate had consistently surpassed 99 percent and the program needed to establish another goal to demonstrate improvement over time. For this program performance measure, a removal attributed to the ATD program counts if the alien (1) was enrolled in ATD for at least 1 day, and (2) was removed or had departed voluntarily from the United States in the same fiscal year, regardless of whether the alien was enrolled in ATD at the time the alien left the country. As shown in table 5, ATD met its goal for removals in fiscal years 2012 and 2013. In fiscal year 2012, their goal was to have a 3 percent increase from their fiscal year 2011 total, and in fiscal year 2013, a 3 percent increase from their 2012 removal goal. Performance rates. ICE also uses four performance rates to evaluate how well the ATD program is operating while aliens are participating in the program. These four performance rates (success rate, failure rate, absconder rate, and removal rate)--though not measures of how well aliens in the ATD program comply with court appearances or removal orders--assess the status of an alien's case at the time the alien is terminated from the ATD program. These performance rates are based on outcomes defined as favorable, neutral, and unfavorable. Favorable outcomes reflect cases where the final outcome of an alien's immigration proceeding resulted in either a verified departure from the United States or a grant of relief and benefits to remain in the country while the alien was an active participant in the ATD program. Neutral outcomes do not reflect final outcomes of immigration proceedings, but rather include aliens who are terminated from the ATD program while awaiting departure, after being arrested, or because ICE determined the alien no longer needed to participate in the program--which could be because the case was administratively closed, the alien moved to a jurisdiction that did not have the ATD program, or ICE determined to lower or raise the alien's level of supervision by moving him or her to a detention facility or another release option. Unfavorable outcomes include aliens who were terminated from the ATD program after absconding or violating program requirements. Specifically, the success rate reflects the percentage of aliens whose cases resulted in either favorable outcomes or neutral outcomes. This rate essentially measures the ATD program's effectiveness in being able to track and monitor an alien while in the program, according to ICE officials. The failure rate is the converse of the success rate, measuring the percentage of unfavorable outcomes, including noncompliance with program terms or absconding from the program. The absconder rate measures the percentage of aliens whom ICE terminated from the program as a result of aliens absconding from the program. The removal rate approximates the percentage of aliens in ATD who will be removed or depart after the completion of their immigration proceedings. ICE calculates these rates for both its Full-service and Technology-only components. Using these performance rates, ICE reported that for the Full-service component over the last 3 years, ICE, along with its contractor, was able to track and monitor 90 percent or more of aliens until they were terminated from the Full-service component of the ATD program, with variance in the rate of aliens who had absconded from the program or who were projected to be removed from the country. During that same time, ICE reported improved ability to track and monitor aliens in the Technology-only component from nearly 80 percent in fiscal year 2011 to nearly 90 percent in fiscal year 2013. See table 6 for Full-service and Technology-only performance rates over these last 3 years. However, ATD program performance measures and rates provide limited information about the aliens who are terminated from the ATD program prior to receiving the final disposition of their immigration proceedings or were removed or voluntarily departed from the country. Specifically, with respect to program performance measures, ICE counts an alien who was terminated from the program and was subsequently removed from the United States toward his or her removal performance measure as long as the alien was in the program during the same fiscal year he or she was removed from the country. However, aliens who were terminated from the program do not count toward court appearance rates if they subsequently do not appear for court. Further, performance rates, for example, did not reflect whether the 87 percent of the aliens whom ICE terminated from the ATD program in fiscal year 2013 were removed, voluntarily departed from the United States, or were granted relief. ICE officials reported that it would be challenging to determine an alien's compliance with the terms of his or her release after termination from the ATD program given insufficient resources and the size of the nondetained alien population. In accordance with ICE guidance, staff resources are instead directed toward apprehending and removing aliens from the United States who are considered enforcement and removal priorities. The ATD program is intended to help ICE cost-effectively manage the aliens for whom ICE, or an immigration judge, has determined that detention is neither mandated nor appropriate, yet may need a higher level of supervision when released into the community until they are removed from the United States or receive approval to remain in the country. ICE has altered its implementation of the ATD program to address the cost associated with keeping aliens in the program in light of lengthy immigration proceedings. However, by analyzing data that ICE plans to collect on supervision levels and specific reasons aliens are terminated from the program, ICE could be better positioned to monitor ERO field offices' implementation of guidance intended to ensure cost- effective management of the ATD program. Further, collecting reliable data on both components of the program would help ensure that ICE has more complete data for assessing the relative performance of these program components as well as the overall ATD program. To strengthen ICE's management of the ATD program and ensure that it has complete and reliable data to assess and make necessary resource and management decisions, we recommend that the Secretary of Homeland Security direct the Deputy Assistant Secretary of ICE to take the following two actions: analyze data on changes in supervision levels and program terminations to monitor ERO field offices' implementation of ICE guidance intended to ensure cost-effective management of the program, and require that field offices ensure that ICE or contractor staff collect and report data on alien compliance with court appearance requirements for all participants in the Technology-only component of the ATD program. We provided a draft of this report to the Departments of Homeland Security and Justice for their review and comment--both provided technical comments, which we incorporated as appropriate. We provided selected excerpts of this draft report to the ATD contractor to obtain its views and verify the accuracy of the information it provided, and the contractor had no technical comments. DHS also provided written comments, which are summarized below and reproduced in full in appendix I. DHS concurred with the two recommendations in the report and described actions under way or planned to address them. With regard to the first recommendation, that ICE analyze data on changes in supervision levels and program terminations to monitor field offices' implementation of guidance intended to ensure cost-effective management of the program, DHS concurred. DHS stated that ICE recognized that, because of contractual limitations, information on termination codes was not amenable to detailed reporting and analysis, which limited the program's ability to adapt and improve. To address this, ICE established a requirement under its new ATD contract that information on termination codes must be collected and reported and that this would allow for more in-depth analyses that may yield avenues for further program refinements. DHS provided an estimated completion date of December 31, 2014. These planned actions, if fully implemented to include monitoring of field offices' cost-effective management of the program, should address the intent of the recommendation. With regard to the second recommendation, to require that field offices ensure that ICE or contractor staff collect and report data on alien compliance with court appearance requirements for all participants in the Technology-only component of the ATD program, DHS concurred. DHS stated that ICE was aware that this recommended enhancement would greatly improve the program and that ICE began working in early fiscal year 2014 to implement the enhancement while developing the requirements for the new ATD contract. Under the new contract, ICE will have the opportunity to select a variety of case management services, including EOIR case tracking for any participant in the ATD program. DHS provided an estimated completion date of December 31, 2014. These planned actions, if fully implemented to include oversight on the extent that field offices are ensuring that ICE or contractor staff collect and report data on alien compliance with court appearance rates, should address the intent of the recommendation. We are sending copies to the Secretary of Homeland Security, the Attorney General of the United States, appropriate congressional committees, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8777 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made significant contributions to this report are listed in appendix II. In addition to the contact named above, Lacinda Ayers (Assistant Director), Tracey Cross, Landis Lindsey, David Alexander, Pedro Almoguera, Frances Cook, Jon Najmi, Jessica Orr, and Eric Warren made significant contributions to the work.

Aliens awaiting removal proceedings or found to be removable from the United States are detained in ICE custody or released into the community under one or more options, such as release on bond and under supervision of the ATD program. Within the Department of Homeland Security (DHS), ICE is responsible for overseeing aliens in detention and those released into the community. In 2004 ICE implemented the ATD program to be a cost-effective alternative to detaining aliens. ICE administers the program with contractor assistance using case management and electronic monitoring to ensure aliens comply with release conditions--including appearing at immigration court hearings and leaving the United States if they receive a final order of removal. The Joint Explanatory Statement to the 2014 Consolidated Appropriations Act mandated that GAO evaluate ICE's implementation of the ATD program. This report addresses (1) trends in ATD program participation from fiscal years 2011 through 2013 and the extent to which ICE provides oversight to help ensure cost-effective program implementation, and (2) the extent that ICE measured the performance of the ATD program for fiscal years 2011 through 2013. GAO analyzed ICE and ATD program data, reviewed ICE documentation, and interviewed ICE and ATD contractor officials. From fiscal year 2011 through fiscal year 2013, the number of aliens who participated in the U.S. Immigration and Customs Enforcement's (ICE) Alternatives to Detention (ATD) program increased from 32,065 to 40,864, in part because of increases in either enrollments or the average length of time aliens spent in one of the program's components. For example, during this time period, the number of aliens enrolled in the Full-service component, which is run by a contractor that maintains in-person contact with the alien and monitors the alien with either Global Positioning System (GPS) equipment or a telephonic reporting system, increased by 60 percent. In addition, the average length of time aliens spent in the Technology-only program component, which offers a lower level of supervision at a lower contract cost than the Full-service program component and involves ICE monitoring of aliens using either telephonic reporting or GPS equipment provided by a contractor, increased by 80 percent--from about 10 months to about 18 months. In 2011, ICE recommended practices in guidance to its Enforcement and Removal Operations (ERO) field offices to better ensure cost-effective implementation of the program. For example, ICE recommended that field officers move aliens who have demonstrated compliance under the Full-service component to the less costly Technology-only component. GAO's work showed differences in ERO field offices' implementation of the guidance. However, ICE headquarters officials said that because of limitations in how they collect and maintain program data, they do not know the extent to which field officers have consistently implemented this guidance. ICE plans to institute new data collection requirements to address these limitations and use these data for a variety of purposes; however, ICE has not considered how to analyze these data to monitor the extent to which ERO field offices are implementing the guidance. Analyzing these data, once collected, could help ICE better monitor the extent to which ERO field offices are implementing the practices in its guidance intended to ensure more cost-effective program operation. ICE has established ATD program performance measures to, among other things, assess alien compliance with requirements to appear in court and leave the country after receiving a final order of removal, but it has not collected complete data for assessing progress against these measures. Specifically, ICE's ATD contractor collected data for the Full-service component, and from fiscal years 2011 through 2013, these data showed that over 99 percent of aliens with a scheduled court hearing appeared in court as required. However, ICE did not collect similar performance data to report results for aliens enrolled in the Technology-only component--which composed 39 percent of the overall ATD program participants in fiscal year 2013--because when the program was first created, ICE officials stated that they envisioned that most aliens would be in the Full-service component with data tracked by the contractor. ICE plans to expand the contractor's role in data collection but does not plan to require collection of performance data for aliens enrolled in the Technology-only component; rather ICE plans to leave it to the discretion of field officials as to whether to require the contractor to collect these data. Without requirements to collect these data, ICE may not have complete information to fully assess program performance. GAO recommends that ICE analyze data to monitor ERO field offices' implementation of guidance and require the collection of data on the Technology-only component. DHS concurred with the recommendations.

SSS is an independent agency within the executive branch of the federal government. Its missions are to (1) provide untrained manpower to the Department of Defense (DOD) for military service in the event of a national emergency declared by the Congress or the President, (2) administer a program of alternative service for conscientious objectors in the event of a draft, and (3) maintain the capability to register and forward for induction health care personnel if so directed in a future crisis. SSS' authorizing legislation, the Military Selective Service Act, requires that all males between the ages of 18 and 26 register with SSS under procedures established by a presidential proclamation and other rules and regulations. Men are required to register within 30 days of reaching age 18. SSS operations have fluctuated since the end of the draft in 1973. In 1975, President Ford terminated registration under the act by revoking several presidential proclamations. In 1976, SSS state and local offices were closed, placing the agency in a deep standby. In 1980, following the Soviet invasion of Afghanistan, President Carter issued a proclamation to establish the current registration procedures. Under these procedures, SSS has been registering young men between the ages of 18 and 26, but not classifying them for a potential draft. According to SSS officials, the September 30, 1996, version of the registration database contained about 13 million names of men between the ages of 18 and 26 and represented about 92 percent of the eligible universe of males subject to registration. Men are most vulnerable to being drafted during the calendar year they reach age 20 and become increasingly less vulnerable each year through age 25. SSS officials estimate that registration compliance for men considered "draft eligible," those aged 20 through 25, is 95 percent. A detailed description of registration methods appears in appendix I. Currently, SSS operates as a backup for the recruiting efforts of the volunteer armed forces in case an emergency compels a reintroduction of the draft. To carry out its operations, SSS is authorized a staff of 197 civilians (166 on board as of June 1, 1997); 15 active military personnel (2 additional positions are funded by the Air Force); 745 part-time authorized reservists (518 are funded); 56 part-time state directors (one in each state, territory, the District of Columbia, and New York City); and 10,635 uncompensated civilian volunteer members of local, review, and various appeal boards. The state directors would manage state headquarters and oversee their states' Area and Alternative Service Offices and boards for SSS in the event of a mobilization. The local and district appeal boards would review claims that registrants file for draft deferments, postponements, and exemptions in a mobilization. Under the Alternative Service Program, civilian review boards review claims for job reassignment based on conscientious objector beliefs. SSS' 1997 budget is $22,930,000, which is divided as follows: $7,810,000 for operational readiness (includes all boards activities), $7,360,000 for registration (includes public awareness activities), and $7,760,000 for administration. (All cost figures provided in this report are in 1997 dollars.) Although DOD does not currently foresee a military crisis of a magnitude that would require immediate reinstatement of the draft, it continues to support registration for all men between the ages of 18 and 26. The registration process furnishes a ready pool of individuals that could be drafted when needed to meet DOD's emergency manpower requirements. Until 1994, DOD required the first inductees to be available 13 days after mobilization notification and 100,000 to be available 30 days after notice. That year, DOD modified its requirements, prescribing accession of the first inductees at 6 months plus 13 days (that is, on day 193) and 100,000 inductees at 6 months plus 30 days (that is, on day 210). For a draft of doctors, nurses, and other medical personnel, the first inductees are presently slated to report on day 222. SSS officials stated that they can provide personnel to DOD in the event of an unforeseen emergency assuming adequate funding and staff. DOD based its time line modifications on the expectation that active and reserve forces would be sufficient to respond to perceived threats, thereby mitigating the need for an immediate infusion of inductees. We did not validate the current DOD requirements for inductees. However, according to DOD, the current requirements maintain an adequate margin of safety and provide time for expanding military training capabilities. The portions of the $22.9 million 1997 budget that could be most affected by the alternatives total approximately $15.2 million: $7.4 million for the registration program and $7.8 million for operational readiness. Registration program activities include handling and entering information into the database on new registrants, producing and distributing publicity material about the requirement to register, running subprograms on registration compliance and address updates, deactivating registrants who no longer remain eligible because of age, and verifying the registration of individuals who may be applying for federal or state employment or other benefits. Operational readiness activities include organizational planning; National Guard and reserve training and compensation; tests and exercises; and various boards' operations, including training, automatic data processing support, and other logistical types of support. Suspending the current registration requirement, with or without maintaining the boards, would generate cost savings primarily through reduced personnel levels. However, savings derived from implementing either option would be partially offset by the cost of downsizing the agency to accomplish planning and maintenance missions only and by severance costs associated with reducing personnel levels. SSS officials estimate one-time severance costs (including severance pay, unemployment insurance, lump sum leave, and buyouts) of $1.6 million for the suspended registration alternative and of $2.8 million for the deep standby alternative. Also, under current federal law and a number of state laws, certain benefits may be denied to individuals who fail to register for a draft. SSS officials estimate that the current cost to verify registration to ensure compliance with such provisions totals about $1.6 million annually. Therefore, the amount of savings under either alternative would depend upon whether the agency is required to continue its verification function (for individuals who were subject to registration prior to suspension) or whether the applicability of such provisions is suspended. According to SSS officials, under the suspended registration alternative, 74 civilian, 4 active duty military, and 241 part-time reserve positions may be eliminated. SSS officials estimated first-year cost savings of $4.1 million and subsequent annual cost savings of $5.7 million under this alternative. SSS would maintain the various boards, their training and operating programs, and the ability to update automated data processing capabilities as technology advances. The agency also informed us that it would continue readiness planning and training plus conduct or participate in mobilization field exercises to test and fine-tune its role in national security strategies. SSS officials told us that under the deep standby alternative, 120 civilian, 7 active duty military, and 440 part-time reserve positions may be eliminated. Also, 10,395 local and appeal board members and 240 civilian review board members (all unpaid volunteers) would be dismissed. In addition, the 56 state directors would move to an unpaid status. SSS officials estimated first-year cost savings of $8.5 million and subsequent annual cost savings of $11.3 million under this alternative. SSS would be placed at a level at which it could accomplish planning and maintenance missions only, including the ability to update automated data processing capabilities as technology advances. Under either the suspended registration or the deep standby alternative, reactivation of a draft registration process would be initiated upon receipt of authorization. The President can reinstate registration requirements by issuing a proclamation, but the Military Selective Service Act does not currently allow induction into the armed forces. The Congress would have to pass legislation giving the President induction authority. Two major concerns relating to the implementation of either of the alternatives are whether SSS could meet DOD's requirements, given the time needed to make the agency fully operational, and how much reconstitution would cost. SSS officials estimate that recovering from suspended registration or a deep standby and delivering the first draftees to the induction centers would take more time than DOD's current 193-day requirement. They estimate it would take about 24 more days to deliver the first draftees after recovering from the suspended registration alternative. The officials expect that the recovery costs would total about $17.2 million. SSS officials also estimate that revitalizing the agency from a deep standby posture and delivering the first draftees would take about 181 more days than DOD's current requirement and would cost about $22.8 million. These costs cover rehiring personnel; obtaining data processing capability; and acquiring equipment, supplies, and other resources needed to conduct a mass registration and return the agency to its present operating capability. These costs also cover acquisition of necessary additional office and data processing space. SSS officials informed us that if the agency reinstated registration after having operated under either the suspended registration or deep standby option, it would need to conduct a time-limited registration of the 19- and 20-year-old groups and then conduct a continuous registration of all males in the remaining age groups (those between the ages of 21 and 26). The agency's experience in conducting a 2-week registration of the 19- and 20-year-old age groups was very successful during the peacetime reinstatement of registration in 1980. However, the agency could not project with a high degree of confidence that it would similarly succeed when conducting a time-limited registration during wartime or a national crisis. SSS officials stated that unless the mass registration program can achieve high levels of compliance (at least 90 percent of the targeted population), the fairness and equity of the ensuing draft could be called into question. Additionally, officials said the "lottery," which would be used to determine the order of call in a draft, could be delayed until high compliance is achieved to preclude men with birthdates that draw low numbers from willfully refusing to register. In 1980, SSS demonstrated that it could achieve a high percentage of compliance during a time-limited registration. At that time, SSS conducted two time-limited registrations, after recovering from a deep standby posture. During these registrations, 87 percent of the young men born in 1960 and 1961 (19- and 20-year-olds) registered during a 2-week period in July 1980, and 77 percent of the young men born in 1962 (19-year olds) registered during a 1-week registration period in January 1981. SSS officials indicated that these mass registrations occurred after 6 months of publicity and public debate and with no threat of an impending draft. In the view of SSS officials, a return to registration from either alternative described in this report is likely to be in connection with a war or crisis, and they believe early compliance rates cannot be predicted in a crisis environment. SSS officials stated that the agency's main problem in gearing up in 1980 was in reinstating and activating the local, district appeal, and national boards in preparation for a possible draft. They said the process would be time-consuming because more than 10,000 volunteers forming 2,000 boards would need to be identified, appointed, and trained. SSS officials also stressed that to help ensure fairness, the composition of the boards should racially and ethnically reflect the demographics of the young men in the communities they would serve. Given the agency's experience in recovering from a deep standby in 1980, SSS officials added extra time to their current estimates of the time required to make the agency fully operational. SSS officials believed that the variables that could affect the timeliness, fairness, and equity of a future draft made it prudent to build additional time into their estimates to conduct a draft, should registration be suspended or the agency placed in deep standby. SSS reviewed a draft of this report and stated that the report did an excellent job of analyzing the dollar requirements of peacetime registration and estimating the structure and funding changes that may result if national security policy was changed to abandon the current registration requirement. SSS also commented that our report did not address some aspects of continuing peacetime registration that it characterized as equally important, but less tangible. Those aspects included viewing peacetime registration as (1) low-cost insurance against unforeseen threats, (2) a sign to potential adversaries of U.S. resolve, and (3) a link between the all volunteer military force and society at large. We did not review these implications of continuing peacetime registration as part of our audit scope and clarified the report to reflect this fact. SSS also provided technical comments, which we incorporated as appropriate. SSS comments are presented in appendix II. In performing our review, we interviewed and obtained documents from SSS officials in Financial Management; Planning, Analysis, and Evaluation; Operations; Public and Congressional Affairs; and Information Management. We identified SSS' current mission and operating parameters, focusing on the draft registration system. We made preliminary inquiries regarding four alternatives to SSS' present operations, that is, two passive registration alternatives, a suspended active registration alternative, and a deep standby alternative. Since passive registration alternatives would raise constitutional issues and possibly encourage lawsuits regarding fairness and equity of such systems during mobilization, we did not address these alternatives. For the two remaining alternatives, we obtained from SSS estimates of costs that could be saved upon implementation of either alternative. Since the cost savings would surface through reductions in personnel, we obtained from SSS the effect of implementing either alternative on its staffing levels. In addition, we obtained from SSS cost estimates associated with revitalizing registration or with moving the agency from a deep standby posture to full operational status. SSS also gave us time estimates for the revitalization of both the registration process and the board structure and its assessment of the alternatives' effects on meeting DOD's manpower and mobilization time frame requirements. We did not validate the cost and time estimates but made judgments on their reasonableness by discussing the methods and assumptions SSS used to develop the estimates and by matching baseline information to agency backup documents. We did not review the policy implications of changing or continuing the peacetime registration program. We conducted our review between December 1996 and July 1997 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Chairmen and Ranking Minority Members of the House Committee on Government Reform and Oversight, Senate Committee on Governmental Affairs, House and Senate Committees on Appropriations, House Committee on National Security, Senate Committee on Armed Services, and House and Senate Committees on the Budget; and the Director of the Selective Service System; the Secretary of Defense; and the Director, Office of Management and Budget. We will also make copies of the report available to others, on request. Please contact me on (202) 512-5140 if you have any questions concerning this report. Major contributors to this report are listed in appendix III. Men between the ages of 18 and 26 can register with SSS in six ways: (1) fill out an SSS form at U.S. Postal Service facilities throughout the nation and at U.S. embassies or consulates overseas; (2) complete and return a registration reminder mail-back postcard or a compliance postcard required as a result of having been identified by SSS from various databases; (3) join the military or Job Corps; (4) complete a registration form provided by volunteer registrars; (5) register when applying for student financial assistance; and (6) initiate registration by computer using the Internet. Men may register at any one of the more than 34,000 post offices in the United States and U.S. territories by completing SSS Form 1. During fiscal year 1996, about 386,000 individuals used this procedure to register. Registrants should receive a registration acknowledgement and a Selective Service number within 90 days. If the registrant does not receive acknowledgement within this time frame, he is required to contact SSS. SSS sends reminder postcards to young men about to turn 18, based on driver licenses lists received from states' departments of motor vehicles and similar lists from other sources. In fiscal year 1996, over 2 million young men were sent reminder mail-back registration postcards, and 792,435 men returned the registration portion. SSS also does list matching to identify eligible males who have not registered as required, using data from each state's departments of motor vehicles, Department of Defense high school recruiting lists, the U.S. Immigration and Naturalization Service's files of individuals seeking citizenship or legal residency status, voter registration files, and the Department of Education. Once identified as possible nonregistrants, the individuals are sent a reminder, including a compliance postcard. About 343,300 men registered after receiving at least one communication requiring compliance. The names of those who did not register or respond are referred to the Department of Justice for possible prosecution. The third registration method is the automatic registration of active duty and reserve military personnel as well as males in the Job Corps who have not reached age 26 at the time of their enlistment. Approximately 55,400 military personnel and about 16,700 Job Corps members were automatically registered through this method in fiscal year 1996. Beginning in fiscal year 1998, the U.S. Immigration and Naturalization Service plans to include on its forms language for automatic registration of all eligible male aliens applying for citizenship or adjustment of status. SSS also has more than 10,000 volunteer registrars in public and private schools who advise eligible males of their responsibility to register. The volunteers provide registration forms and collect and forward the completed forms to SSS. Additionally, SSS has about 4,300 volunteer registrars in the National Association of Farmworkers program and in various state agencies and state military departments. Approximately 60,500 men were registered by volunteer registrars during fiscal year 1996. The electronic registration procedure can be used by students applying for student financial assistance and by individuals who initiate registration through the Internet. In 1982, the Congress amended the Military Selective Service Act to provide that any student who is required to register with SSS but has failed to do so is ineligible for student assistance under title IV of the Higher Education Act of 1965. Since then, the Department of Education and SSS have implemented a telecommunications datalink that is used for electronic registration and registration verification. A student is automatically registered by marking the box "register me" on the Application for Federal Student Aid. During fiscal year 1996, about 177,600 men registered using this method. Beginning in March 1997, men who have access to the Internet can initiate the registration process by filling in name, date of birth, address, and social security number on an on-line registration form. This information is downloaded to SSS, which sends the registrant a card requesting that the information be verified. When the verification card is returned and SSS sends the registration acknowledgement to the registrant, registration is completed. All new registrants receive an acknowledgement card from SSS. The card serves as proof of registration and gives each registrant a unique Selective Service number. Mark C. Speight 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 organization and costs of the Selective Service System (SSS) draft registration program and estimates of the comparative costs and organizational structure changes of two selected alternatives: (1) a suspended registration alternative, under which most of SSS' infrastructure would remain intact, including a significant portion of its staff and all of its local, district appeal, civilian review, and national boards; and (2) a deep standby alternative, which would suspend registration, reduce a substantial portion of the workforce, and disband the local, district appeal, civilian review, and national boards. GAO noted that: (1) most of SSS' potential cost reductions, under either a suspended registration or a deep standby alternative, would result from reductions in personnel; (2) SSS estimates that the suspended registration alternative would reduce authorized and assigned civilian, active military, and part-time military reserve personnel by about 33 percent; (3) these reductions would produce first-year cost savings of $4.1 million and subsequent annual cost savings of $5.7 million; (4) SSS estimates that the deep standby alternative would reduce authorized civilian, active military, and part-time reserve personnel by about 60 percent; (5) the latter alternative reflects a dismissal of thousands of trained, unpaid local, review, and appeal board volunteers; (6) under the deep standby alternative, the part-time state directors, who according to SSS officials are paid for an average of 14 days of work per year, would not be paid; (7) altogether, these reductions would produce first-year cost savings of $8.5 million and subsequent annual cost savings of $11.3 million; (8) under both alternatives, mass registrations would be needed if a mobilization were authorized; (9) SSS' plans show that the agency could currently meet the Department of Defense's (DOD) requirement to provide the first draftees at 193 days; (10) in contrast, SSS officials believe that the agency would be unable to meet DOD's current requirements for unpaid manpower under either alternative; (11) the reason cited is the time needed to reinstate an active registration system (for either alternative), to reconstitute and train the boards, and to rebuild their supporting infrastructure (for the deep standby alternative); (12) SSS officials estimate that in reinstating registration after suspension, they could meet DOD's requirement for the first draftees in about 217 days; (13) they also estimate that in reinstating a registration system, reconstituting and training the boards, and rebuilding the supporting infrastructure after a deep standby posture, they could meet DOD's requirement for the first draftees in about 374 days; (14) officials told GAO that these estimates represent their best assessment of the time required to return to full operations; and (15) SSS officials also estimated that the cost to reinstate a suspended registration could total about $17.2 million and the cost to revitalize the agency from a deep standby posture could total about $22.8 million.

DI and SSI provide cash benefits to people with long-term disabilities. While the definition of disability and the process for determining disability are the same for both programs, the programs were initially designed to serve different populations. The DI program, enacted in 1954, provides monthly cash benefits to disabled workers--and their dependents or survivors--whose employment history qualifies them for disability insurance. These benefits are financed through payroll taxes paid by workers and their employers and by the self-employed. In fiscal year 2001, more than 6 million individuals received more than $59 billion in DI benefits. SSI, on the other hand, was enacted in 1972 as an income assistance program for aged, blind, or disabled individuals whose income and resources fall below a certain threshold. SSI payments are financed from general tax revenues, and SSI beneficiaries are usually poorer than DI beneficiaries. In 2001, more than 6 million individuals received almost $28 billion in SSI benefits. The process to obtain SSA disability benefits is complex and fragmented; multiple organizations are involved in determining whether a claimant is eligible for benefits. As shown in figure 1, the current process consists of an initial decision and up to three levels of administrative appeals if the claimant is dissatisfied with SSA's decision. Each level of appeal involves multistep procedures for evidence collection, review, and decision- making. Generally, a claimant applies for disability benefits at one of SSA's 1,300 field offices across the country, where a claims representative determines whether the claimant meets financial and other program eligibility criteria. If the claimant meets these eligibility criteria, the claims representative forwards the claim to the state disability determination service (DDS).DDS staff then obtain and review evidence about the claimant's impairment to determine whether the claimant is disabled. Once the claimant is notified of the medical decision, the claim is returned to the field office for payment processing or file retention. This completes the initial claims process. Claimants who are initially denied benefits can ask to have the DDS reconsider its initial denial. If the decision at this reconsideration level remains unfavorable, the claimant can request a hearing before a federal administrative law judge (ALJ) at an SSA hearings office, and, if still dissatisfied, the claimant can request a review by SSA's Appeals Council. Upon exhausting these administrative remedies, the individual may file a complaint in federal district court. Given its complexity, the disability claims process can be confusing, frustrating, and lengthy for claimants. Many individuals who appeal SSA's initial decision will wait a year or longer for a final decision on their benefit claims. In fact, the commissioner recently testified that claimants can wait as long as 1,153 days from initial claim through a decision from the Appeals Council. Moreover, the claims process can also result in inconsistent assessments of whether claimants are disabled; specifically, the DDS may deny a claim that is later allowed upon appeal. For example, in fiscal year 2000, about 40 percent of claimants denied at the initial level filed an appeal and about two-thirds were awarded benefits. This inconsistency calls into question the fairness, integrity and cost of SSA's disability decisions. Program rules, such as claimants' ability to submit additional evidence and to allege new impairments upon appeal, as well as the worsening of some claimants' conditions over time can explain only some but not all of the overturned cases. Other overturned cases may be due to inaccurate decisions by the DDSs or ALJs or to other unexplained factors. In response to these problems, SSA first announced an ambitious plan to redesign the disability claims process in 1994, after a period of rapid growth in the number of people applying for disability benefits. This plan represented the agency's first effort to significantly revise its procedures for deciding disability claims since the DI program began in the 1950's. The overall purpose of the redesign was to ensure that decisions are made quickly, ensure that the disability claims process is efficient, award legitimate claims as early in the process as possible, ensure that the process is user friendly for claimants and those who provide employees with a satisfying work environment. The agency's initial plan entailed a massive effort to redesign the way it made disability decisions. SSA had high expectations for its redesign effort. Among other things, SSA planned to develop a streamlined decision-making and appeals process, more consistent guidance and training for decision makers at all levels of the process, and an improved process for reviewing the quality of eligibility decisions. In our reviews of SSA's efforts after 2 and 4 years, we found that the agency had accomplished little. In some cases, the plans were too large and too complex to keep on track. In addition, the results of many of the initiatives that were tested fell far short of expectations. Moreover, the agency was not able to garner consistent stakeholder support and cooperation for its proposed changes. In 1999, we recommended that SSA focus attention and resources on those initiatives that offer the greatest potential for achieving the most critical redesign objectives, such as quality assurance, computer support systems, and initiatives that improve consistency in decision-making. In addition, because implementing process changes can be even more difficult than testing them, we recommended that SSA develop a comprehensive and meaningful set of performance measures that help the agency assess and monitor the results of changes in the claims process on a timely basis. We have also pointed out the need for effective leadership and sustained management attention to maintain the momentum needed to effect change in such a large and complex system. SSA's five most recent initiatives were designed to improve claims processing at all levels of the service delivery system. These redesign initiatives continue to experience only limited success. A brief summary of the status, results and problems experienced in implementing each of the five initiatives follows. The Disability Claim Manager initiative, which began in November 1997 and ended in June 2001, was designed to make the claims process more user friendly and efficient by eliminating steps resulting from numerous employees handling discrete parts of the claim. It did so by having one person--the disability claim manager--serve as the primary point of contact for claimants until initial decisions were made on their claims.The managers assumed responsibilities normally divided between SSA's field office claims representatives and state DDS disability examiners. After an initial training phase, SSA tested the concept in 36 locations in 15 states from November 1999 through November 2000. While the test resulted in several benefits, such as improved customer and employee satisfaction and quicker claims processing, the increased costs of the initiative and other concerns convinced SSA not to implement the initiative. The Prototype changed the way state DDSs process initial claims, with the goal of ensuring that legitimate claims are awarded as early in the process as possible. This initiative makes substantial changes to the way the DDS processes initial claims. The Prototype requires disability examiners to more thoroughly document and explain the basis for their decisions and it gives them greater decisional authority for certain claims. The Prototype also eliminates the DDS reconsideration step. It has been operating in 10 states since October 1999 with mixed results. Interim results show that the DDSs operating under the Prototype are awarding a higher percentage of claims at the initial decision level without compromising accuracy, and that claims are reaching hearing offices faster because the Prototype eliminates DDS reconsideration as the first level of appeal. However, interim results also indicate that more denied claimants would appeal to administrative law judges (ALJ) at hearings offices, which would increase both administrative and program costs (benefit payments) and lengthen the wait for final agency decisions for many claimants. As a result, SSA decided that the Prototype would not continue in its current form. In April, the commissioner announced her "short-term" decisions to revise certain features of the Prototype in order to reduce processing time while it continues to develop longer-term improvements. It remains to be seen whether these revisions will retain the positive results from the Prototype while also controlling administrative and program costs. The Hearings Process Improvement initiative is an effort to overhaul operations at hearings offices in order to reduce the time it takes to issue decisions on appealed claims. This was to be accomplished by increasing the level of analysis and screening done on a case before it is scheduled for a hearing with an ALJ; by reorganizing hearing office staff into small "processing groups" intended to enhance accountability and control in handling each claim; and by launching automated functions that would facilitate case monitoring. The initiative was implemented in phases without a test beginning in January 2000 and has been operating in all 138 hearings offices since November 2000. The initiative has not achieved its goals. In fact, decisions on appealed claims are taking longer to make, fewer decisions are being made, and the backlog of pending claims is growing and approaching crisis levels. The initiative's failure can be attributed primarily to SSA's decision to implement large-scale changes too quickly without resolving known problems. For example, problems with process delays, poorly timed and insufficient staff training, and the absence of the planned automated functions all surfaced during the first phase of implementation and were not resolved before the last two phases were implemented. Instead, the pace of implementation was accelerated when the decision was made to implement the second and third phases at the same time. Additional factors, such as a freeze on hiring ALJs and the ALJs' mixed support for the initiative, may also have contributed to the initiative's failure to achieve its intended results. SSA has recently made some decisions to implement changes that can be made relatively quickly in order to help reduce backlogs and to streamline the hearings process, and they are preparing to negotiate some of these changes with union officials before they can be implemented. These changes include creating a law clerk position and allowing ALJs to issue decisions from the bench immediately after a hearing and including them in the early screening of cases for on-the-record decisions. They also include decisions to enhance the use of technology in the hearings process, as well as other refinements. The Appeals Council Process Improvement initiative combined temporary staff support with permanent case processing changes in an effort to process cases faster and to reduce the backlog of pending cases. The initiative was implemented in fiscal year 2000 with somewhat positive results. The initiative has slightly reduced both case processing time and the backlog of pending cases, but the results fall significantly short of the initiative's goals. The temporary addition of outside staff to help process cases did not fulfill expectations, and automation problems and changes in policy which made cases with certain characteristics more difficult to resolve hindered the initiative's success. However, SSA officials believe that recent management actions to resolve these problems should enhance future progress. Improving or revamping its quality assurance system has been an agency goal since 1994, yet it has made very little progress in this area, in part because of disagreement among stakeholders on how to accomplish this difficult objective. In March 2001, a contractor issued a report assessing SSA's existing quality assurance practices and recommended a significant overhaul to encompass a more comprehensive view of quality management. We agreed with this assessment and in our recent report to this subcommittee recommended that SSA develop an action plan for implementing a more comprehensive and sophisticated quality assurance program. Since then, the commissioner has signaled the high priority she attaches to this effort by appointing to her staff a senior manager for quality who reports directly to her. The senior manager, in place since mid-April, is responsible for developing a proposal to establish a quality- oriented approach to all SSA business processes. The manager is currently assembling a team to carry out this challenging undertaking. SSA's slow progress in achieving technological improvements has contributed, at least in part, to SSA's lack of progress in achieving results from its redesign initiatives. As originally envisioned, SSA's plan to redesign its disability determination process was heavily dependent upon these improvements. The agency spent a number of years designing and developing a new computer software application to automate the disability claims process. However, SSA decided to discontinue the initiative in July 1999, after about 7 years, citing software performance problems and delays in developing the software. In August 2000, SSA issued a new management plan for the development of the agency's electronic disability system. SSA expects this effort to move the agency toward a totally paperless disability claims process. The strategy consists of several key components, including (1) an electronic claims intake process for the field offices, (2) enhanced state DDS claims processing systems, and (3) technology to support the Office of Hearing and Appeals' business processes. The components are to be linked to one another through the use of an electronic folder that is being designed to transmit data from one processing location to another and to serve as a data repository, storing documents that are keyed in, scanned, or faxed. SSA began piloting certain components of its electronic disability system in one state in May 2000 and has expanded this pilot test to one more state since then. According to agency officials, SSA has taken various steps to increase the functionality of the system; however, the agency still has a number of remaining issues to address. For example, SSA's system must comply with privacy and data protection standards required under the Health Information Portability and Accountability Act, and the agency will need to effectively integrate its existing legacy information systems with new technologies, including interactive Web-based applications. SSA is optimistic that it will achieve a paperless disability claims process. The agency has taken several actions to ensure that its efforts support the agency's mission. For example, to better ensure that its business processes drive its information technology strategy, SSA has transferred management of the electronic disability strategy from the Office of Systems to the Office of Disability and Income Security Programs. In addition, SSA hired a contractor to independently evaluate the electronic disability strategy and recommend options for ensuring that the effort addresses all of the business and technical issues required to meet the agency's mission. More recently, the commissioner announced plans to accelerate implementation of the electronic folder. In spite of the significant resources SSA has dedicated to improving the disability claims process since 1994, the overall results have been disappointing. We recognize that implementing sweeping changes such as those envisioned by these initiatives can be difficult to accomplish successfully, given the complexity of the decision-making process, the agency's fragmented service delivery structure, and the challenge of overcoming an organization's natural resistance to change. But the factors that led SSA to attempt the redesign--increasing disability workloads in the face of resource constraints--continue to exist today and will likely worsen when SSA experiences a surge in applications as more baby boomers reach their disability-prone years. Today, SSA management continues to face crucial decisions on its initiatives. We agree that SSA should not implement the Disability Claim Manager at this time, given its high costs and the other practical barriers to implementation at this time. We also agree that the Appeals Council Process Improvement initiative should continue, but with increased management focus and commitment to achieve the initiative's performance goals. Deciding the future course of action on each of the remaining three initiatives presents a challenge to SSA. For example, SSA continues to face decisions on how to proceed with the Prototype initiative. Although SSA has recently decided to revise some features of the Prototype in the near term, it also is considering long-term improvements. As such, SSA continues to face the challenge of ensuring that the revisions it makes retain the Prototype's most positive elements while also reducing its impact on costs. We are most concerned about the failure of the Hearings Process Improvement initiative to achieve its goals. Hearing office backlogs are fast approaching the crisis levels of the mid-1990's. We have recommended that the new commissioner act quickly to implement short-term strategies to reduce the backlog and develop a long-term strategy for a more permanent solution to the backlog and efficiency problems at the Office of Hearings and Appeals. The new commissioner responded by announcing her decisions on short-term actions intended to reduce the backlogs, and the agency is preparing to negotiate with union officials on some of these planned changes. It is too early to tell if these decisions will have their intended effect, and the challenge to identify and implement a long-term strategy for a more permanent solution remains. It is especially crucial that the Office of Hearings and Appeals make significant headway in reducing its backlog quickly, as it faces in the next several months a potentially significant increase in Medicare appeals due to recent legislative changes in that program. In addition to the changes the agency is currently considering, it may be time for the agency to step back and reassess the nature and scope of its basic approach. SSA has focused significant energy and resources over the past 7 years on changing the steps and procedures of the process and adjusting the duties of its decision makers, yet this approach has not been effective to date. A new analysis of the fundamental issues impeding progress may help SSA identify areas for future action. Experts, such as members of the Social Security Advisory Board, have raised concerns about certain systemic problems that can undermine the overall effectiveness of SSA's claims process, which in turn can also undermine the effectiveness of SSA's redesign efforts. The Board found that SSA's fragmented disability administrative structure, created nearly 50 years ago, is ill-equipped to handle today's workload. Among other problems, it identified the lack of clarity in SSA's relationship with the states and an outdated hearing process fraught with tension and poor communication. As the new commissioner charts the agency's future course, she may need to consider measures to address these systemic problems as well. Regardless of the choices the agency makes about which particular reform initiatives to pursue, SSA's experience over the past 7 years offers some important lessons. For example, sustained management oversight is critical, particularly in such a large agency and with such a complex process. We have found that perhaps the single most important element of successful management improvement initiatives is the demonstrated commitment of top leaders to change. In addition, some initiatives have not enjoyed stakeholder support or have contributed to poor morale in certain offices, both of which may undermine the chances for success. While it is probably not possible for the agency to fully please all of its stakeholders, it will be important for the agency to involve stakeholders in planning for change, where appropriate, and to communicate openly and often the need for change and the rationale for agency decisions. Moreover, because SSA has experienced problems implementing its process changes, the agency will need to continue to closely monitor the results of its decisions and watch for early signs of problems. An improved quality assurance process and a more comprehensive set of performance goals and measures can help the agency monitor its progress and hold different entities accountable for their part in implementing change and meeting agency goals. Thus, we are concerned about SSA's lack of progress in revamping its quality assurance system. Without such as system, it is difficult for SSA to ensure the integrity of its disability claims process. Finally, because SSA has had mixed success in implementing information technology initiatives in the past, it is vital that the agency look back at its past problems and take the necessary steps to make sure its electronic disability system provides the needed supports to the disability claims process. It is imperative that the agency effectively identify, track, and manage the costs, benefits, schedule, and risks associated with the system's full development and implementation. Moreover, SSA must ensure that it has the right mix of skills and capabilities to support this initiative and that desired end results are achieved. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions that you or other members of the subcommittee may have. For further information regarding this testimony, please contact Robert E. Robertson, Director, or Kay E. Brown, Assistant Director, Education, Workforce, and Income Security at (202) 512-7215. Ellen Habenicht and Angela Miles made key contributions to this testimony on the status of the five initiatives, and Valerie Melvin was the key contributor to the section on information technology.

This testimony discusses Social Security Administration (SSA) improvements in the claims process for its two disability programs, Disability Insurance (DI) and Supplemental Security Income (SSI). Managing its disability caseloads with fair, consistent, and timely eligibility decisions in the face of resource constraints has become one of SSA's most pressing management challenges. SSA has spent more than $39 million over the past 7 years to test and implement initiatives designed to improve the timeliness, accuracy, and consistency of its disability decisions and to make the process more efficient and understandable for claimants. These have included efforts to improve the initial claims process as well as handling appeals of denied claims. The results to date have been disappointing. SSA's two tests to improve the initial claims process produced some benefits; however, both initiatives as tested would have significantly raised costs, and one would have lengthened the wait for final decisions for many claimants. As a result, SSA is considering additional changes to one of these initiatives and has shelved the other. One initiative to change the process for handling appealed claims in SSA's hearing offices has resulted in even slower case processing and larger backlogs of pending claims. A second initiative has reduced the processing times for a separate group of appealed claims, though far less than expected. Moreover, a cross-cutting initiative to update the SSA's quality assurance program--a goal the SSA has held since 1994--is still in the planning stage. Finally, SSA's plans to improve its disability claims process relied upon hoped for technological improvements. However, SSA failed to design and develop a software application to automate the disability claims process after a 7-year effort.

PACE integrates Medicare and Medicaid financing to provide comprehensive delivery of those programs' services to individuals age 55 and older who have been certified as eligible for nursing home care by a state under Medicaid. PACE providers are, or are a separate part of, government entities or are not-for-profit private or public entities that provide PACE services to eligible individuals. PACE services include, but are not limited to, all Medicare services and all Medicaid services as specified in the state plan. Adult day care, medical treatment, home health and personal care, prescription drugs, social services, restorative therapies, respite care, and hospital and nursing home care when necessary are all required services under PACE. For most individuals, the comprehensive services offered by PACE allow them to live in their homes. CMS requires that each PACE provider operate an adult day center for its beneficiaries. WPP is a state-sponsored program that integrates Medicare and Medicaid financing to provide comprehensive delivery of those programs' services to individuals age 55 and older and individuals age 18 and older with physical disabilities who have been certified by Wisconsin as eligible for nursing home care. To deliver WPP services, the state contracts with organizations to provide eligible individuals with primary, acute, and long- term care services; prescription drugs; rehabilitation services and physical therapy; adult day care; nursing home care; durable medical equipment and supplies; and other services such as meal delivery and transportation to medical appointments. The comprehensive services provided by WPP are intended to allow individuals to live in the setting of their choice. While similar to PACE, WPP does not require that providers operate an adult day center. ALTCS, the long-term care division of the Arizona Medicaid program, serves individuals who are age 65 and over, blind, or disabled and who need ongoing services at a nursing home level of care. Arizona provides all its Medicaid services through a Medicaid waiver, which allows some flexibility in the design and administration of the program. In Arizona, ALTCS contracts with providers to deliver acute medical care services, institutional care, hospice, behavioral health services, home health, homemaker services, personal care, respite care, transportation, adult day care, and home delivered meals. Many ALTCS participants are able to live in their own homes or in assisted living facility and receive in-home services. Palliative care programs are operated by a variety of health care entities, including hospitals, health care systems, and hospices. These programs generally do not receive federal or state funding and may rely on private grants or charitable support. Palliative care programs are designed to improve the quality of a seriously ill individual's life and support the individual and his or her family during and after treatment. Services provided by palliative care programs vary and may include pain and symptom management, assistance with planning for additional services, and psychosocial and spiritual support and can be provided in conjunction with curative care. The IOM and AHRQ studies identified the following key components in providing care to individuals nearing the end of life: care management; supportive services for individuals; pain and symptom management; family and caregiver support; communication among the individuals, families, and program staff; and assistance with advance care planning. Care management, also referred to as case management, interdisciplinary care, or care coordination, is the coordination and facilitation of service delivery and can be provided by a team or a single manager. Supportive services include personal care services, home delivered meals, transportation to medical appointments, and other services that assist individuals who reside in noninstitutional settings. Pain and symptom management is pharmacological and nonpharmacological therapies, such as massage therapy, to treat pain and other symptoms of an individual who is seriously ill. Family and caregiver support are services that provide assistance to those caring for an individual nearing the end of life in his or her home and can include respite care and bereavement counseling. Communication among individuals, families, and program staff includes discussions regarding end-of-life issues with individuals and their family members and the use of various tools to foster communication among program staff. Advance care planning is the process by which individuals make decisions about their future care and may include the completion of written documents, such as advance directives. Specifically, IOM reported that for individuals nearing the end of life, care systems should ensure that the following are provided: interdisciplinary care management; home care or personal care services, which we refer to as supportive services; pain and symptom management; supportive care for caregivers and family through services such as respite care or housekeeping services; and communication. The IOM report also identified advance care planning as a key component of end-of-life care. The IOM report recommended that people nearing the end of life should receive supportive services managed by those involved in their care and that health care organizations should facilitate advance care planning. In addition, the IOM report recommended that health care professionals improve care for individuals nearing the end of life by providing pain and symptom management. The AHRQ report focused on identifying outcomes that can indicate the quality of the end-of-life experience and identifying the patient, family, and health care system factors that are associated with better or worse outcomes at the end of life. The AHRQ report identified continuity of health care, such as that provided through care management; supportive services, such as home care services; pain and symptom management; support for families and caregivers; and effective communication among program staff, which could include improved medical record documentation, as core components of end-of-life care. The programs we identified in four states that incorporate key components of end-of-life care described in the IOM and AHRQ reports are PACE, WPP, ALTCS, and palliative care programs. These programs use care management to ensure continuity of care and supportive services, such as personal care services, to assist individuals nearing the end of life. These programs also integrate pain and symptom management into their services; provide family and caregiver support; foster communication among the individuals, families, and program staff; and initiate or encourage advance care planning. Care management is used by all of the programs we identified to ensure continuity of care for individuals nearing the end of life. Most of these programs provide care management through interdisciplinary care teams. The interdisciplinary care teams of PACE providers include a primary care physician, nurse, social worker, physical therapist, occupational therapist, recreational therapist or activity coordinator, dietitian, PACE adult day center manager, health care aides, and transportation providers. PACE beneficiaries attend a PACE adult day center where they receive services from the interdisciplinary care team. The WPP providers use an interdisciplinary care team approach similar to PACE, although the teams are generally smaller. Representatives of two WPP providers we interviewed stated that care management reduces hospitalizations. Representatives of one of these providers stated that care management ensures that individuals admitted to a hospital are discharged to an appropriate setting to avoid unnecessary readmission. Representatives of the second WPP provider stated that care management improves the medical care of individuals by providing physicians with an accurate picture of individuals' health status and assisting individuals with accessing physicians in a timely manner. Representatives of both PACE and WPP providers stated that the interdisciplinary care teams meet to exchange information, ensure that individuals' needs are being met, and address changes in the health status of individuals. The four hospital-based palliative care programs we identified use interdisciplinary care teams to coordinate services. These programs' teams include medical directors, social workers, chaplains, nurses, psychologists, and case managers. Two of the hospice-based palliative care programs developed partnerships with local hospitals and use interdisciplinary care teams to assist individuals. Two other hospice-based palliative care programs use interdisciplinary care teams of health care professionals to coordinate medical, nursing, social work, and spiritual services. Staff from one of these programs told us that because case managers facilitate communication among different medical providers and ensure that tests performed have a clear purpose, unnecessary or duplicate tests are avoided. One hospice-based palliative care program's interdisciplinary care team consists of a nurse, social worker, and palliative care physician who coordinate care and monitor the quality of care provided. The two palliative care programs operated by health care systems use interdisciplinary care teams composed of nurses, social workers, chaplains, and pharmacists. The care team of one of these palliative care programs makes treatment recommendations and enhances coordination among medical staff. The other of these palliative care programs provides social and psychological support and assists individuals with transitioning between the hospital and their homes. One hospice-based palliative care program uses a single case manager to assist individuals with coordinating services. In the ALTCS program, each Medicaid beneficiary is assigned a case manager. The case manager aids the beneficiary in obtaining necessary services, coordinates service delivery, and consults with other providers as needed. ALTCS case managers refer beneficiaries to other social service agencies when additional services are needed. ALTCS officials noted that a unique feature of the program is that it provides institutional, supportive, and all other medical and long-term care services under one agency and under the supervision of a single case manager for each beneficiary. An official also noted that the ALTCS program fosters continuity of care and care coordination at the end of life through the case manager and the integrated delivery of services from a single agency. The programs we identified provide a variety of supportive services to assist individuals near the end of life. The PACE providers we interviewed are required to deliver supportive services such as personal care services, adult day care, social work services, and meal delivery. Representatives of one PACE provider stated that one strength of PACE is the integration of all Medicare- and Medicaid-covered services, which includes the supportive services, such as personal care services, covered by Medicaid. Representatives of a PACE provider reported that when individuals become too frail to come to the day center, a designated team visits individuals in their homes to provide personal care, nursing, and physician services. Representatives of this provider also described how they assist individuals residing in residential care facilities and adult foster homes who are nearing the end of life by providing additional staff support and visits from the primary care physician. The supportive services offered by WPP providers include social services, personal care services, adult day care, environmental adaptations, meal delivery, and transportation to medical appointments. Representatives of a WPP provider stated that they also involve local community resources such as religious institutions and friends to ensure that individuals receive the assistance they need in their homes and communities. Representatives of another WPP provider stated that the most common supportive services they provide are home care, transportation, and day center activities. Representatives of this provider noted that as individuals get closer to the end of life, additional home care support can be provided. Supportive services provided by the ALTCS program include home health services, homemaker services, personal care, transportation, adult day care, and home delivered meals. ALTCS officials stated that the type of supportive services provided can vary significantly depending on a beneficiary's level of functioning and the level of support provided by the family. A CMS official noted that two-thirds of ALTCS beneficiaries receive supportive services in their homes or communities, which the official cited as being above the national average. The palliative care programs we identified either provide supportive services directly to individuals nearing the end of life or assist individuals with obtaining such services. One hospice-based palliative care program provides individuals telephone calls and visits and assists individuals with applying for other benefits. Another hospice-based palliative care program provides supportive care that includes nursing and social work services and spiritual counseling. A palliative care program that is operated by a health care system provides individuals with 24-hour nursing support and pastoral services. A palliative care program operated by a hospital helps individuals establish supportive services, such as personal care services, at the time of discharge from the hospital. All the programs we identified provide pain and symptom management or assist with the coordination of such services. Representatives of the WPP and PACE providers we interviewed incorporate pain and symptom management into the care they provide. For example, representatives of a provider of both PACE and WPP described how individuals they serve are able to receive pain and symptom management services whenever they feel such services are necessary. One PACE provider we interviewed offers pain and symptom management to individuals nearing the end of life, and a palliative care team visits individuals in the home when they are unable to attend the PACE day center. Other providers of PACE and WPP obtain assistance from local hospices to help provide pain and symptom management services, such as overnight nursing, spiritual care, or pain management. ALTCS provides pain and symptom management to individuals when such services are needed. Representatives of the 12 palliative care providers we interviewed provide or assist with coordinating pain and symptom management for individuals in either the home or hospital setting. Programs we identified offer family and caregiver support through a variety of services. PACE and WPP providers offer family and caregiver support through personal care services, which can help alleviate demands on a caregiver, and respite services provided in the home. In addition, the adult day centers operated by the PACE providers we visited offer respite opportunities for the caregivers of the individuals who attend the day care programs. One WPP provider also operates a day center to provide caregivers with respite. The ALTCS program provides support for caregivers through personal care, respite, and adult day care services. Most of the palliative care programs we identified also provide support to family members and caregivers. They provide this support in a variety of ways. Two hospice-based palliative care programs use social workers to assist families and caregivers with end-of-life decision making and accessing community agencies and resources. Another hospice-based palliative care program uses an interdisciplinary care team to assist families in making end-of-life decisions. One hospital-based palliative care program, two hospice-based palliative care programs, and one palliative care program operated by a health care system provide bereavement support to family members. One health care system's palliative care program provides 24-hour nursing support for individuals in their homes, which assists caregivers, and another palliative care program operated by a hospice assists family members with coordinating in-home support services. Two hospital-based palliative care programs assist families with coordinating care upon an individual's discharge from the hospital. Officials from one hospice-based palliative care program and a palliative care program operated by a hospital both stated that they provide education about end-of-life care to family members. The programs we identified communicate frequently with individuals and their families regarding end-of-life issues. Representatives of the PACE, WPP, and palliative care providers and ALTCS officials we interviewed stated that they work with individuals and their families to develop a plan of care that reflects each individual's choices. For example, a representative of a PACE provider described how the interdisciplinary care team fosters communication with the individual about what type of care he or she wants to receive at the end of life, including pain and symptom management. Representatives of a provider of both PACE and WPP described how the interdisciplinary care team establishes goals with the individual and includes a physician and social worker to facilitate discussions involving end-of-life issues. A hospital-based palliative care program's interdisciplinary care team holds meetings with family members to discuss an individual's health status, prognosis, and end-of-life wishes, and another palliative care program has discharge coordinators follow up with individuals for as long as services are required. An ALTCS official stated that case managers discuss with beneficiaries what their needs are and what care they want to receive. Representatives of palliative care, PACE, and WPP providers informed us that they develop close, trusting relationships with individuals through their frequent communication to facilitate discussions about end-of-life care. Representatives of PACE, WPP, and palliative care providers we interviewed stated that communicating with individuals and their families about end-of-life issues earlier, rather than later, in the individual's illness makes it easier for both the individual and family to manage the decisions they face when the individual is closer to death. Representatives of a WPP provider stated that they have continuous conversations with individuals and families about plans for the end of life, and representatives of a PACE provider noted that they have these discussions early because such discussions become more challenging when someone is very near the end of life. Representatives of another WPP provider stated that they have monthly conversations with individuals about which life-saving measures they would like implemented as their condition worsens. A PACE provider's staff visits an individual nearing the end of life every other day to ensure that the individual's and family's needs are being met. Representatives of a palliative care provider described how they repeatedly discuss with individuals near the end of life the availability of other services such as hospice. Programs we identified use a variety of tools to foster communication among the members of the care team concerning individuals' needs as they near the end of life. Staff members of a provider of both PACE and WPP use a checklist to identify changes in an individual's condition. The checklist is completed at an individual's periodic review or whenever there is a change in health status and helps inform the care team about the need to discuss end-of-life planning with the individual. Representatives of providers described the benefits of electronic medical records in promoting communication among members of the care team. Representatives of a PACE provider and a palliative care program stated that creating an electronic medical record accessible to all members of the care team facilitates communication among the team regarding the condition of each beneficiary and increases the quality of care. A palliative care provider distributed laptop computers and handheld wireless devices to all clinical staff. Using these devices, clinical staff can both access and input information when they visit an individual's home, which keeps all staff who interact with the individual informed. Another palliative care provider shares clinicians' notes and correspondence electronically, which enhances communication. Representatives of a hospice-based palliative care provider in Oregon stated that the physicians they work with are more comfortable discussing end-of-life issues with their patients since the 1997 enactment in Oregon of the Death with Dignity Act, which focused attention in the state on end-of- life care and the options available to individuals. Representatives of a palliative care program operated by a health care system we interviewed stated that passage of this act helped create an environment in Oregon where end-of-life issues are discussed more openly. The WPP, PACE, and palliative care providers initiate or encourage advance care planning to assist individuals with planning for the end of life, making decisions about future medical care, and sharing information with family members. Representatives of all the PACE providers stated that they assist individuals with advance care planning tasks, such as completing advance directives and identifying health care proxies, that is, those who can make health care decisions on behalf of the individuals. Representatives of a provider of PACE and WPP stated that each individual begins the advance care planning process as soon as he or she is admitted to the program. This provider's staff members work with individuals to identify health care proxies and persuade individuals to communicate their decisions to family members. Representatives of a WPP provider stated that the staff have monthly conversations with individuals about their end-of-life choices, such as do-not-resuscitate orders. Representatives of another WPP provider stated that the care team encourages individuals and their families to plan for the end of life, and representatives of a provider of both PACE and WPP discuss with individuals all the medical services and interventions they wish to receive. Officials of palliative care programs stated that they offer assistance to individuals enrolled in their programs in completing advance directives and informing their families of any decisions they have made about their end-of-life care. One palliative care program operated by a hospice assists individuals with completing advance directives and informing family members of their decisions for the end of life. Palliative care programs operated by hospitals assist individuals with advance care planning tasks such as completing advance directives and making medical decisions. Representatives of a PACE provider in Oregon stated that they use Physician Orders for Life-Sustaining Treatment (POLST) forms to assist all individuals in their program with advance care planning. The POLST form is a physician's order that communicates which medical interventions should be performed in the event of a health emergency. Similar to other advance directives, the POLST form allows individuals to document their choices regarding the use of life-sustaining procedures; a representative in Oregon stated that, unlike other advance directives, POLST forms are physician orders, which are more effective at communicating an individual's preferences to providers, particularly when the individual is transferred across health care settings. A representative of an Oregon PACE provider stated that the POLST form makes an individual's wishes clear and, because it is in the form of a physician's order, legally protects medical personnel, including emergency medical technicians, when they carry out an individual's documented choices during an emergency. Representatives of providers we interviewed described challenges they encounter to delivering some of the key components of end-of-life care. They described difficulties delivering supportive services and family and caregiver support to rural residents because of travel distances, fewer community-based service options, and an inability to hire adequate numbers of staff in rural areas. Representatives of providers also stated that they believe physician training and practices can inhibit the provision of pain and symptom management and advance care planning to individuals nearing the end of life. Representatives of providers we interviewed described difficulties delivering supportive services and family and caregiver support to rural residents because of travel distances, lack of community-based services, and insufficient numbers of nursing and personal care staff in rural areas. Representatives of providers we interviewed stated that significant distances between residents in rural areas make it difficult to provide family and caregiver support, such as respite care, and supportive services, such as personal care services. The length of time it takes for personal care staff to travel between individuals in rural areas decreases the number of services the providers can deliver in a day. In addition, representatives of providers told us that increases in fuel costs have affected how many services they can provide. Representatives of providers we interviewed also described how unpaved roads and inclement weather can increase travel time or prevent travel entirely when serving rural residents. Representatives of one provider stated that the challenge of providing transportation in rural areas is one of the barriers that has prevented the provider's expansion into rural areas of the state. Representatives of providers we interviewed also cited the limited availability of certain services in rural areas as a challenge to serving individuals nearing the end of life who reside in those areas. Representatives of providers described difficulties in delivering supplies and medications to rural residents. For example, representatives of a hospice-based palliative care provider noted that the pharmacy service it contracts with to provide home delivery of medications cannot provide daily delivery in very rural areas and inclement weather may further delay deliveries. To address the problem, this provider has contracted with local rural pharmacies to provide emergency medication; however, in a two- county area, only one pharmacy is open 24 hours a day, making it difficult for individuals to access medications in an emergency. Representatives of another hospice-based palliative care provider and a WPP provider stated that they are sometimes unable to coordinate supportive services, such as meal delivery and personal care services, for individuals in rural areas because they are unable to locate providers of these services in these regions. In addition, representatives of providers noted that a lack of transit services makes it difficult to provide individuals living in rural areas with transportation to medical appointments or day centers. Representatives of providers stated that an insufficient number of nursing staff and personal care workers in rural areas makes it difficult to provide end-of-life care to those residents. For example, representatives of a provider of both PACE and WPP noted that it is often difficult to hire staff to work in more remote geographic areas, and they cited this as a barrier to expanding the provider's services into additional rural areas of the state. In addition, representatives of one hospice-based palliative care provider that serves a remote rural area stated that they have been unable to maintain adequate numbers of health care workers to provide services to its patients because such workers are increasingly choosing to relocate to urban areas. Representatives of another hospice-based palliative care provider in a rural region also stated that they have difficulty finding qualified staff to fill these positions. State officials we interviewed said that PACE is not a feasible option in rural areas because of the requirement that the providers operate an adult day center. Representatives of a provider that was formerly a PACE provider stated that it was difficult to remain financially solvent as a PACE provider in a rural community because there were not enough eligible individuals to support an adult day center model. This provider ended its participation in PACE because the community it served did not have enough eligible individuals to justify the expense of a day center. Also, in rural areas, the distance to the PACE adult day center from the residences of individuals enrolled in the program can be a challenge for the PACE program's transportation services. Representatives of providers we interviewed described how they believe physician training and practices may present challenges to providing pain and symptom management and advance care planning to individuals nearing the end of life. Representatives of providers stated that physicians often do not receive adequate training in pain and symptom management. A physician we interviewed who is the director of a hospital-based palliative care program stated that he believes because physicians lack training to recognize the need for pain and symptom management, individuals nearing the end of life often have difficulty accessing such services. Representatives of other palliative care providers we interviewed agreed that lack of physician training in pain and symptom management is a challenge to the provision of pain and symptom management. Representatives of a hospital-based palliative care provider believe that many medical schools do not provide sufficient training for physicians in pain and symptom management. Representatives of a palliative care provider operated by a health care system stated that they believe most physicians are not trained to provide pain and symptom management to individuals nearing the end of life. A recent article in the New England Journal of Medicine (NEJM) has also noted that physicians receive little or no training in the use of medications for pain and symptom management. Representatives of providers we interviewed also cited physician practices as challenges to individuals receiving pain and symptom management services as they near the end of life. A representative of a hospital-based palliative care provider stated that some physicians are reluctant to refer individuals to the program so that they can receive pain and symptom management because these physicians do not understand or recognize the need for such care. Representatives of providers we interviewed also described how, in their experience, physicians may fail to address pain in a timely manner. A representative of a hospital-based palliative care provider stated that patients' severe pain may go untreated while physicians, intent on finding the cause of the pain, order extensive diagnostic testing. Representatives of a palliative care program operated by a health care system stated that some physicians perform aggressive medical procedures on individuals nearing the end of life. These representatives stated that they believe some physicians view providing pain and symptom management as "giving up" on a patient. Representatives of providers we interviewed described how physicians often do not engage in advance care planning with individuals nearing the end of life. For example, representatives of a hospice-based palliative care provider stated that they believe physicians do not spend enough time talking with individuals about end-of-life care options such as hospice. As was recently reported in NEJM, physicians receive little training in the compassionate discussion of end-of-life issues. Furthermore, ALTCS officials stated that, in their experience, physicians often do not inform individuals about advance directives. Representatives of a hospice-based palliative care provider stated that physicians sometimes provide individuals with incorrect information about care options for the end of life. Representatives of a PACE provider told us that some physicians resist ending curative care to allow individuals nearing the end of life to receive only supportive care services, and the article published in NEJM reported that some physicians regard the death of patient as a professional failure. In commenting on a draft of this report, CMS stated that the report is a useful description of a diverse set of provider types in very different settings, each of which provides useful services to persons coming to the end of life. CMS noted that the report is especially helpful as a time approaches when more Americans will be living with serious and eventually fatal chronic conditions. CMS also stated that it was useful that our report included individuals living with serious chronic conditions who might live for some years. However, CMS suggested that we avoid using the term terminal illness when referring to such individuals. We note that, in our draft report, we used this term only in the context of discussing the Medicare hospice benefit, which is, by definition, a benefit for individuals with terminal conditions. CMS also stated that we should mention other important components of end-of-life care including, for example, having the appropriate medical diagnosis and having all possible opportunities for a meaningful life. However, these issues are beyond the scope of our report. CMS also provided technical comments, which we incorporated where appropriate. CMS's comments are reprinted in appendix I. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from its date. At that time, we will send copies of this report to the Administrator of CMS and to 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 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, key contributors to this report were Nancy A. Edwards, Assistant Director; Beth Cameron Feldpush; Krister Friday; John Larsen; and Andrea E. Richardson.

Approximately 28 percent of all Medicare spending in 1999 was used to provide care for beneficiaries in the last year of their lives. The Medicare hospice benefit is specifically designed for end-of-life care but is an elected benefit for individuals who have a terminal diagnosis with a prognosis of 6 months or less if the disease runs its normal course. GAO was asked to identify examples of programs that provide key components of end-of-life care. Specifically, GAO (1) identified key components of end-of-life care, (2) identified and described how certain programs incorporate key components of end-of-life care, and (3) described the challenges program providers have identified to delivering the key components of end-of-life care. To identify the key components of end-of-life care, GAO relied on studies by the Institute of Medicine (IOM) and the Agency for Healthcare Research and Quality (AHRQ). To identify and describe programs that implement these key components and describe the challenges providers of these programs face, GAO conducted site visits to four states, Arizona, Florida, Oregon, and Wisconsin, that, in addition to other criteria, demonstrated a high use of end-of-life services. We interviewed officials of federal, state, and private programs in these four states that provide care to individuals nearing the end of life. The IOM and AHRQ studies identified the following key components in providing care to individuals nearing the end of life: care management to coordinate and facilitate service delivery; supportive services, such as transportation, provided to individuals residing in noninstitutional settings; pain and symptom management; family and caregiver support such as respite care; communication among the individuals, families, and program staff; and assistance with advance care planning to aid individuals with making decisions about their future care. The programs GAO identified in the four states incorporate key components of end-of-life care when delivering services to individuals nearing the end of life. These programs use care management, either through a case manager or an interdisciplinary care team of health care professionals, to ensure continuity of care and the delivery of appropriate services. The programs also provide supportive services, such as personal care services or meal delivery, to assist individuals in their homes. Pain and symptom management is provided by these programs to treat pain and other symptoms of an individual who is seriously ill. These programs provide family and caregiver support through services that alleviate demands on the caregiver and by providing bereavement support for family members. The programs foster communication with individuals and family members to plan care that reflects each individual's choices. In addition, these programs use tools such as electronic medical records to facilitate communication among staff members. The programs GAO identified initiate and encourage advance care planning for the end of life and assist individuals with making decisions about future medical care, such as completing advance directives and identifying health care proxies, that is, those who can make health care decisions on behalf of the individual. Providers of the programs GAO identified described challenges they encounter to delivering some of the key components of end-of-life care. Providers described difficulties delivering supportive services and family and caregiver supports to rural residents because of travel distances, fewer community-based service options, and an inability to hire adequate numbers of staff in rural areas. Providers also stated that, in their experience, physician training and practices can inhibit the provision of pain and symptom management and advance care planning to individuals nearing the end of life. A recent article published in a medical journal GAO reviewed identified similar issues with physician training and practices. The Centers for Medicare & Medicaid Services (CMS), the agency that administers Medicare and Medicaid, commented that the report is a useful description of diverse provider types that deliver services to persons coming to the end of life. CMS noted that the report is especially helpful as a time approaches when more Americans will be living with serious and eventually fatal chronic conditions.

Visa applicants, including science students and scholars, generally begin the visa process by scheduling an interview at a consular post. On the day of the appointment, a consular officer reviews the application, interviews the applicant, and checks the applicant's name in the Consular Lookout and Support System (CLASS). The consular officer then decides if the applicant will need a Security Advisory Opinion, which provides an opinion or clearance from Washington on whether to issue a visa to the applicant and may include a Visas Mantis check. In deciding if a Visas Mantis check is needed, the consular officer determines whether the applicant's background or proposed activity in the United States could involve exposure to technologies on the Technology Alert List, which lists science and technology-related fields where, if knowledge gained from work in these fields were used against the United States, it could be potentially harmful. After a consular officer decides that a Visas Mantis security check is necessary for an applicant, several steps are taken to resolve the process. The consular officer prepares a Visas Mantis cable, which contains information on the applicant, and then transmits the information to Washington for an interagency security check. The State Department's Bureau of Nonproliferation, the FBI, and other agencies review the information contained in the cable and then provide a response on the applicant to the Consular Affairs section of State headquarters. The Bureau of Nonproliferation and other agencies are given 15 working days to respond to State with any objections. However, State has agreed to wait for a response from the FBI before proceeding with each Visas Mantis case. Once State headquarters receives all the information pertaining to an applicant, Consular Affairs summarizes the information and transmits a response to the consular post. A consular official at post reviews the response and decides, based on the information from Washington, whether to issue the visa to the applicant. State cannot readily identify the total length of time it takes for a science student or scholar to obtain a visa. However, in discussions with State officials, we learned that a key factor that contributes to the length of time is whether an applicant must undergo a Visas Mantis. To obtain visa data on science students and scholars, and to determine how long the visa process takes, we reviewed all Visas Mantis cables received from posts between April and June 2003, which totaled approximately 5,000. Of these cases, 2,888 pertained to science students and scholars, of which approximately 58 percent were sent from China, about 20 percent from Russia, and less than 2 percent from India. We drew a random sample of 71 cases from the 2,888 science student and scholar visa applications to measure the length of time taken at various points in the visa process. The sample of 71 cases is a probability sample, and results from the data in this sample project to the universe of the 2,888 science visa applications. We found that visas for science students and scholars took on average 67 days from the date the Visas Mantis cable was submitted from post to the date State sent a response to the post. This is slightly longer than 2 months per application, on average. In the sample, 67 of the visa applications completed processing and approval by December 3, 2003. In addition, 3 of the 67 completed applications had processing times in excess of 180 days. Four of the cases in our sample of 71 remained pending as of December 3, 2003. Of the 4 cases pending, 3 had been pending for more than 150 days and 1 for more than 240 days. In addition to our sample of 71 cases, State provided us with data on two samples it had taken of Visas Mantis case processing times. Data on the first sample included 40 visa cases taken from August to October 2003; data on the second sample included 50 Visas Mantis cases taken from November and December 2003. State indicated that both samples show improvements in processing times compared with earlier periods in 2003. However, based on the documentation of how these cases were selected, we were unable to determine whether these were scientifically valid samples and therefore we could not validate that processing times have improved. For the first sample, the data show that 58 percent of the cases were completed within 30 days; for the second sample, the data show that 52 percent were completed within this time frame. In addition, the data for both samples show that lengthy waits remain in some cases. For example, 9 of the 40 cases had been outstanding for more than 60 days as of December 3, 2003, including 3 cases that had been pending for more than 120 days. Also, 9 of the 50 cases were still pending as of February 13, 2004, including 6 that had been outstanding for more than 60 days. State officials commented that most of the outstanding cases from both samples were still being reviewed by the agencies. During our fieldwork at posts in China, India, and Russia in September 2003, we also obtained data indicating that 410 Visas Mantis cases submitted in fiscal year 2003 were still outstanding more than 60 days at the end of the fiscal year. In addition, we found numerous cases-- involving 27 students and scholars from Shanghai--that were pending more than 120 days as of October 16, 2003. We found that several factors, including interoperability problems among the systems that State and FBI use, contribute to the time it takes to process a Visas Mantis case. Because many different agencies, bureaus, posts, and field offices are involved in processing Visas Mantis security checks, and each has different databases and systems, we found that Visas Mantis cases can get delayed or lost at different points in the process. We found that in fiscal year 2003, some Visas Mantis cases did not always reach their intended recipient and as a result, some of the security checks were delayed. For example, we followed up with the FBI on 14 outstanding cases from some of the posts we visited in China in September 2003 to see if it had received and processed the cases. FBI officials provided information indicating that they had no record of receiving three of the cases, they had responded to State on eight cases, and they were still reviewing three cases. FBI officials stated that the most likely reason why they did not have a record of the three cases from State were due to cable formatting errors. State did not comment on the status of the 14 cases we provided to the FBI for review. However, a Consular Affairs official told us that in fall 2003, there were about 700 Visas Mantis cases sent from Beijing that did not reach the FBI for the security check. The official did not know how the cases got lost but told us that it took Consular Affairs about a month to identify this problem and provide the FBI with the cases. As a result, several hundred visa applications were delayed for another month. Figure 1 illustrates some of the time-consuming factors in the Visas Mantis process for our sample of 71 cases. While the FBI received most of the cases from State within a day, seven cases took a month or more, most likely because they had been improperly formatted and thus were rejected by the FBI's system. In more than half of the cases, the FBI was able to complete the clearance process the same day, but some cases took more than 100 days. These cases may have taken longer because (1) the FBI had to investigate the case or request additional information from State; (2) the FBI had to locate files in field offices, because not all of its files are an electronic format; or (3) the case was a duplicate, which the FBI's name check system also rejects. In most of the cases, the FBI was able to send a response--which it generally does in batches of name checks, not by individual case--to State within a week. The FBI provides the results of name checks for Visas Mantis cases to State on computer compact disks (CDs), a step that could cause delays. In December 2003, a FBI official told us that these CDs were provided to State twice a week. However, in the past, the CDs were provided to State on a less frequent basis. In addition, it takes time for data to be entered in State's systems once State receives the information. In the majority of our sample cases, it took State 2 weeks or longer to inform a post that it could issue a visa. State officials were unable to explain why it took State this long to respond to post. Officials told us that the time frame could be due to a lack of resources at headquarters or because State was waiting for a response from agencies other than the FBI. However, the data show that only 5 of the 71 cases were pending information from agencies other than the FBI. During our visits to posts in September 2003, officials told us they were unsure whether they were adding to the wait time because they did not have clear guidance on when to apply the Visas Mantis process and were not receiving feedback on the amount of information they provided in their Visas Mantis requests. According to the officials, additional information and feedback from Washington agencies regarding these issues could help expedite Visas Mantis cases. Consular officers told us that they would like the guidance to be simplified--for example, by expressing some scientific terms in more easily understood language. Several consular officers also told us they had only a limited understanding of the Visas Mantis process, including how long the process takes. They told us they would like to have better information on how long a Visas Mantis check is taking so that they can more accurately inform the applicant of the expected wait. Consular officers at most of the posts we visited told us they would like more feedback from State on whether the Visas Mantis cases they are sending to Washington are appropriate, particularly whether they are sending too many or too few Visas Mantis requests. They said they would like to know if including more information in the security check request would reduce the time to process an application in Washington. Moreover, consular officers indicated they would like additional information on some of the outstanding Visas Mantis cases, such as where the case is in the process. State confirmed that it has not always responded to posts' requests for feedback or information on outstanding cases. Aside from the time it takes to process Visas Mantis checks, an applicant also has to wait for an interview. State does not have data or criteria for the length of time applicants at its overseas posts wait for an interview, but at the posts we visited in September 2003, we found that it generally took 2 to 3 weeks. Furthermore, post officials in Chennai, India, told us that the interview wait time was as long as 12 weeks during the summer of 2003 when the demand for visas was greater than the resources available at post to adjudicate a visa. Officials at some of the posts we visited indicated they did not have enough space and staffing resources to handle interview demands and the new visa requirement that went into effect on August 1, 2003. That requirement states that, with a few exceptions, all foreign individuals seeking to visit the United States need to be interviewed prior to receiving a visa. Factors such as the time of year an applicant applies for a visa, the appointment requirements, and the staffing situation at posts generally affect how long an applicant will have to wait for an interview. State and FBI officials acknowledged that visa waits have been a problem but said they are implementing improvements to the process and working to decrease the number of pending Visas Mantis cases. For example, State and FBI officials told us that the validity of Visas Mantis checks for students and scholars has been extended to 12 months for applicants who are returning to a program or activity and will perform the same functions at the same facility or organization that was the basis for the original Visas Mantis check. FBI officials said that to address delays stemming from problems with lost case files or systems that are not interoperable, the FBI is working on automating its files and setting up a common database between the field offices and headquarters. They also told us they have set up a tracking system within the FBI for all Security Advisory Opinions, including Visas Mantis cases. Consular Affairs officials told us that State has invested about $1 million on a new information management system that it said would reduce the time it takes to process Visas Mantis cases. They described the new system as a mechanism that would help strengthen the accountability of Visas Mantis clearance requests and responses, establish consistency in data collection, and improve data exchange between State and other agencies involved in the clearance process. In addition, officials said the system would allow them to improve overall visa statistical reporting capabilities and data integrity for Mantis cases. The new system will be paperless, which means that the current system of requesting Visas Mantis clearances by cable will be eliminated. State officials told us that the system is on schedule for release early this year and that the portion relating to Security Advisory Opinions will be operational sometime later this year. However, challenges remain. FBI officials told us that the name check component of the FBI's system would not immediately be interoperable with State's new system but that they are actively working with State to seek solutions to this problem. Nonetheless, FBI and State have not determined how the information will be transmitted in the meantime. We were not able to assess the new system since it was not yet functioning at the time of our review. Officials from Consular Affairs and the FBI told us they are coordinating efforts to identify and resolve outstanding Visas Mantis cases. For example, they have been working together on a case-by-case basis to make sure that cases outstanding for several months to a year are completed. However, State officials said they do not have a target date for completion of all the outstanding cases, which they estimated at 1,000 in November 2003. In addition to improvements to the Visas Mantis process, State officials told us that they are monitoring post resource needs and adding staff as needed. These officials also told us that State added 66 new officers in 2003 and plans to add an additional 80 in 2004. In conclusion, Mr. Chairman, agency officials recognize that the process for issuing a visa to a science student or scholar can be an important tool to control the transfer of sensitive technology that could put the United States at risk. They also acknowledge that if the process is lengthy, students and scholars with science backgrounds might decide not to come to the United States, and technological advancements that serve U.S. and global interests could be jeopardized. Our analysis of a sample of Visas Mantis cases from April to June 2003 show that some applicants faced lengthy waits. While the State Department and the FBI report improvements in Visas Mantis processing times, our analysis of data from the posts we visited in September 2003 and our contact with post officials in January 2004 show that there are still some instances of lengthy waits. State's and FBI's implementation of the Visas Mantis process still has gaps that are causing wait times for visas. State's new information management system could improve the Visas Mantis process. Nevertheless, it is unclear whether the new system will address all the current issues with the process. To help improve the process and reduce the length of time it takes for a science student or scholar to obtain a visa, we are recommending that the Secretary of State, in coordination with the Director of the FBI and the Secretary of Homeland Security, develop and implement a plan to improve the Visas Mantis process. In developing this plan, the Secretary should consider actions to establish milestones to reduce the current number of pending Visas Mantis develop performance goals and measurements for processing Visas Mantis provide additional information through training or other means to consular posts that clarifies guidance on the overall operation of the Visas Mantis program, when Mantis clearances are required, what information consular posts should submit to enable the clearance process to proceed as efficiently as possible, and how long the process takes; and work to achieve interoperable systems and expedite transmittal of data between agencies. In commenting on our draft report, State said it had taken some actions to improve the Visas Mantis process and it would study our recommendation to make further improvements. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions you or other members of the committee may have. For future contacts regarding this testimony, please call Jess Ford or John Brummet at (202) 512-4128. Individuals making key contributions to this testimony included Jeanette Espinola, Heather Barker, Janey Cohen, and Andrea Miller. 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.

Each year thousands of international science students and scholars apply for visas to enter the United States to participate in education and exchange programs. They offer our country diversity and intellectual knowledge and are an economic resource. At the same time, the United States has important national security interests in screening these individuals when they apply for a visa. At a House Committee on Science hearing in March 2003, witnesses raised concern about the length of time it takes for science students and scholars to obtain a visa and about losing top international students to other countries due to visa delays. GAO reviewed 1) how long it takes a science student or scholar from another country to obtain a visa and the factors contributing to the length of time, and 2) what measures are under way to improve the process and decrease the number of pending cases. State Department (State) cannot readily identify the time it takes for a science student or scholar to obtain a visa. State has not set specific criteria or time frames for how long the visa process should take, but its goal is to adjudicate visas as quickly as possible, consistent with immigration laws and homeland security objectives. GAO found that the time it takes to adjudicate a visa depends largely on whether an applicant must undergo an interagency security check known as Visas Mantis, which is designed to protect against sensitive technology transfers. Based on a random sample of Visas Mantis cases for science students and scholars sent from posts between April and June 2003, GAO found it took an average of 67 days for the security check to be processed and for State to notify the post. In addition, GAO's visits to posts in China, India, and Russia in September 2003 showed that many Visas Mantis cases had been pending 60 days or more. GAO also found that the way in which Visas Mantis information was disseminated at headquarters level made it difficult to resolve some of these cases expeditiously. Furthermore, consular staff at posts GAO visited said they were unsure whether they were contributing to lengthy waits because they lacked clear guidance on when to apply Visas Mantis checks and did not receive feedback on whether they were providing enough information in their Visas Mantis requests. Another factor that may affect the time taken to adjudicate visas for science students and scholars is the wait for an interview. While State and Federal Bureau of Investigation (FBI) officials acknowledged there have been lengthy waits for visas, they report having measures under way that they believe will improve the process and that they are collaborating to identify and resolve outstanding Visas Mantis cases. In addition, State officials told GAO they have invested about $1 million to upgrade the technology for sending Visas Mantis requests. According to State officials, the new system will help to reduce the time it takes to process Visas Mantis cases.

Federal agencies are required to have an occupant emergency program that establishes procedures for safeguarding lives and property during According to ISC, an OEP is a emergencies in their respective facilities.critical component of an effective occupant emergency program. Further, these plans are intended to minimize the risk to personnel, property, and other assets within a facility by providing facility-specific response procedures for occupants to follow. Several federal entities--ISC, GSA, and FPS--play a role in protection policy and programs for GSA-owned and -leased facilities. Established by Executive Order 12977, ISC is an interagency organization chaired by DHS to enhance the quality and effectiveness of security in, and protection of, nonmilitary buildings occupied by federal employees for nonmilitary activities in the United States, among other things.agencies, including FPS and GSA. Under the executive order, ISC was directed to develop policies and standards that govern federal facilities' physical security efforts. As a part of its government-wide effort to develop physical security standards and improve the protection of federal facilities, it also provides guidance on OEPs. In its 2010 standard, ISC ISC includes members from 53 federal departments and lists 10 elements that should be addressed at a minimum in an OEP, and states that the plan must be reviewed annually. As the federal government's landlord, GSA designs, builds, manages, and maintains federal facilities. Presidential Policy Directive 21 designates DHS and GSA as cosector-specific agencies for the government facilities sector, 1 of 16 critical infrastructure sectors. In 2002, GSA issued its Occupant Emergency Program Guide to provide step-by-step instructions for agencies to use to meet federal regulatory requirements for OEPs. GSA also served as chair and sponsor of ISC's working group that developed additional guidance for preparing OEPs. The Homeland Security Act of 2002 transferred FPS from GSA to the newly established DHS in March 2003, and required DHS to protect the buildings, grounds, and property that are under the control and custody of GSA and the persons on the property. As part of an agreement between GSA and DHS, FPS provides law enforcement and related security services for GSA's approximately 9,600 facilities, which include--but are not limited to--responding to incidents and conducting facility security assessments.inspectors to help FPS identify and evaluate potential risks so that countermeasures can be recommended to help prevent or mitigate risks. FPS inspectors are law enforcement officers and trained security experts who perform facility security assessments and inspections and respond to Facility security assessments are conducted by FPS incidents. FPS also assigns an FSL in accordance with the ISC standard and in coordination with the FSC and GSA representative based on a facility's cumulative rating on five factors established by ISC (plus an adjustment for intangible factors), as shown in figure 1. According to ISC, a facility's FSL is a key factor in establishing appropriate physical security measures. Further, while the minimum OEP elements in the ISC 2010 standard apply to all FSL facilities, what is appropriate may vary based on facility characteristics. The federal agencies that occupy federal facilities are responsible for preparing and maintaining OEPs; ISC, GSA, and FPS provide guidance or assistance to the agencies in developing OEPs, and FPS can periodically review OEPs. All 20 facilities we visited had written emergency plans in place, the majority of which reflected ISC's minimum elements for a facility OEP. The OEPs we reviewed varied in length and content based on a number of factors, such as facility security level. Ensuring that each of the approximately 9,600 GSA-owned and -leased facilities protected by FPS has emergency plans to safely evacuate occupants is a complex undertaking. Each agency occupying a facility is responsible for ensuring the safety of its occupants in that facility. Although no one agency accounts for OEPs across the federal government, ISC, GSA, and FPS each provide guidance on what should be included in a plan. FPS also provides a check that plans are in place as part of its periodic facility security assessments. Federal agencies have designated officials to create and oversee emergency plans and duties for the facilities they occupy. According to federal regulations, designated officials are responsible for developing, In the event of implementing, and maintaining the OEP for the facility.an emergency, the designated official is expected to initiate appropriate action according to the OEP, including the evacuation and relocation of facility occupants. The designated official is also to establish, staff, and train an Occupant Emergency Organization, which is to be composed of employees from within agencies designated to perform the requirements established by the plan. We found that all 20 facilities we visited had assigned designated officials to perform these duties. ISC is responsible for issuing policies and standards on facility protection, such as OEPs, but does not review the extent to which federal facilities have OEPs. As previously mentioned, ISC listed 10 minimum elements in its ISC 2010 standard that an OEP should address. In March 2013, ISC issued Occupant Emergency Programs: An Interagency Security Committee Guide, to further assist department and agency officials as they develop and review their occupant emergency programs, including how to develop OEPs that best fit their individual facility and agency needs. According to ISC officials, the guidance was disseminated via e- mail to the full ISC membership, which includes 53 federal agencies and departments. ISC officials said they rely on agencies located in federal facilities to ensure OEPs are in place and shared several reasons why it would not be feasible for ISC to comprehensively review OEPs. First, according to these officials, ISC decided to use broad guidelines that would allow agencies to develop plans that are suited to the unique characteristics of their facilities. As a result, the guidance does not provide specific standards or metrics against which to compare a facility's plan. Second, although OEPs are an important part of an overall occupant emergency program, ISC officials said that OEPs are a relatively small part of an agency's overall emergency and security planning, which may not warrant implementing additional monitoring and data-gathering efforts. Last, ISC officials cited staffing constraints and noted that, per Executive Order 12977, they rely on volunteers from member organizations to carry out the committee's efforts. GSA also plays a role in coordinating directly with facilities to provide guidance on OEPs and participates in emergency planning efforts. According to GSA officials, its tenant agencies, through their designated officials, are responsible for tracking and reviewing OEPs. Further, designated officials are to represent the government's interests to public safety and emergency response in conjunction with GSA and other key stakeholders. However, GSA officials said that they will assist agencies with OEPs as requested. GSA officials also told us that they participate on facility security committees and in planning drills and exercises, and can provide GSA and other OEP guidance to their tenants. GSA officials also said that they work with tenants, as well as building owners at leased facilities, to ensure that facilities comply with building safety codes, such as having appropriate exits and fire alarms. Presidential Policy Directive 21 jointly assigns FPS and GSA responsibility for critical infrastructure protection of the government facilities sector. According to a GSA Associate Administrator, there is a need for greater visibility of OEPs. Consequently, GSA and FPS officials told us they have initiated discussions on future collaboration to ensure OEPs are in place and updated at GSA facilities. According to GSA officials, as part of a Joint Strategy for Facility Resilience, GSA and FPS will work collaboratively to develop a platform that could serve as a repository for OEPs, facility security assessments, and other data over the next 2 to 4 years. FPS is responsible for assisting federal agencies with guidance, training, exercises, and drills, and also conducts periodic facility security assessments that include checking OEPs. FPS officials in the three cities we visited said that, when requested, they provide agencies with OEP guidance, which includes an OEP template, and advise the designated and other agency officials regarding an emergency plan that is appropriate for their location and circumstances. According to FPS officials, its OEP template (a Microsoft Word file) can be requested from the DHS and GSA websites and can also be made available to agency officials on a DVD. Of the 20 facilities we visited, officials at 14 reported using FPS guidance or feedback on their OEPs, for example, using the FPS template as a base for their OEPs and officials at 5 facilities reported using their own agency guidance for OEP development. FPS officials in one city we visited reiterated that some agencies have their own emergency coordinators and choose not to use FPS materials. Officials at 1 facility reported not using FPS or other agency guidance for OEP development. FPS also provides evacuation training, including awareness training on active shooter and workplace violence incidents, as well as safety and security.training FPS had provided them, primarily active shooter awareness Officials from 5 of the 20 facilities we visited mentioned specific training, and officials at 1 facility stated that they were planning an active shooter exercise with FPS. Additionally, FPS inspectors in the three locations we visited said they make themselves available to participate in facility exercises and emergency drills, and officials at 11 of the 20 facilities we visited told us that FPS had participated, for example, by providing traffic control services or ensuring all occupants have evacuated. Officials at 5 facilities we visited mentioned that FPS had not consistently participated in drills at their facilities, in one case because FPS had not been invited and in another case because FPS arrived after the drill had been completed. According to FPS officials, FPS participation in exercises and drills can be limited if FPS personnel are not nearby, are on duty responding to actual incidents, or were not given advance notice. FPS inspectors also are to check and answer a series of questions about the facility's OEP during periodic facility security assessments, including whether or not the facility has a written OEP, and consider whether it addresses the 10 minimum elements for an OEP identified by ISC. FPS's facility security assessments are to occur periodically, every 3 to 5 years, In July 2011, we reported depending on the security level of the facility. that FPS could not complete security assessments as intended because of limitations in its assessment tool, among other reasons. We recommended that the agency evaluate whether other alternatives for completing security assessments would be more appropriate. DHS agreed with the recommendation and has developed a new facility security assessment tool, the Modified Infrastructure Survey Tool (MIST), which DHS officials said was deployed in April 2012. FPS headquarters officials told us that its agency currently has no national data on which agencies have an OEP, and we previously reported that MIST was not FPS headquarters designed to compare risk across federal facilities.officials said as the agency moves forward with enhancing MIST's capabilities, it would consider whether it was feasible to add a feature that would allow it to aggregate data across facilities, such as the status of OEPs. According to FPS officials, recommendations about OEPs and evacuation processes, such as suggestions to change assembly points in the event of an evacuation, may be made during facility security assessments. For example, one FPS inspector recommended that 1 facility change its assembly point because he determined that it was too close to the evacuated facility. Although officials at this facility expressed some reluctance in changing the assembly location, the inspector told us that facilities generally implement FPS suggestions. FPS inspectors also said that there have been few examples where agencies did not want to comply. Although agencies do not have to comply with their recommendations on OEPs, FPS inspectors stated that they do have enforcement authority related to life safety issues during an actual emergency event, such as moving occupants to different evacuation locations. Further, FPS headquarters officials said recommendations about OEPs may be made at any time, not just during facility security assessments. All 20 facilities we visited had written OEPs, as required by regulation, which included evacuation procedures. Consistent with the ISC 2010 standard that plans should be reviewed annually, officials at 19 of the 20 facilities we visited reported that they review, and update as needed, their emergency plans on at least an annual basis, and some reported reviewing their plans more frequently. For example, officials at 1 FSL-II facility reported that the OEP program manager reviews the plan on a monthly basis, and officials at a FSL-IV facility said their plan was reviewed quarterly. The OEPs we examined had been reviewed by officials in the past year, except for one. Officials at this FSL-III facility reported that they have an emergency plan in place; however, their OEP had not been annually reviewed, and was last updated in 2004. Officials at that facility said that a revision was currently under way. Officials at all 20 facilities told us they conduct at least one annual evacuation drill, as directed in the ISC 2010 standard, with several officials reporting their facility conducts multiple drills each year. We analyzed the extent to which the selected facilities' OEPs incorporated elements that should be in an OEP according to the ISC 2010 standard, which outlines 10 minimum elements: 1. purpose and circumstances for activation, 2. command officials and supporting personnel contact information, 3. occupant life safety options (e.g., evacuation, shelter-in-place), 4. local law enforcement and first responder response, 5. special needs individuals (e.g., those with disabilities, or who are 7. special facilities (e.g., child care centers), 8. assembly and accountability, 9. security during and after incident, and 10. training and exercises. We found that 13 of the 20 facilities addressed all of the minimum elements that were applicable; in some of these cases, OEP elements were addressed in other emergency documents, such as supplemental child care OEPs. Seven of the facilities did not address at least one OEP element in the ISC 2010 standard in their OEPs or other documents. That an element was not in the plan or in related documents for 7 facilities does not necessarily indicate potential vulnerabilities for these facilities because other procedures or facility services may address the intent of the OEP element. For example, 6 of the 7 OEPs did not specifically describe security during or after an emergency event. Officials in all six cases identified existing security, such as building security guards, as having responsibility. Officials at 2 facilities reported that they were updating their OEPs after our site visit and would identify existing security in the plans. As another example, at 2 facilities where training or exercises were not included in the OEPs, officials at both facilities (which were housed in leased GSA space) said that building management conducts drills and that they participate. The 2010 standard and 2013 ISC guidance both allow for necessary adjustments to be made to a facility's emergency plan based on specific requirements or needs. Plans at the 20 facilities we reviewed were unique to each facility, and there were differences in how each element was addressed, as the ISC 2010 standard and 2013 guidance allow. Specific details on how OEP elements are expected to be addressed are not included in ISC's 2010 standard, which we used to review facility OEPs, or in ISC's 2013 guidance. ISC officials said that there is so much variability among facilities that it is difficult to identify what would be appropriate for all facilities. For example, in one plan, command official information might include multiple contacts and a detailed list of responsibilities for each official, while another plan refers occupants to security services, which would be responsible for contacting command officials. Appendix II provides other examples of variation in how facilities addressed the 10 minimum elements in the plans we reviewed. We did observe some commonality in the 20 facility OEPs we reviewed, based on facility characteristics such as security level, whether the facility was GSA owned or leased, and occupant characteristics, as shown in table 1. Officials at 14 of 20 facilities in our review identified challenges, and all but one reported responding to challenges they encountered in developing and implementing emergency evacuation procedures. Officials at 6 facilities said that they did not identify any challenges. Half of the officials reporting challenges told us that actual emergency events and exercises helped to identify issues and mitigation steps that allowed their facilities to generally carry out effective emergency evacuations. For example, the majority of officials at facilities we visited in Washington, D.C., who experienced the 2011 earthquake said that because of the lack of earthquake procedures or training, emergency teams could not control employees' evacuation process. They said that many employees essentially self-evacuated, exposing themselves to hazards such as falling debris and, in one case, evacuated to an unsafe assembly area under an overpass. These officials said that they have since researched proper earthquake procedures, and have revised or are in the process of revising their OEPs accordingly. As shown in figure 2, officials at facilities we visited identified several challenges they addressed. The top three challenges cited by officials at the14 selected facilities that identified challenges were (1) participation (2) knowing which employees are present (9 apathy (10 facilities), facilities), and (3) keeping plan information current (7 facilities). The remaining challenges were cited by 6 or fewer of the selected facilities. Officials at all but 1 facility provided additional detail regarding actions they are taking to mitigate facility evacuation challenges. Officials at that facility reported that the OEP was to be updated, but did not describe how they specifically plan to mitigate OEP challenges they identified. For each of the top three challenges, officials at facilities that cited challenges described some of the actions taken to address those challenges. Employee participation apathy. Officials at 10 of the 20 selected facilities cited apathy as a challenge they encountered, such as employees not participating in or responding quickly to drills; not wanting to stop working or leave the building; not reporting to the assembly area (e.g., going for a coffee break during an evacuation drill); and not volunteering for emergency team responsibilities, such as becoming a floor warden. Officials at 9 of the 10 facilities described a variety of actions to address this challenge, Officials at 5 facilities said that leadership plays a role, such as leading by example, or drawing management or supervisory attention to nonparticipants. For example, at 1 facility, officials said supervisors were notified of the lack of participation in emergency drills and training and asked to emphasize the importance of participation. Officials at another facility indicated that senior leaders lead by example, responding quickly and taking emergency drills and participation seriously to encourage employees to take emergency responsibilities seriously. Officials at 3 facilities said they address apathy by using drills, an awareness campaign, or other efforts to promote participation. At the other 2 facilities where this challenge was identified, officials at 1 facility said they were reviewing challenges and action options, and the other did not provide information on any mitigating activities. Officials at the third facility said that they made efforts to make emergency and evacuation training more interesting and interactive to maintain employee interest and attention, such as implementing a game meant to teach about various emergency situations and proper procedures. Knowing which employees are present (accounting for employees). Officials at 9 of the 20 selected facilities reported encountering this challenge, with employees teleworking or working offsite as a contributing factor. Officials at 8 facilities provided various examples of addressing this challenge. At 6 facilities, officials said they relied on supervisors, managers, and sign-in sheets to keep track of employees. Officials at 2 facilities mentioned using or planning to use technology to account for employees in an emergency situation. One facility is developing an emergency notification system that sends emergency information to as many as 10 different electronic devices to contact an individual and determine the individual's location. Another facility is planning to use an entry scan system that records who is in the building and can provide a list to take roll at the evacuation rally point to account for employees. At 1 facility, where officials reported they are updating their OEP, efforts to mitigate this challenge were not described. Keeping emergency contact information updated. Officials at 7 of the 20 facilities said that it was an ongoing challenge to keep emergency contacts in the OEP current because of changes in an employee's contact information or status such as a transfer or retirement. To address this challenge, officials at 6 facilities said they review and update contact information at various points, such as when staff leave; before drills; or on a daily, weekly, monthly, or quarterly basis at different facilities. At one facility, officials said that they rely on tenants to provide notice of personnel changes. At another, an official said that the facility's technology department was able to align its employee finder database with the agency's separation database to automatically flag when employees have a change in location or status. Information was not available for 1 facility on any efforts to mitigate this challenge. Officials at facilities we visited reported experiencing and addressing other challenges less frequently such as keeping employees trained, evacuating the public and persons with physical handicaps, communicating about an evacuation, and coordinating with other building tenants. Officials who reported encountering these challenges told us that they had mechanisms in place to mitigate the challenges they encountered, such as the use of hand-held radios for communications, so the challenges were not considered an issue that prevented them from carrying out effective emergency evacuations. Other incidents or situations have also prompted facilities to revise their OEPs or for FPS to evaluate emerging threats and revise its training, as discussed in the examples below. Practice drills. During a practice drill evacuation at 1 facility, it was discovered that the path to the evacuation assembly area was up a steep slope and that some of the employees could not make the climb. The assembly area was subsequently changed and the OEP revised. Emerging threats. FPS headquarters officials stated that recent media coverage of active shooter situations has increased the public's perception of this threat to facility safety and security. A fatal active shooter incident at 1 facility in Los Angeles prompted the revision of safety and evacuation procedures. FPS headquarters officials said that FPS has developed awareness training courses for how to handle an active shooter situation, and has proactively offered this training to facilities. To identify and help agencies address evacuation or OEP challenges, officials at ISC, GSA, and FPS said that they provide initial guidance regarding the OEP, and may provide additional assistance if requested by facilities or agencies. For example, ISC officials stated that they issued their March 2013 OEP Program Guidance in response to concerns raised by ISC's members for consistency in OEP guidance. Officials said agencies experiencing a challenge regarding their OEPs (or other issues) can ask ISC for specific help such as one-on-one assistance, or referral to other agency officials that have addressed a similar challenge. Also, ISC officials said a working group can be created to identify solutions to an issue, as was the case in developing the 2013 guidance. As discussed earlier, GSA and FPS have published OEP information, and may provide additional information or training assistance in meeting specific challenges on a case-by-case basis. We provided a draft of this report to DHS and GSA for review and comment. GSA had no comments on the report. DHS provided technical comments, which were incorporated as appropriate. DHS also provided written comments, which are summarized below and reprinted in appendix III. In its written comments, DHS reiterated that OEPs are critical in safely evacuating federal facility occupants in an emergency. DHS noted that GAO recognized the complex roles performed by the ISC, GSA, FPS, and agency officials to ensure that the approximately 9,600 GSA-owned and -leased facilities have an OEP. For instance, DHS cited that ISC establishes standards and guidance for developing OEPs that are responsive to individual facility needs, whereas FPS is responsible for coordinating with and assisting department and agency officials in developing facility OEPs, and providing agencies with evacuation training, among other things. DHS also stated that it is committed to working collaboratively with ISC and GSA to identify and mitigate security-related vulnerabilities at federal facilities. We are sending copies of this report to the Department of Homeland Security, the Administrator of the General Services Administration, selected congressional committees, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. Should you or your staff have any questions concerning this report, please contact Joseph Kirschbaum at (202) 512-9971 or by e-mail at [email protected] or Mark Goldstein 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. Key contributors to this report are listed in appendix IV. 1. who is responsible for ensuring that federal facilities have occupant emergency plans (OEP) in place and the extent to which selected facilities' OEPs reflect federal guidance and 2. evacuation challenges, if any, that selected facilities experienced and what actions, if any, they reported taking to address these issues. To describe who is responsible for ensuring that federal facilities have OEPs in place, we reviewed federal laws, regulations, executive orders, and guidance related to the oversight of federal facilities. This included relevant sections of the Homeland Security Act of 2002; the regulations regarding federal property facility management and federal agency requirements for OEPs; Executive Order 12977, establishing the Interagency Security Committee (ISC); and Executive Order 13286, amending it. We reviewed OEP guidance issued by ISC, the Federal Protective Service (FPS), and the General Services Administration (GSA). We also reviewed our previous work on the roles of FPS, GSA, and ISC in protecting federal facilities. We interviewed relevant senior agency officials regarding their agencies' role in ensuring federal facilities have OEPs in place, including ISC officials in Washington, D.C.; officials from FPS and GSA in their headquarters; and FPS and GSA officials in the three field locations where we conducted site visits to selected federal facilities, as described below. To describe the extent to which the selected facilities' OEPs reflect federal guidance, we conducted site visits at 20 of the GSA facilities protected by FPS.follows: We selected a nonprobability sample of facilities as We selected three geographically diverse areas with a concentration of GSA facilities from GSA's top 15 major real estate markets. Specifically, we selected two areas from the top 5 markets in terms of GSA assets (Los Angeles, California, and Washington, D.C.), and one area from a smaller GSA market defined as having fewer than 100 facilities (Kansas City, Missouri). To ensure a subset of facilities would be able to discuss evacuation experiences they have had, we selected 9 facilities total from the three areas that had reported an evacuation incident to an FPS MegaCenter during 2011 or 2012. Each of the four FPS MegaCenters records incidents such as fire alarms, suspicious packages, and evacuation drills that are reported to that center as part of the center's operations log, with an activity code that can be queried for incidents. Only incidents reported to a MegaCenter are captured, so, for example, if local police respond to a call at a facility and do not call FPS, the incident would not be included in the MegaCenter data. According to discussions with MegaCenter data officials and a review of the data content, we determined that the incident data were reliable for our purposes, as our sample was not intended to be representative of all incidents. We used a list provided by GSA from its Real Estate Across the United States (REXUS) database to select the remaining 11 facilities to provide a mix of owned and leased properties, and a mix of facility security levels. We determined that the REXUS database was reliable for our purposes based on a review of database documents and discussion with relevant GSA officials. See table 2 for a summary of characteristics of the 20 facilities we selected. For all selected facilities, we reviewed the extent to which the OEPs included the 10 minimum elements that should be included based on ISC's Physical Security Standard (ISC 2010 standard) for federal facilities. For example, 1 element that an OEP should include is information on "Special Needs Individuals (disabled, deaf, etc.)." For each facility in our sample, two team members reviewed the OEP and assessed whether or not each of the elements was addressed. The ISC 2010 standard indicates that the 10 elements should be present; however, it notes that the scope and complexity of the OEP are dependent on the facility's size, population, and mission, and the standard does not provide a description of, or detail on, what should be included for each element. Further, not all elements may be applicable for a facility, for example, if the facility does not have a child care or other special facility. Because of the general nature of the elements, we assessed whether a particular element was present in a facility's OEP, not its quality or comprehensiveness. We reviewed additional documents provided by agency officials, such as child care center emergency plans, emergency cards for quick use, and FPS's facility security assessment protocol, used by FPS inspectors when periodically checking OEPs. We also interviewed GSA property managers and officials from agencies who occupy each facility about the facility's plan. Further, those officials were those identified by GSA and the tenant agency as most knowledgeable about the OEP, which in some cases was the designated official, and in other cases, the facility official was, for example, a manager involved with facility security. While the findings from our 20 case studies are not generalizable to all GSA-owned and -leased facilities, they provide specific examples of how selected facilities have addressed emergency plan requirements and provide insights from a range of federal facilities. To describe the challenges and evacuation experiences of the 20 selected facilities, we discussed specific evacuation instances with facility and GSA officials, the challenges officials face in planning and executing evacuation plans, and any steps taken to mitigate the challenges. We asked about evacuation challenges in general, and about specific challenges that were identified by a review of the literature and from discussion with FPS. We also asked officials at the facilities we visited about challenges, and they determined whether they perceived an issue to be a challenge or not. Where available, we reviewed after-action reports documenting facility evacuation experiences. We also discussed evacuation experiences and challenges with ISC, GSA, and FPS officials. Our findings regarding what issues presented challenges and how such challenges could be resolved cannot be generalized to all GSA-owned and -leased facilities; however, they provide specific examples of issues encountered and how varying facilities addressed them. We conducted this performance audit from August 2012 to October 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Facility plans we reviewed addressed the ISC minimum 10 elements in a variety of ways, consistent with agency guidance and facility characteristics. Guidance in the ISC 2010 Physical Security Criteria for Federal Facilities notes that an OEP's scope and complexity will be dependent on a facility's size, population, and mission. Table 3 presents excerpts from OEPs from the 20 selected facilities we visited in Washington, D.C.; Kansas City, Missouri; and Los Angeles, California; and were selected to show the variation in how plan elements were addressed. Joseph Kirschbaum, 202-512-9971, or [email protected], Mark Goldstein, 202-512-2834, or [email protected]. In addition to the contacts named above, Leyla Kazaz (Assistant Director), Tammy Conquest (Assistant Director), Dorian Dunbar, Eric Hauswirth, Mary Catherine Hult, Monica Kelly, Tracey King, Erica Miles, Linda Miller, and Kelly Rubin made key contributions to this report.

Recent emergencies, such as earthquakes in the nation's capital, have raised concerns about how prepared federal agencies are in the 9,600 facilities owned or leased by GSA and protected by the Department of Homeland Security's FPS to safely evacuate occupants in federal buildings. All federal agencies are required to prepare OEPs for their facilities, which describe actions agencies should take to plan for a safe evacuation during an emergency. GAO was asked to provide information on how prepared GSA-owned and -leased facilities are to evacuate occupants during an emergency. This report describes (1) who is responsible for ensuring that federal facilities have OEPs in place and the extent to which selected facilities' OEPs reflect federal guidance, and (2) the evacuation challenges, if any, selected facilities experienced and what actions, if any, they reported taking to address these issues. GAO reviewed federal regulations and guidance on OEPs, including documents from ISC, GSA, and FPS, which develop governmentwide physical security standards and policies, such as minimum elements for OEPs. GAO also reviewed OEPs and interviewed facility officials at 20 GSA-owned and -leased facilities, selected based on geographic dispersion, recent evacuations, and facility security level. While not generalizable to all GSA-owned and -leased facilities the results provided perspectives of varying facilities. DHS written and technical comments were incorporated, as appropriate. GSA did not have any comments. Federal agencies occupying facilities owned or leased by the General Services Administration (GSA) are responsible for preparing and maintaining occupant emergency plans (OEP), with assistance or guidance from the Federal Protective Service (FPS) and others, and the majority of selected federal facilities' OEPs GAO reviewed reflect federal guidance. As required by federal regulations, all 20 selected facilities had OEPs and had designated officials, who are responsible for maintaining OEPs and initiating action according to the OEP in the event of an emergency, including the evacuation of facility occupants. Consistent with federal guidance, officials at 19 of the 20 selected facilities reported that they review and update OEPs at least annually, and officials at 1 facility said they were in the process of updating their OEP. When requested, FPS provides OEP guidance, such as templates to facility officials. Officials at 14 facilities reported using FPS guidance or feedback for their OEPs, officials at 1 facility reported not using FPS guidance, and officials at 5 facilities said they used their own agency's guidance. FPS also checks OEPs during periodic facility security assessments--conducted at least every 3 to 5 years-- to assess overall facility risk. GSA officials said they have a role in coordinating directly with facilities to provide guidance and feedback on OEPs, and to help facility officials plan drills and exercises. To assist agency officials as they develop OEPs that best fit individual facilities and agency needs, the Interagency Security Committee (ISC), a Department of Homeland Security-chaired policy development organization, in April 2010 identified 10 minimum elements, such as exercises or evacuating occupants with special needs, that should be addressed in an OEP. Thirteen of the 20 selected facilities addressed all 10 minimum elements in OEPs or related documents. Seven facilities' OEPs did not address at least 1 of the 10 elements; however, lack of an element does not necessarily indicate potential vulnerabilities for that facility because the intent of the element may be addressed by other procedures or modified based on facility characteristics. For example, evacuation exercises were not included in OEPs for 2 facilities located in leased GSA space; however, officials said they participate in drills conducted by building management. The 20 selected facility OEPs were unique to each facility and how OEPs addressed particular elements. Officials at 14 of 20 facilities identified evacuation challenges. The most frequently cited challenges included employee apathy toward participating in drills, accounting for employees, and keeping contact information updated. Officials at all but one facility, which was updating its OEP, reported various ways they addressed evacuation challenges, including using technology such as entry scan systems and radios to track and communicate with employees and making evacuation training more interesting to employees. Other incidents and emerging threats also prompted officials to change OEPs or evacuation training. For example, during the 2011 Washington, D.C., earthquake, officials at selected facilities in the D.C. area said that the lack of employee training on earthquake procedures may have exposed employees to potential hazards when they self-evacuated. Officials reported revising their OEPs to include procedures for earthquakes. Recent shootings also prompted facility officials to revise their OEPs and participate in FPS awareness training on active shooter incidents. Officials at 6 facilities did not report challenges.

The government relies on contractors to provide a range of mission- critical support from operating information technology systems to battlefield logistics support. Federal regulations state that prime contractors are responsible for managing contract performance, including planning, placing, and administering subcontracts as necessary to ensure the lowest overall cost and technical risk to the government. Successful offerors for contracts exceeding $650,000 that have subcontracting possibilities are required to submit a subcontracting plan which includes, among other things, a statement of the total dollars planned to be subcontracted, the principal types of supplies and services to be subcontracted, and assurances that the offeror will submit periodic reports so that the government can determine the extent to which it has complied with the plan.pays the contractor for allowable incurred costs, to the extent prescribed in the contract. These costs may include the costs and fees charged to the prime by its subcontractors. Figure 1 depicts how lower tier subcontractor costs become part of the higher tier's and prime contractor's overall costs. USAID, State, and DOD varied in their implementation of Section 802. USAID issued a policy directive that restated Section 802 requirements in 2013 and is in the process of updating various tools to assist its contracting officers. More recently, State issued a procurement bulletin that restated Section 802 requirements, but has not taken further steps to update tools to assist its contracting officers. In contrast, DOD has not taken actions, noting that the department intends to wait until a final FAR rule is published in 2015. In general, agencies do not know the extent to which offerors proposed to subcontract 70 percent or more of the total cost of their contracts because agency specific and federal data systems do not provide such information. In lieu of creating new reporting mechanisms, each agency indicated its intent to assess contracting officers' implementation of Section 802 requirements using its existing procurement management reviews. USAID has initiated revisions of associated review guidance to incorporate these requirements, State indicated that its current review guidance is adequate, and DOD has not determined if changes to its guidance are necessary. USAID and State have taken some initial steps to implement Section 802, but neither have provided contracting officers with guidance on how to perform the required analysis of alternate acquisition approaches or determine the feasibility of contracting directly with proposed subcontractors, specified what documentation is necessary, or identified where the required determination should be recorded. For example, USAID issued a policy directive and State issued a procurement bulletin in June 2013 and July 2014, respectively, that each restate the requirements of Section 802. Specifically, both agencies require that if offerors propose to award subcontracts for more than 70 percent of the total cost of work to be performed, agency contracting officers must consider alternative contracting vehicles, make a written determination of why the contracting approach is in the best interest of the government, and document the basis for the determination. USAID's Office of Acquisition and Assistance and State's Office of Acquisition Management communicated the new requirement to its acquisition community electronically and posted the policy to its websites for future reference. USAID and State have not issued guidance or agency-specific regulations, however, to assist contracting officers in carrying out the tasks required by Section 802. USAID officials noted that the agency is currently updating checklists used by its contracting officers when performing cost and price analysis or for drafting memoranda of negotiation to include Section 802 requirements. They expect that these checklists will be revised by the end of the year. USAID officials do not anticipate the need to revise agency regulations once the FAR is updated, noting that its contracting personnel assess proposed contracting arrangements in accordance with the FAR as part of its standard acquisition processes. Officials noted that the updated checklists will remind its personnel of the Section 802 requirements to assess the feasibility of contracting directly with proposed subcontractors, and to document their determination that the accepted approach is in the government's best interests as well as the basis for that determination. However, it is unclear if checklist revisions will provide contracting officers with the information necessary to perform the analysis of alternative acquisition approaches required by Section 802. State officials do not plan to update guidance to assist contracting officers with information on how to perform the steps required by Section 802. Similar to USAID, State officials do not anticipate revising departmental regulations once the FAR rule is finalized. DOD has not issued any policies nor has it issued guidance or regulations to implement Section 802. DOD officials explained that they are waiting for the FAR rule expected to be issued by March 2015 and did not want to issue policy, guidance, or regulations that may contradict the final FAR rule. DOD officials noted that once the FAR is revised, they will consider whether changes to DOD policy, guidance, and instruction would be necessary. Federal government internal control standards state that control activities, such as policies and procedures, help to ensure that management directives are carried out and actions are taken to address risks. Further, government internal controls note that information should be recorded and communicated to enable completion of internal control and other responsibilities. The lack of additional guidance that identifies approaches for or examples of how USAID, State, and DOD contracting officers may assess alternative contracting approaches, to include the feasibility of contracting directly with proposed subcontractors, or how to document their determination that the selected approach is in the best interests of the government may increase the departments' risk of not being in compliance Section 802. USAID, State, and DOD officials stated that their contracting and financial management systems do not track the subcontracting that a contractor intends to, or has used, in performing the contracts. Further, while there have been efforts to develop government-wide information on subcontracting awards, these systems do not include data to identify all levels of subcontracting. In that regard, in June 2014, we found subcontract data contained in USASpending.gov to be unverifiable because agencies frequently did not maintain the records necessary to verify the information reported by the awardees. Our analysis found that in fiscal year 2013 DOD reported obligating approximately $129.5 billion on contracts which were of the type of contract and dollar value that would potentially be subject to Section 802, and that had a subcontracting plan, while USAID and State reported obligating approximately $817 million and $222 million, respectively, for contracts that would be subject to the criteria applicable to those agencies. USAID, State, and DOD officials believe that few of the prime contractors subcontract 70 percent or more of the total cost of work performed on the types of contracts subject to Section 802. For example, State acquisition officials believe that such a high level of subcontracting is more likely to be found on State's contracts for construction, which often use fixed-priced contracts and, therefore, would not be subject to the requirements of Section 802. In lieu of developing new data or reporting requirements to assess whether its acquisition personnel are properly implementing Section 802, USAID acquisition officials noted that they will rely on routine, on-site procurement system and contract reviews to evaluate contracting offices' compliance with Section 802. An official from USAID's Office of Acquisition and Assistance, Evaluation Division stated that they completed three procurement management reviews at international locations in October 2014 during which pass-through contracts were discussed, but were not found to be an issue. USAID officials noted that they intend to revise their guidance governing procurement system reviews by the end of 2014. Similarly, both State and DOD officials indicated that they intend to rely on procurement management reviews to determine if contracting officers are properly implementing Section 802, but noted that associated review guidance has not been updated. At the same time, our review of current USAID, State, and DOD procurement management review instructions and checklists found that they do not reflect all Section 802 requirements. State officials believe that pass- through contracting issues will be addressed because its officials use the department's domestic contract file table of contents as a checklist, which includes sections on solicitation and pre-award documentation, to conduct contract file reviews. State does not currently plan to revise the guidance to specifically reflect Section 802 requirements. DOD acquisition officials noted that they have not yet determined what changes to guidance, if any, would be required. GAO/AIMD-00-21.3.1. specifically incorporating these requirements into review guidance, agencies may not effectively oversee compliance. Over the past 8 years, a number of legislative and regulatory changes have been enacted to enhance the government's insight into the billions of dollars that prime contractors award to subcontractors. Initially, the focus of these changes had been on requiring prime contractors to notify contracting officers when they intend to rely largely on subcontractors. Section 802 changed that paradigm by requiring contracting officers to consider alternative arrangements, such as directly contracting with subcontractors and to make a written determination that the accepted approach is in the best interest of the government, and to document the basis for such a determination when they receive such a notification. Neither USAID nor State has provided its contracting officers additional guidance to help them implement these new requirements. DOD, having the highest level of obligations for contracts that may be potentially subject to Section 802 requirements, has not taken any actions and is waiting for the issuance of a final FAR rule before deciding what, if any, revisions to its guidance are needed. USAID, State, and DOD intend to use procurement management reviews to monitor implementation of Section 802, but have not updated the related review processes and guidance. Without data on the extent to which agencies make use of contracts that rely largely on subcontractors, it is essential that agencies provide guidance to assist their contracting officers in implementing legislative requirements and develop oversight processes to assess their agencies' compliance. DOD's decision to wait until the FAR is revised next year rather than proactively initiating actions has increased the risk that its contracting personnel are not currently acting in compliance with the law and may also have missed opportunities to establish more beneficial contracting arrangements. While State and USAID obligate less for contracts that may be subject to Section 802, their more limited exposure does not obviate the need to provide guidance or management oversight. Federal internal control standards highlight the need for agencies to establish processes and procedures to ensure compliance with statutory provisions. We recommend that the Secretary of Defense, Secretary of State, and Administrator of USAID take the following two actions to help ensure contracting officers carry out the requirements of Section 802: issue guidance to assist contracting officers by identifying approaches for or examples of how to assess alternative contracting approaches to include the feasibility of contracting directly with proposed subcontractors, and documenting a determination that the approach selected is in the best interests of the government; and revise the processes and guidance governing management reviews of procurements to ensure that such reviews assess whether contracting officers are complying with the provisions of Section 802. We provided a draft of this report to DOD, State, and USAID for comment. DOD and State concurred with our recommendations, but USAID did not agree that additional guidance was necessary to assist contracting officers when assessing alternative contracting approaches and noted current management reviews would be used to identify subcontracting issues. The agencies' comments are summarized below. Written comments from DOD, State, and USAID are reproduced in appendixes II, III, and IV respectively. In response to the recommendation to identify approaches for, or examples of, how to assess alternative contracting approaches, and document a determination that the approach selected is in the best interests of the government, DOD and State concurred. DOD, by way of explaining its delay in issuing guidance, noted it was required to adhere to the regulatory rulemaking process and noted that the final FAR rule to implement Section 802 is expected to be issued in March 2015. Section 802 provided flexibility for DOD to issue guidance and regulations as may be necessary to ensure contracting officers take specific actions for certain solicitations and we continue to believe DOD should do so expeditiously. State noted that it will issue guidance to assist contracting officer to assess alternative contracting approaches and document the determination that the approach selected is in the best interest of the government. USAID did not believe it was necessary to issue additional guidance, stating that the FAR has provided specific actions for a contracting officer to follow to ensure that they identify and adequately reconsider proposed contracts and that to provide additional guidance may limit its contracting officers' discretion. As we noted in the report, USAID has restated these actions in a policy directive, but it has not provided contracting officers with guidance on how to perform these new requirements. Specifically, USAID has not provided examples of how to conduct an analysis of alternate acquisition approaches or determine the feasibility of contracting directly with proposed subcontractors, described what documentation is necessary, or identified where the required contracting officer's determination should be recorded. Rather than limit a contracting officer's discretion, we believe that more specific guidance will help contracting officer's comply with these new requirements, improve oversight, and align more closely with federal internal control standards. DOD and State concurred with our recommendation to revise their processes and guidance governing management reviews of procurements to ensure that such reviews assess whether contracting officers are complying with the provisions of Section 802. DOD indicated it will provide or revise and update guidance governing management reviews to ensure that such reviews assess whether contracting officers are complying with the provisions of Section 802. In addition, once the final FAR rule is issued, DOD noted it will assess whether it needs to include supplemental information in its Procedures, Guidance, and Information to ensure compliance. State noted that it will also revise its management review guidance to include compliance with Section 802. USAID did not specifically state whether it concurred with the recommendation, noting that it will be reviewing random files during procurement system reviews to see if contracting officers are taking appropriate steps in instances where an offeror proposes to award subcontracts for more than 70 percent of the total award. We agree that such an approach could be an appropriate step when conducting a procurement management review, but, as noted in the report, USAID has not revised the processes and guidance governing management reviews of procurements to do so. Federal internal control standards state that guidance helps to ensure that management directives are carried out and actions are taken to address risks and, accordingly, we continue to believe that USAID should revise its procurement management guidance. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, the Secretary of State, and the Administrator, USAID, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions 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 who made key contributions to this report are listed in appendix V. Section 802 of the National Defense Authorization Act (NDAA) for Fiscal Year 2013 directed the Secretary of Defense, Secretary of State, and the Administrator of the United States Agency for International Development (USAID) to issue guidance and regulations as may be necessary to ensure that when an offeror notifies the contracting officer of its intent to subcontract more than 70 percent of the total cost of the work to be performed on certain contracts or orders, contracting officers consider alternative contracting arrangements and make a written determination that the contracting approach selected is in the best interest of the government and document the basis for the determination. The conference report that accompanied the act mandated GAO to report on the implementation of this provision. We assessed the extent to which the Department of Defense (DOD), Department of State (State), and USAID revised their guidance and regulations to address pass-through contracting issues consistent with Section 802. To conduct our work, we compared the provisions of Section 802 to current DOD, State and USAID acquisition policies, guidance, and regulations. Specifically, we assessed whether these agencies issued policies, guidance, and regulations to ensure for certain solicitations when an offeror informs the agency of its intention to award subcontracts for more than 70 percent of the total cost of work to be performed that the contracting officer (1) considers the availability of alternative contracting arrangements and the feasibility of contracting directly with a subcontractor that will perform the bulk of the work, (2) makes a written determination that the contracting approach selected is in the best interest of the government, and (3) documents the basis for such determination. We interviewed acquisition officials at DOD's Office of Defense Procurement and Acquisition Policy, the military departments, Defense Contract Management Agency (DCMA), and Defense Contract Audit Agency (DCAA); State's Offices of Acquisition Management and Office of the Procurement Executive; and USAID's Office of Acquisitions and Assistance in Washington, D.C. and Kabul, Afghanistan, to understand the steps taken and future plans for completing the required guidance and regulation. We also interviewed Federal Acquisition Regulation Council representatives to understand content and timeframes for a government-wide regulation being developed in response to the Section 802 statutory requirements. To determine how agencies identify or monitor pass-through contracts, we interviewed acquisition officials at DOD, State, and USAID and reviewed guidance available to contracting officers and supporting agencies, such as DCAA and DCMA. We used the government's procurement database--Federal Procurement Data System-Next Generation (FPDS-NG)--to identify DOD, State, and USAID total obligations for fiscal year 2013 on contracts that by type and value could be subject to Section 802 requirements and reported having a plan to use subcontractors. For DOD, these are contracts where obligations exceed $700,000 and exclude certain fixed-price contracts. For State and USAID, contracts include those where obligations exceeded $150,000 and are cost-type contracts. To assess the reliability of FPDS-NG's data, we (1) performed electronic testing for obvious errors in accuracy and completeness; and (2) reviewed related documentation. We found the prime contract obligation data sufficiently reliable for the purposes of this report. We were unable to use subaward information in USASpending.gov to reliably identify whether these obligations were made to contractors whose subcontracting costs comprised over 70 percent of the total costs of the contract. As noted in our June 2014 report, federal reporting systems used to populate USASpending.gov do not identify all contract awards and that the information is largely inconsistent with agency records or unverifiable. We conducted this performance audit from June 2014 to December 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Penny Berrier (Assistant Director), Marycella Cortes, Thomas Twambly, Julia Kennon, Alyssa Weir, Danielle Greene, and Jena Sinkfield made key contributions to this report.

DOD, State, and USAID collectively spent approximately $322 billion on goods and services in fiscal year 2013. Nearly two-thirds of this dollar amount was awarded to prime contractors reportedly having a plan for using subcontractors. Concerns remain that the government could overpay contractors that provide no, or little, added value for work performed by lower-tier subcontractors. Section 802 of the NDAA for fiscal year 2013, mandated DOD, State, and USAID to issue guidance and regulations as necessary to ensure that contracting officers take additional steps prior to awarding pass-through contracts. The accompanying conference report mandated that GAO evaluate the implementation of these requirements. This report assesses the extent to which DOD, State, and USAID issued guidance and regulations consistent with Section 802. GAO reviewed policies, guidance, and regulations at the three agencies and interviewed acquisition officials. Congress required the Department of Defense (DOD), the Department of State (State), and the United States Agency for International Development (USAID) to issue guidance and regulations as necessary to ensure that contracting officers complete additional analyses prior to awarding pass-through contracts--contracts meeting certain criteria and in which prime contractors plan to subcontract 70 percent or more of the total cost of work to be performed--by July 2013. (See figure.) DOD, State, and USAID varied in their implementation of Section 802. Specifically, GAO's analysis of the agencies' policies and regulations found the following: USAID issued a policy directive in June 2013 restating Section 802 requirements and is updating checklists used by contracting officers. State issued a procurement bulletin in July 2014 that restated Section 802 requirements but has not taken further steps. Neither USAID nor State has provided its contracting officers additional information to help them implement these new requirements, such as by identifying how to assess alternative contracting arrangements or how to document their decisions. DOD has not taken any actions and is waiting for revisions to the Federal Acquisition Regulation--expected to be completed by March 2015--before deciding what, if any, changes to its guidance are needed. As of November 2014, none of the agencies have updated their management review processes to reflect Section 802 requirements. Federal government internal control standards state that control activities, such as policies and procedures, help to ensure that management directives are carried out and actions are taken to address risk. The lack of guidance and updated management review processes limits the agencies' ability to minimize the potential risk of paying excessive pass-through costs. To help ensure contracting officers carry out Section 802 requirements, GAO recommends that DOD, State, and USAID take two actions: issue guidance to help contracting officers perform the additional steps required, and revise management review processes and guidance to verify implementation. DOD and State agreed with GAO's recommendations but USAID did not, stating that additional guidance might limit its contracting officers' discretion. GAO maintains that both recommended actions are still warranted for USAID.

DHS's primary strategic planning effort in recent years has been the QHSR. DHS approached the 9/11 Commission Act requirement for a quadrennial homeland security review in three phases. In the first phase, DHS defined the nation's homeland security interests, identified the critical homeland security missions, and developed a strategic approach to those missions by laying out the principal goals, objectives, and strategic outcomes for the mission areas. DHS reported on the results of this effort in the February 2010 QHSR report in which the department identified 5 homeland security missions, 14 associated goals, and 43 objectives. The QHSR report also identified threats and challenges confronting U.S. homeland security, strategic objectives for strengthening the homeland security enterprise, and federal agencies' roles and responsibilities for homeland security. The QHSR identified five homeland security missions-- (1) Preventing Terrorism and Enhancing Security, (2) Securing and Managing Our Borders, (3) Enforcing and Administering Our Immigration Laws, (4) Safeguarding and Securing Cyberspace, and (5) Ensuring Resilience to Disasters--and goals and objectives to be achieved within each mission. A sixth category of DHS activities-- Providing Essential Support to National and Economic Security--was added in the fiscal year 2012 budget request but was not included in the 2010 QHSR report. In the second phase--the BUR--DHS identified its component agencies' activities, aligned those activities with the QHSR missions and goals, and made recommendations for improving the department's organizational alignment and business processes. DHS reported on the results of this second phase in the July 2010 BUR report. In the third phase DHS developed its budget plan necessary to execute the QHSR missions. DHS presented this budget plan in the President's fiscal year 2012 budget request, issued February 14, 2011, and the accompanying Fiscal Year 2012-2016 Future Years Homeland Security Program (FYHSP), issued in May 2011. In December 2010, we issued a report on the extent to which the QHSR addressed the 9/11 Commission Act's required reporting elements. We reported that of the nine 9/11 Commission Act reporting elements for the QHSR, DHS addressed three and partially addressed six. Elements DHS addressed included a description of homeland security threats and an explanation of underlying assumptions for the QHSR report. Elements addressed in part included a prioritized list of homeland security missions, an assessment of the alignment of DHS with the QHSR missions, and discussions of cooperation between the federal government and state, local, and tribal governments. In September 2011, we reported on the extent to which DHS consulted with stakeholders in developing the QHSR. DHS solicited input from various stakeholder groups in conducting the first QHSR, but DHS officials, stakeholders GAO contacted, and other reviewers of the QHSR noted concerns with time frames provided for stakeholder consultations and outreach to nonfederal stakeholders. DHS consulted with stakeholders--federal agencies; department and component officials; state, local, and tribal governments; the private sector; academics; and policy experts-- through various mechanisms, such as the solicitation of papers to help frame the QHSR and a web-based discussion forum. DHS and these stakeholders identified benefits from these consultations, such as DHS receiving varied perspectives. However, stakeholders also identified challenges in the consultation process. For example: Sixteen of 63 stakeholders who provided comments to GAO noted concerns about the limited time frames for providing input into the QHSR or BUR. Nine other stakeholders commented that DHS consultations with nonfederal stakeholders, such as state, local, and private-sector entities, could be enhanced by including more of these stakeholders in QHSR consultations. Reports on the QHSR by the National Academy of Public Administration, which administered DHS's web-based discussion forum, and a DHS advisory committee comprised of nonfederal representatives noted that DHS could provide more time and strengthen nonfederal outreach during stakeholder consultations. By providing more time for obtaining feedback and examining mechanisms to obtain nonfederal stakeholders' input, DHS could strengthen its management of stakeholder consultations and be better positioned to review and incorporate, as appropriate, stakeholders' input during future reviews. We recommended that DHS provide more time for consulting with stakeholders during the QHSR process and examine additional mechanisms for obtaining input from nonfederal stakeholders during the QHSR process, such as whether panels of state, local, and tribal government officials or components' existing advisory or other groups could be useful. DHS concurred and reported that it will endeavor to incorporate increased opportunities for time and meaningful stakeholder engagement and will examine the use of panels of nonfederal stakeholders for the next QHSR. The 9/11 Commission Act called for DHS to prioritize homeland security missions in the QHSR. As we reported in December 2010, DHS identified five homeland security missions in the QHSR, but did not fully address the 9/11 Commission Act reporting element because the department did not prioritize the missions. According to DHS officials, the five missions listed in the QHSR report have equal priority--no one mission is given greater priority than another. Moreover, they stated that in selecting the five missions from the many potential homeland security mission areas upon which DHS could focus its efforts, the five mission areas are DHS's highest-priority homeland security concerns. Risk management has been widely supported by Congress and DHS as a management approach for homeland security, enhancing the department's ability to make informed decisions and prioritize resource investments. In September 2011, we also reported that in the 2010 QHSR report, DHS identified threats confronting homeland security, such as high-consequence weapons of mass destruction and illicit trafficking, but did not conduct a national risk assessment for the QHSR. DHS officials stated that at the time DHS conducted the QHSR, DHS did not have a well-developed methodology or the analytical resources to complete a national risk assessment that would include likelihood and consequence assessments--key elements of a national risk assessment. The QHSR terms of reference, which established the QHSR process, also stated that at the time the QHSR was launched, DHS lacked a process and a methodology for consistently and defensibly assessing risk at a national level and using the results of such an assessment to drive strategic prioritization and resource decisions. In recognition of a need to develop a national risk assessment, DHS created a study group as part of the QHSR process that developed a national risk assessment methodology. DHS officials plan to implement a national risk assessment in advance of the next QHSR, which DHS anticipates conducting in fiscal year 2013. Consistent with DHS's plans, we reported that a national risk assessment conducted in advance of the next QHSR could assist DHS in developing QHSR missions that target homeland security risks and could allow DHS to demonstrate how it is reducing risk across multiple hazards. DHS considered various factors in identifying high-priority BUR initiatives for implementation in fiscal year 2012 but did not include risk information as one of these factors as called for in our prior work and DHS's risk management guidance. Through the BUR, DHS identified 43 initiatives aligned with the QHSR mission areas to help strengthen DHS's activities and serve as mechanisms for implementing those mission areas (see app. I for a complete list). According to DHS officials, the department could not implement all of these initiatives in fiscal year 2012 because of, among other things, resource constraints and organizational or legislative changes that would need to be made to implement some of the initiatives. In identifying which BUR initiatives to prioritize for implementation in fiscal year 2012, DHS leadership considered (1) "importance," that is, how soon the initiative needed to be implemented; (2) "maturity," that is, how soon the initiative could be implemented; and (3) "priority," that is, whether the initiative enhanced secretarial or presidential priorities. Risk information was not included as an element in any of these three criteria, according to DHS officials, because of differences among the initiatives that made it difficult to compare risks across them, among other things. However, DHS officials stated that there are benefits to considering risk information in resource allocation decisions. Consideration of risk information during future implementation efforts could help strengthen DHS's prioritization of mechanisms for implementing the QHSR, including assisting in determinations of which initiatives should be implemented in the short or longer term. In our September 2011 report, we recommended that DHS examine how risk information could be used in prioritizing future QHSR initiatives. DHS concurred and reported that DHS intends to conduct risk analysis specific to the QHSR in advance of the next review and will use the analysis as an input into decision making related to implementing the QHSR. Further, in September 2011, we reported on progress made by DHS in implementing its homeland security missions since 9/11. As part of this work, we identified various themes that affected DHS's implementation efforts. One of these themes was DHS's efforts to strategically manage risk across the department. We reported that DHS made important progress in assessing and analyzing risk across sectors. For example, in January 2009 DHS published its Integrated Risk Management Framework, which, among other things, calls for DHS to use risk assessments to inform decision making. In May 2010, the Secretary issued a Policy Statement on Integrated Risk Management, calling for DHS and its partners to manage risks to the nation. We also reported that DHS had more work to do in using this information to inform planning and resource-allocation decisions. Our work shows that DHS has conducted risk assessments across a number of areas, but should strengthen the assessments and risk management process. For example: In June 2011, we reported that DHS and Health and Human Services could further strengthen coordination for chemical, biological, radiological, and nuclear (CBRN) risk assessments. Among other things, we recommended that DHS establish time frames and milestones to better ensure timely development and interagency agreement on written procedures for development of DHS's CBRN risk assessments. DHS concurred and stated that the department had begun efforts to develop milestones and time frames for its strategic and implementation plans for interagency risk assessment development. In November 2011, we reported that the U.S. Coast Guard used its Maritime Security Risk Assessment Model at the national level to focus resources on the highest-priority targets, leading to Coast Guard operating efficiencies, but use at the local level for operational and tactical risk-management efforts has been limited by a lack of staff time, the complexity of the risk tool, and competing mission demands. Among other things, we recommended that the Coast Guard provide additional training for sector command staff and others involved in sector management and operations on how the model can be used as a risk-management tool to inform sector-level decision making. The Coast Guard concurred and stated that it will explore other opportunities to provide risk training to sector command staff, including online and webinar training opportunities. In November 2011, we reported that the Federal Emergency Management Agency (FEMA) used risk assessments to inform funding-allocation decisions for its port security grant program. However, we found that FEMA could further enhance its risk-analysis model and recommended incorporating the results of past security investments and refining other data inputs into the model. DHS concurred with the recommendation, but did not provide details on how it plans to implement it. In October 2009, we reported that TSA's strategic plan to guide research, development, and deployment of passenger checkpoint screening technologies was not risk-based. Among other things, we recommended that DHS conduct a complete risk assessment related to TSA's passenger screening program and incorporate the results into the program's strategy. DHS concurred, and in July 2011 reported actions underway to address it, such as beginning to use a risk- management analysis process to analyze the effectiveness and efficiency of potential countermeasures and effect on the commercial aviation system. In September 2011, we reported that DHS established performance measures for most of the QHSR objectives and had plans to develop additional measures. Specifically, DHS established new performance measures, or linked existing measures, to 13 of 14 QHSR goals, and to 3 of 4 goals for the sixth category of DHS activities--Providing Essential Support to National and Economic Security. DHS reported these measures in its fiscal years 2010-2012 Annual Performance Report. For goals without measures, DHS officials told us that the department was developing performance measures and planned to publish them in future budget justifications to Congress. In September 2011, we also reported that DHS had not yet fully developed outcome-based measures for assessing progress and performance for many of its mission functions. We recognized that DHS faced inherent difficulties in developing performance goals and measures to address its unique mission and programs, such as in developing measures for the effectiveness of its efforts to prevent and deter terrorist attacks. While DHS had made progress in strengthening performance measurement, our work across the department has shown that a number of programs lacked outcome goals and measures, which may have hindered the department's ability to effectively assess results or fully assess whether the department was using resources effectively and efficiently. For example, our work has shown that DHS did not have performance measures for assessing the effectiveness of key border security and immigration programs, to include: In September 2009, we reported that U.S. Customs and Border Protection (CBP) had invested $2.4 billion in tactical infrastructure (fencing, roads, and lighting) along the southwest border under the Secure Border Initiative--a multiyear, multibillion dollar program aimed at securing U.S. borders and reducing illegal immigration. However, DHS could not measure the effect of this investment in tactical infrastructure on border security. We recommended that DHS conduct an evaluation of the effect of tactical infrastructure on effective control of the border. DHS concurred with the recommendation and subsequently reported that the ongoing analysis is expected to be completed in February 2012. In August 2009, we reported that CBP had established three performance measures to report the results of checkpoint operations, which provided some insight into checkpoint activity. However, the measures did not indicate if checkpoints were operating efficiently and effectively, and data reporting and collection challenges hindered the use of results to inform Congress and the public on checkpoint performance. We recommended that CBP improve the measurement and reporting of checkpoint effectiveness. CBP agreed and, as of September 2011, reported plans to develop and better use data on checkpoint effectiveness. Further, we reported that U.S. Immigration and Customs Enforcement (ICE) and CBP did not have measures for assessing the performance of key immigration enforcement programs. For example, in April 2011, we reported that ICE did not have measures for its overstay enforcement efforts, and in May 2010 that CBP did not have measures for its alien smuggling investigative efforts, making it difficult for these agencies to determine progress made in these areas and evaluate possible improvements. We recommended that ICE and CBP develop performance measures for these two areas. They generally agreed and reported actions underway to develop these measures. In 2003, GAO designated the transformation of DHS as high risk because DHS had to transform 22 agencies--several with major management challenges--into one department, and failure to effectively address DHS's management and mission risks could have serious consequences for U.S. national and economic security. This high-risk area includes challenges in strengthening DHS's management functions--financial management, human capital, information technology, and acquisition management--the impact of those challenges on DHS's mission implementation, and challenges in integrating management functions within and across the department and its components. Addressing these challenges would better position DHS to align resources to its strategic priorities, assess progress in meeting mission goals, enhance linkages within and across components, and improve the overall effectiveness and efficiency of the department. On the basis of our prior work, in September 2010, we identified and provided to DHS 31 key actions and outcomes that are critical to addressing the challenges within the department's management functions and in integrating those functions across the department. These key actions and outcomes include, among others, validating required acquisition documents at major milestones in the acquisition review process; obtaining and then sustaining unqualified audit opinions for at least 2 consecutive years on the departmentwide financial statements while demonstrating measurable progress in reducing material weaknesses and significant deficiencies; and implementing its workforce strategy and linking workforce planning efforts to strategic and program- specific planning efforts to identify current and future human capital needs. In our February 2011 high-risk update, we reported that DHS had taken action to implement, transform, and strengthen its management functions, and had begun to demonstrate progress in addressing some of the actions and outcomes we identified within each management area. For example, we reported that the Secretary and Deputy Secretary of Homeland Security, and other senior officials, have demonstrated commitment and top leadership support to address the department's management challenges. DHS also put in place common policies, procedures, and systems within individual management functions, such as human capital, that help to integrate its component agencies. For example, DHS revised its acquisition management oversight policies to include more detailed guidance to inform departmental acquisition decision making. strengthened its enterprise architecture, or blueprint to guide information technology acquisitions, and improved its policies and procedures for investment management. developed corrective action plans for its financial management weaknesses, and, for the first time since its inception, DHS earned a qualified audit opinion on its fiscal year 2011 balance sheet; and issued its Workforce Strategy for Fiscal Years 2011-2016, which contains the department's workforce goals, objectives, and performance measures for human capital management. Further, in January 2011, DHS provided us with its Integrated Strategy for High Risk Management, which summarized the department's preliminary plans for addressing the high-risk area. Specifically, the strategy contained details on the implementation and transformation of DHS, such as corrective actions to address challenges within each management area, and officials responsible for implementing those corrective actions. DHS provided us with updates to this strategy in June and December 2011. We provided DHS with written feedback on the January 2011 strategy and the June update, and have worked with the department to monitor implementation efforts. We noted that both versions of the strategy were generally responsive to actions and outcomes we identified for the department to address the high-risk area. For example, DHS included a management integration plan containing information on initiatives to integrate its management functions across the department. Specifically, DHS plans to establish a framework for managing investments across its components and management functions to strengthen integration within and across those functions, as well as to ensure that mission needs drive investment decisions. This framework seeks to enhance DHS resource decision making and oversight by creating new department-level councils to identify priorities and capability gaps, revising how DHS components and lines of business manage acquisition programs, and developing a common framework for monitoring and assessing implementation of investment decisions. These actions, if implemented effectively, should help to further and more effectively integrate the department and enhance DHS's ability to implement its strategies. However, we noted in response to the June update that specific resources to implement planned corrective actions were not consistently identified, making it difficult to assess the extent to which DHS has the capacity to implement these actions. Additionally, for both versions, we noted that the department did not provide information on the underlying metrics or factors DHS used to rate its progress, making it difficult for us to assess DHS's overall characterizations of progress. We are currently assessing the December 2011 update and plan to provide DHS with feedback shortly. Although DHS has made progress in strengthening and integrating its management functions, the department continues to face significant challenges affecting the department's transformation efforts and its ability to meet its missions. In particular, challenges within acquisition, information technology, financial, and human capital management have resulted in performance problems and mission delays. For example, DHS does not yet have enough skilled personnel to carry out activities in some key programmatic and management areas, such as for acquisition management. DHS also has not yet implemented an integrated financial management system, impeding its ability to have ready access to information to inform decision making, and has been unable to obtain a clean audit opinion on the audit of its consolidated financial statements since its establishment. Going forward, DHS needs to implement its Integrated Strategy for High Risk Management, and continue its efforts to (1) identify and acquire resources needed to achieve key actions and outcomes; (2) implement a program to independently monitor and validate corrective measures; and (3) show measurable, sustainable progress in implementing corrective actions and achieving key outcomes. Demonstrated, sustained progress in all of these areas will help DHS strengthen and integrate management functions within and across the department and its components. Chairman McCaul, Ranking Member Keating, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to respond to any questions that you may have. For questions about this statement, please contact David C. Maurer at (202) 512-9627 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 Rebecca Gambler, Acting Director; Ben Atwater; Scott Behen; Janay Sam; Jean Orland; and Justin Dunleavy. Key contributors for the previous work that this testimony is based on are listed within each individual product. Initiatives selected by DHS for implementation in fiscal year 2012 listed in bold. Coast Guard: Security Risk Model Meets DHS Criteria, but More Training Could Enhance Its Use for Managing Programs and Operations. GAO-12-14. Washington, D.C.: November 17, 2011. Port Security Grant Program: Risk Model, Grant Management, and Effectiveness Measures Could Be Strengthened. GAO-12-47. Washington, D.C.: November 17, 2011. Quadrennial Homeland Security Review: Enhanced Stakeholder Consultation and Use of Risk Information Could Strengthen Future Reviews. GAO-11-873. Washington, D.C.: September 15, 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. National Preparedness: DHS and HHS Can Further Strengthen Coordination for Chemical, Biological, Radiological, and Nuclear Risk Assessments. GAO-11-606. Washington, D.C.: June 21, 2011. Overstay Enforcement: Additional Mechanisms for Collecting, Assessing, and Sharing Data Could Strengthen DHS's Efforts but Would Have Costs. GAO-11-411. Washington, D.C.: April 15, 2011. High-Risk Series: An Update. GAO-11-278. Washington, D.C: February 2011. Alien Smuggling: DHS Needs to Better Leverage Investigative Resources to Measure Program Performance along the Southwest Border. GAO-10-328. Washington, D.C.: May 24, 2010. Quadrennial Homeland Security Review: 2010 Reports Addressed Many Required Elements, but Budget Planning Not Yet Completed. GAO-11-153R. Washington, D.C.: December 16, 2010. Aviation Security: DHS and TSA Have Researched, Developed, and Begun Deploying Passenger Checkpoint Screening Technologies, but Continue to Face Challenges. GAO-10-128. Washington, D.C.: October 7, 2009. Secure Border Initiative: Technology Deployment Delays Persist and the Impact of Border Fencing Has Not Been Assessed. GAO-09-1013T. Washington, D.C.: September 17, 2009. Border Patrol: Checkpoints Contribute to Border Patrol's Mission, but More Consistent Data Collection and Performance Measurement Could Improve Effectiveness. GAO-09-824. Washington, D.C.: August 31, 2009. Transportation Security: Comprehensive Risk Assessments and Stronger Internal Controls Needed to Help Inform TSA Resource Allocation. GAO-09-492. Washington, D.C.: March 27, 2009. Risk Management: Further Refinements Needed to Assess Risks and Prioritize Protective Measures at Ports and Other Critical Infrastructure. GAO-06-91. Washington. D.C.: Dec. 15, 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.

The Implementing Recommendations of the 9/11 Commission Act of 2007 (9/11 Commission Act) requires that beginning in fiscal year 2009 and every 4 years thereafter the Department of Homeland Security (DHS) conduct a review that provides a comprehensive examination of the homeland security strategy of the United States. In February 2010, DHS issued its first Quadrennial Homeland Security Review (QHSR) report, outlining a strategic framework for homeland security. In July 2010 DHS issued a report on the results of its Bottom-Up Review (BUR), a departmentwide assessment to implement the QHSR strategy by aligning DHS's programmatic activities, such as inspecting cargo at ports of entry, and its organizational structure with the missions and goals identified in the QHSR. This testimony addresses DHS's efforts to (1) strategically plan its homeland security missions through the QHSR, (2) set strategic priorities and measure performance, and (3) build a unified department. This testimony is based on GAO reports issued in December 2010, February 2011, and September 2011. DHS's primary strategic planning effort in recent years has been the QHSR. In September 2011, GAO reported on the extent to which DHS consulted with stakeholders in developing the QHSR. DHS solicited input from various stakeholder groups in conducting the first QHSR, but DHS officials, several stakeholders GAO contacted, and other reviewers of the QHSR noted concerns with time frames provided for stakeholder consultations and outreach to nonfederal stakeholders. Specifically, DHS consulted with stakeholders--federal agencies; department and component officials; state, local, and tribal governments; the private sector; academics; and policy experts--through various mechanisms, such as the solicitation of papers to help frame the QHSR. DHS and these stakeholders identified benefits from these consultations, such as DHS receiving varied perspectives. However, stakeholders also identified challenges in the consultation process, such as concerns about the limited time frames for providing input into the QHSR or BUR and the need to examine additional mechanisms for including more nonfederal stakeholders in consultations. By providing more time for obtaining feedback and examining mechanisms to obtain nonfederal stakeholders' input, DHS could strengthen its management of stakeholder consultations and be better positioned to review and incorporate, as appropriate, stakeholders' input during future reviews. DHS considered various factors in identifying high-priority BUR initiatives for implementation in fiscal year 2012 but did not include risk information as one of these factors, as called for in GAO's prior work and DHS's risk-management guidance. Through the BUR, DHS identified 43 initiatives aligned with the QHSR mission areas to serve as mechanisms for implementing those mission areas. According to DHS officials, DHS did not consider risk information in prioritizing initiatives because of differences among the initiatives that made it difficult to compare risks across them, among other things. In September 2011, GAO reported that consideration of risk information during future implementation efforts could help strengthen DHS's prioritization of mechanisms for implementing the QHSR. Further, GAO reported that DHS established performance measures for most of the QHSR objectives and had plans to develop additional measures. However, with regard to specific programs, GAO's work has shown that a number of programs and efforts lack outcome goals and measures, hindering the department's ability to effectively assess results. In 2003, GAO designated the transformation of DHS as high risk because DHS had to transform 22 agencies--several with major management challenges--into one department, and failure to effectively address DHS's management and mission risks could have serious consequences for U.S. national and economic security. DHS has taken action to implement, transform, and strengthen its management functions, such as developing a strategy for addressing this high-risk area and putting in place common policies, procedures, and systems within individual management functions, such as human capital, that help to integrate its component agencies. However, DHS needs to demonstrate measurable, sustainable progress in implementing its strategy and corrective actions to address its management challenges. GAO made recommendations in prior reports for DHS to, among other things, provide more time for consulting with stakeholders during the QHSR process, examine additional mechanisms for obtaining input from nonfederal stakeholders, and examine how risk information could be used in prioritizing future QHSR initiatives. DHS concurred and has actions planned or underway to address them.

SAFETEA-LU authorized over $45 billion for federal transit programs, including $8 billion for the New Starts program, from fiscal year 2005 through fiscal year 2009. Under New Starts, FTA identifies and recommends fixed-guideway transit projects for funding--including heavy, light, and commuter rail; ferry; and certain bus projects (such as bus rapid transit). FTA generally funds New Starts projects through full funding grant agreements (FFGA), which establish the terms and conditions for federal participation in a New Starts project. FFGAs also define a project's scope, including the length of the system and the number of stations; its schedule, including the date when the system is expected to open for service; and its cost. For a project to obtain an FFGA, it must progress through a local or regional review of alternatives and meet a number of federal requirements, including requirements for information used in the New Starts evaluation and rating process (see fig. 1). New Starts projects must emerge from a regional, multimodal transportation planning process. The first two phases of the New Starts process--systems planning and alternatives analysis-- address this requirement. The systems planning phase identifies the transportation needs of a region, while the alternatives analysis phase provides information on the benefits, costs, and impacts of different options, such as rail lines or bus routes. The alternatives analysis phase results in the selection of a locally preferred alternative, which is intended to be the New Starts project that FTA evaluates for funding, as required by statute. After a locally preferred alternative is selected, the project sponsor submits an application to FTA for the project to enter the preliminary engineering phase. When this phase is completed and federal environmental requirements are satisfied, FTA may approve the project's advancement into final design, after which FTA may approve the project for an FFGA and proceed to construction, as provided for in statute. FTA oversees grantees' management of projects from the preliminary engineering through construction phases and evaluates the projects for advancement into each phase of the process, as well as annually for the New Starts report to Congress. To help inform administration and congressional decisions about which projects should receive federal funds, FTA assigns ratings on the basis of various statutorily defined evaluation criteria--including both financial commitment and project justification criteria--and then assigns an overall rating. These evaluation criteria reflect a broad range of benefits and effects of the proposed project, such as cost-effectiveness, as well as the ability of the project sponsor to fund the project and finance the continued operation of its transit system. FTA assigns the proposed project a rating for each criterion and then assigns a summary rating for local financial commitment and project justification. Finally, FTA develops an overall project rating. Projects are rated at several points during the New Starts process--as part of the evaluation for entry into the preliminary engineering and final design phases, and yearly for inclusion in the New Starts annual report. As required by statute, the administration uses the FTA evaluation and rating process, along with the phase of development of New Starts projects, to decide which projects to recommend to Congress for funding. Although many projects receive a summary rating that would make them eligible for FFGAs, only a few are proposed for FFGAs in a given fiscal year. FTA proposes projects for FFGAs when it believes that the projects will be able to meet the following conditions during the fiscal year for which funding is proposed: All non-federal project funding must be committed and available for the project. The project must be in the final design phase and have progressed to the point where uncertainties about costs, benefits, and impacts (i.e., environmental or financial) are minimized. The project must meet FTA's tests for readiness and technical capacity, which confirm that there are no remaining cost, project scope, or local financial commitment issues. SAFETEA-LU made a number of changes to the New Starts program and FTA has made progress in implementing some of those changes. However, FTA has more work to do to implement these changes. In particular, although the Small Starts program has fewer application and document submission requirements than the New Starts program, project sponsors have expressed concern that the Small Starts program could be further streamlined. In addition, SAFETEA-LU added economic development to the list of evaluation criteria, but FTA has not fully incorporated this criterion into the New Starts and Small Starts evaluation and rating processes. SAFETEA-LU introduced a number of changes to the New Starts program. For example, SAFETEA-LU added economic development to the list of evaluation criteria that FTA must use in evaluating and rating New Starts projects and required FTA to issue notice and guidance each time significant changes are made to the program. In addition, SAFETEA-LU established the Small Starts program, a new capital investment grant program to provide funding for lower-cost fixed- and non-fixed-guideway projects such as bus rapid transit, streetcars, and commuter rail projects. This program is intended to advance smaller-scale projects through an expedited and streamlined evaluation and rating process. Small Starts projects are defined as those that require less than $75 million in federal funding and have a total cost of less than $250 million. According to FTA's guidance, Small Starts projects must (a) meet the definition of a fixed guideway for at least 50 percent of the project length in the peak period or (b) be a corridor-based bus project with the following minimum elements: traffic signal priority/pre-emption, to the extent, if any, that there are traffic signals on the corridor, low-floor vehicles or level boarding, branding of the proposed service, and 10 minute peak/12 minute off-peak running times (i.e., headways) or better while operating at least 14 hours per weekday. FTA has made progress in implementing SAFETEA-LU changes. For example, it published the New Starts policy guidance in January 2006 and February 2007, and interim guidance on the Small Starts program in July 2006. The July 2006 interim guidance introduced a separate eligibility category within the Small Starts program for "Very Small Starts" projects. Small Starts projects that qualify as Very Small Starts are simple, low-cost projects that FTA has determined qualify for a simplified evaluation and rating process. These projects must meet the same eligibility requirements as Small Starts projects and be located in corridors with more than 3,000 existing riders per average weekday who will benefit from the proposed project. In addition, the projects must have a total capital cost less than $50 million (for all project elements) and a per-mile cost of less than $3 million, excluding rolling stock (e.g., train cars). Table 1 describes SAFETEA-LU provisions for the New Starts program and the status of the implementation of those provisions as of April 2007. Although FTA has made progress in implementing SAFETEA-LU changes, more work remains. Project sponsors identified two key issues for FTA to consider as it moves forward in implementing SAFETEA-LU changes: further streamline the Small Starts program and fully incorporate economic development into the New Starts and Small Starts evaluation and rating processes. FTA officials agree that the Small Starts program can be further streamlined. Further, FTA officials said they understand the importance of economic development, and are currently working to develop an appropriate economic development measure. In implementing the Small Starts program, FTA has taken steps to streamline the application and evaluation and rating process for smaller- scale transit projects, as envisioned by SAFETEA-LU. According to our analysis of the number and types of requirements for the New Starts and Small Starts application processes, the Small Starts process has fewer requirements. For example, in the categories of travel forecasting, project justification, and local financial commitment, the requirements were reduced. In addition, FTA developed simplified methods for travel forecasts that predict transportation benefits and reduced the number of documents that need to be submitted as part of the Small Starts application process. For example, the number of documents required for the Small Starts application is one-quarter fewer than those for the New Starts program. Furthermore, FTA established the Very Small Starts program, which has even fewer application and document submission requirements than the Small Starts program. Despite these efforts, many of the project sponsors we interviewed find the Small Starts application process time consuming and costly to complete, and would like to see FTA further streamline the process. Frequently, project sponsors said that the current Small Starts application process takes as long and costs as much to complete as the New Starts application process, even though the planned projects cost less. For example, a project sponsor who applied for the Small Starts program told us that FTA asks its applicants to submit templates used in the New Starts application process that call for information not relevant for a Small Starts project. For example, while project sponsors are only required to submit an opening year travel forecast as part of their Small Starts application, the template FTA provides project sponsors asks for information on additional forecasting years. The project sponsor suggested that FTA develop a separate set of templates for the Small Starts program that would ask only for Small Starts-related information. FTA officials told us that in these cases, they would not expect project sponsors to provide the additional information that is not required. Another project sponsor we interviewed told us that although FTA tried to streamline the process by requiring ridership projections only for the opening year of Small Starts projects, the environmental impact statement still mandates the development of multi- year ridership projections. Such extensive ridership projections take a considerable amount of work, staff time, and funding to produce. Several other project sponsors who applied to the Small Starts or Very Small Starts programs expressed additional concerns about having to provide duplicate information, such as project finance and capital cost data that can be found in other required worksheets. FTA officials do not believe that such duplicate information is burdensome for projects sponsors to submit. However, because some of the project sponsors are smaller-sized entities and have no previous experience with the New Starts program, the concerns expressed by project sponsors likely reflect their inexperience and lack of in-house expertise and resources. In reviewing the Small Starts application process requirements, we also found that the application is not, in some cases, tailored for Small Starts applicants and, in several instances, requests duplicate information. FTA officials acknowledged that the Small Starts application process could be further streamlined and are working to reduce the burden, such as minimizing the duplicate information project sponsors are currently required to submit. However, FTA officials noted that some requirements are statutorily-defined or reflect industry-established planning principles. For example, SAFETEA-LU requires that projects, even Small Starts projects, emerge from an alternatives analysis that considered various options to address the transportation problem at hand. Therefore, only certain aspects of the process can or should be streamlined. Project sponsors also noted that FTA has not fully incorporated economic development--a new project justification evaluation criterion identified by SAFETEA-LU--into the evaluation process. Specifically, FTA currently assigns a weight of 50 percent each to cost-effectiveness and land use to calculate a project's overall rating; the other four statutorily-identified criteria, including economic development, mobility improvements, operating efficiencies, and environmental benefits, are not weighted. To reflect SAFETEA-LU's increased emphasis on economic development, FTA has encouraged project sponsors to submit information that they believe demonstrates the impacts of their proposed transit investments on economic development. According to FTA, this information is considered as an "other factor" in the evaluation process, but not weighted. However, FTA officials told us that few project sponsors submit information on their projects' economic development benefits for consideration as an "other factor." We previously reported that FTA's reliance on two evaluation criteria to calculate a project's overall rating is drifting away from the multiple-measure evaluation and rating process outlined in statute and current New Starts regulations. Thus, we recommended that FTA improve the measures used to evaluate New Starts projects so that all of the statutorily-defined criteria can be used in determining a project's overall rating, or provide a crosswalk in the regulations showing clear linkages between the criteria outlined in statute and the criteria and measures used in the evaluation and rating process in the upcoming rulemaking process. Many of the project sponsors and all industry groups we interviewed also stated that certain types of projects are penalized in the evaluation and rating process because of the weights assigned to the different evaluation criteria. Specifically, by not weighting economic development, the project sponsors and industry groups said that the evaluation and rating process does not consider an important benefit of some transit projects. They also expressed concern that the measure FTA uses to determine cost- effectiveness does not adequately capture the benefits of certain types of fixed guideway projects--such as streetcars--that have shorter systems and provide enhanced access to a dense urban core rather than transport commuters from longer distances (like light or heavy rail). Project sponsors and an industry group we interviewed further noted that FTA's cost effectiveness measure has influenced some project sponsors to change their project designs from more traditional fixed-guideway systems like light rail or streetcars to bus rapid transit, expressly to receive a more favorable cost-effectiveness rating from FTA. According to FTA officials, they understand the importance of economic development to the transit community and the concerns raised by project sponsors, and said they are currently working to develop an appropriate economic development measure. FTA is currently soliciting input from industry groups on how to measure economic development, studying possible options, and is planning to describe how it will incorporate economic development into the evaluation criteria in its upcoming rulemaking. FTA officials also stated that incorporating economic development into the evaluation process prior to the issuance of a regulation would have the potential of creating significant evaluation and rating uncertainty for project sponsors. Furthermore, they agreed with our previous recommendation that this issue should be addressed as part of their upcoming rulemaking, which they expect to be completed in April 2008. FTA officials noted that they have had difficulty developing an economic development measure that both accurately measures benefits and distinguishes competing projects. For example, FTA officials said that separating economic development benefits from land use benefits-- another New Starts evaluation criterion--is difficult. In addition, FTA noted that many economic development benefits result from direct benefits (e.g., travel time savings), and therefore, including them in the evaluation could lead to double counting the benefits FTA already measures and uses to evaluate projects. Furthermore, FTA noted that some economic development impacts may represent transfers between regions rather than a net benefit for the nation, raising questions about the usefulness of these benefits for a national comparison of projects. We have also reported on many of the same challenges of measuring and forecasting indirect benefits, such as economic development and land use impacts. For example, we noted that certain benefits are often double counted when evaluating transportation projects. We also noted that indirect benefits, such as economic development, may be more correctly considered transfers of direct user benefits or economic activity from one area to another. Therefore, estimating and adding such indirect benefits to direct benefits could constitute double counting and lead to overestimating a project's benefits. Despite these challenges, we have previously reported that it is important to consider economic development and land use impacts, since they often drive local transportation investment choices. The number of projects in the New Starts pipeline has decreased since the fiscal year 2001 evaluation and rating cycle, and the types of projects in the pipeline have changed. FTA and project sponsors ascribed these changes to different factors, with FTA officials citing their increased scrutiny of applications and projects, and the project sponsors pointing to the complex, time-consuming, and costly nature of the New Starts process. FTA is considering different ideas on how to improve the New Starts process, some of which may address the concerns identified by project sponsors. Since the fiscal year 2001 evaluation cycle, the number of projects in the New Starts pipeline--which includes projects that are in the preliminary engineering or final design phases--has decreased by more than half, from 48 projects in the fiscal year 2001 evaluation cycle to 19 projects in the fiscal year 2008 evaluation cycle. Similarly, the number of projects FTA has evaluated, rated, and recommended for New Starts FFGAs has decreased since the fiscal year 2001 evaluation and rating cycle. Specifically, as shown in table 2, the number of projects that FTA evaluated and rated decreased by about two-thirds, from 41 projects to 14 projects. The composition of the pipeline--that is, the types of projects in the pipeline--has also changed since the fiscal year 2001 evaluation cycle. During fiscal years 2001 through 2007, light rail and commuter rail were the more prevalent modes for projects in the pipeline. In fiscal year 2008, bus rapid transit became the most common transit mode for projects in the pipeline. Overall, heavy rail has become a less common mode for projects in the pipeline since fiscal year 2001 (see fig. 2). The increase in bus rapid transit projects is likely due to a number of factors, including SAFETEA-LU's expanded definition of fixed guideways and foreign countries' positive experiences with this type of transit system. In particular, SAFETEA-LU expanded the definition of fixed guideways for the Small Starts program to include corridor-based bus projects. To be eligible, a corridor-based bus project must (1) operate in a separate right- of-way dedicated for public transit use for a substantial portion of the project, or (2) represent a substantial investment in a defined corridor. FTA and project sponsors identified different reasons for the decrease in the New Starts pipeline. FTA officials cited their increased scrutiny of applications to help ensure that only the strongest projects enter the pipeline, and said they had taken steps to remove projects from the pipeline that were inactive, not advancing, or did not adequately address identified problems. FTA officials told us that they believe projects had been progressing too slowly through the pipeline in recent years and therefore needed encouragement to move forward or be removed from the pipeline. Along these lines, since fiscal year 2004, FTA has issued warnings to project sponsors that alert them to specific project deficiencies that must be corrected by a specified date in order for the project to advance through the pipeline. If the deficiency is not corrected, FTA removes the project from the pipeline. To date, FTA has issued warnings for 13 projects. Three projects have only recently received a warning and their status is to be determined; 3 projects have adequately addressed the deficiency identified by FTA; 1 project was removed by FTA for failing to address the identified deficiency; and 6 projects were withdrawn from the pipeline by the projects' sponsor. FTA officials told us that project sponsors are generally aware of FTA's efforts to better manage the pipeline. Although FTA has taken steps to remove inactive or stalled projects from the pipeline, FTA officials noted that most projects have been withdrawn by their project sponsors, not FTA. According to FTA data, 23 projects have been withdrawn from the New Starts pipeline between 2001 and 2007. Of these, 16 were withdrawn at the request of the project sponsors, 6 were removed in response to efforts initiated by FTA, and 1 was removed at congressional direction (see fig. 3). Of the projects that were withdrawn by project sponsors, the most common reasons were that the projects were either reconfigured (the project scope or design was significantly changed) or reconsidered, or that the local financial commitment was not demonstrated. Similarly, FTA initiated the removal of 4 of the 6 projects for lack of a local financial commitment, often demonstrated by a failed referendum at the local level. Of the 23 projects withdrawn from the New Starts pipeline, 3 were expected to reenter the pipeline at a later date. The project sponsors we interviewed provided other reasons for the decrease in the number of projects in the New Starts pipeline. The most common reasons cited by project sponsors are that the New Starts process is too complex, costly, and time-consuming: Complexity and cost of the New Starts process: The majority of project sponsors we interviewed told us that the complexity of the requirements, including those for financial commitment projections and travel forecasts--which require extensive analysis and economic modeling--create disincentives to entering the New Starts pipeline. Sponsors also told us that the expense involved in fulfilling the application requirements, including the costs of hiring additional staff and private grant consultants, discourages some project sponsors with fewer resources from applying for New Starts funding. Time required to complete the New Starts process: More than half of the project sponsors we interviewed said that the application process is too time-consuming or leads to project delays. One project sponsor we interviewed told us that constructing a project with New Starts funding (as opposed to without) delays the time line for the project by as much as several years, which in turn leads to increased project costs as inflation and expenses from labor and materials increase with the delay. The lengthy nature of the New Starts process is due, at least in part, to the rigorous and systematic evaluation and rating process established by law--which we have previously noted could serve as a model for other transportation programs. In addition, FTA officials noted that most project delays are caused by the project sponsor, not FTA. Other reasons cited by project sponsors for the decrease in the pipeline include that project sponsors are finding other ways to fund projects, such as using other federal funds or seeking state, local, or private funding. One project sponsor remarked that sponsors try to avoid the New Starts process by obtaining a congressional designation, so that they can skip the cumbersome New Starts application process and construct their project faster. In addition, three other project sponsors we interviewed said that since the New Starts process is well-established and outcomes are predictable, many potential project sponsors do not even enter the pipeline because they realize their projects are unlikely to receive New Starts funding. Our survey results also reflect many of the reasons for the decline in the New Starts pipeline. Among the project sponsors we surveyed with completed transit projects, the most common reasons given for not applying to the New Starts program were that the process is too lengthy or that the sponsor wanted to move the project along faster than could be done in the New Starts process. About two-thirds of these project sponsors reported that their most recent project was eligible for New Starts, yet more than one-fourth of them did not apply to the program . Instead, these project sponsors reported using other federal funding and state, local, and private funding--with other federal and local funding being the most commonly used and private funding least commonly used--to fund their most recently completed project. Further, we also found that two-thirds of the large project sponsors we surveyed applied to the New Starts program for its most recently completed project while only about one-third of medium and smaller project sponsors did. Other reasons these project sponsors cited for not applying include sufficient funding from other sources to complete the project, concern about jeopardizing other projects submitted for New Starts funding, and difficulty understanding and completing the process and the program's eligibility requirements. FTA is considering and implementing different ideas on how to improve the New Starts process--many of which would address the concerns identified by project sponsors. For example, FTA has recognized that the process can be lengthy and in 2006, FTA commissioned a study to examine, among other issues, opportunities for accelerating and simplifying the process for implementing the New Starts program. According to FTA officials, one of the study's recommendations was to implement project development agreements to solidify New Starts project schedules and improve FTA's timeline for reviews. FTA officials told us that they are implementing this recommendation, and have already implemented project schedules for three New Starts projects in the pipeline. In addition, in February 2007, FTA proposed the elimination of a number of reporting requirements. FTA's Administrator stated that FTA will continue to look for ways to further improve the program. Our survey of project sponsors indicates that there will be a future demand for New Starts, Small Starts, and Very Small Starts funding. About forty-five percent (75 of 166) of the project sponsors we surveyed reported that they had a total of 137 planned transit projects, which we defined as those currently undergoing an alternatives analysis or other corridor- based planning study. According to the project sponsors, they anticipate seeking New Starts, Small Starts, or Very Small Starts funding for 100 of these 137 planned projects. More specifically, they anticipate seeking New Starts funding for 57 of the planned projects; Small Starts funding for 29 of the planned projects; and Very Small Starts funding for 14 of the planned projects (see fig 4). Although the project sponsors we surveyed indicated that they were considering a range of project type alternatives in their planning, the most commonly cited alternatives were bus rapid transit and light rail. All of the Small Starts and Very Small Starts project sponsors we interviewed view the new Small Starts and Very Small Starts programs favorably. These project sponsors told us that they appreciate the emphasis FTA has placed on smaller transit projects through its new programs and the steps FTA has taken to streamline the application process for the programs. The project sponsors also told us that the Small Starts and Very Small Starts programs address a critical and unmet funding need, and that they believe their projects will be more competitive under these programs then under the New Starts program because they are vying for funding with projects and agencies of similar size. FTA told us that they have been responsive in providing assistance on the program when contacted. Our survey results also indicate that, through its Small Starts and Very Small Starts programs, FTA is attracting project sponsors that would not have otherwise applied for the New Starts program or have not previously applied to the New Starts program. For example, project sponsors indicated that they would not have applied for New Starts funding for 14 of the 18 Small Starts and Very Small Starts projects identified in our survey, if the Small Starts and Very Small Starts programs had not been established. In addition, of 28 project sponsors that intend to seek Small Starts or Very Small Starts funding for their planned projects, 13 have not previously applied for New Starts, Small Starts, or Very Small Starts funding. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other Members of the Subcommittee may have at this time. For further information on this testimony, please contact Katherine Siggerud at (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony include Nikki Clowers, Assistant Director; Elizabeth Eisenstadt; Carol Henn; Bert Japikse; Amanda Miller; SaraAnn Moessbauer; Nitin Rao; Tina Won Sherman; Bethany Claus Widick; and Elizabeth Wood. Public Transportation: New Starts Program Is in a Period of Transition. GAO-06-819. Washington, D.C.: August 30, 2006. Public Transportation: Preliminary Information on FTA's Implementation of SAFETEA-LU Changes. GAO-06-910T. Washington, D.C.: June 27, 2006. Public Transportation: Opportunities Exist to Improve the Communication and Transparency of Changes Made to the New Starts Program. GAO-05-674. Washington, D.C.: June 28, 2005. Mass Transit: FTA Needs to Better Define and Assess Impact of Certain Policies on New Starts Program. GAO-04-748. Washington, D.C.: June 25, 2004. Mass Transit: FTA Needs to Provide Clear Information and Additional Guidance on the New Starts Ratings Process. GAO-03-701. Washington, D.C.: June 23, 2003. Mass Transit: Status of New Starts Program and Potential for Bus Rapid Transit Projects. GAO-02-840T. Washington, D.C.: June 20, 2002. Mass Transit: FTA's New Starts Commitments for Fiscal Year 2003. GAO-02-603. Washington, D.C.: April 30, 2002. Mass Transit: FTA Could Relieve New Starts Program Funding Constraints. GAO-01-987. Washington, D.C.: August 15, 2001. Mass Transit: Implementation of FTA's New Starts Evaluation Process and FY 2001 Funding Proposals. GAO/RCED-00-149. Washington, D.C.: April 28, 2000. Mass Transit: Status of New Starts Transit Projects With Full Funding Grant Agreements. GAO/RCED-99-240. Washington, D.C.: August 19, 1999. Mass Transit: FTA's Progress in Developing and Implementing a New Starts Evaluation Process. GAO/RCED-99-113. Washington, D.C.: April 26, 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.

Through the New Starts program, the Federal Transit Administration (FTA) identifies and recommends new fixed-guideway transit projects for funding--including heavy, light, and commuter rail; ferry; and certain bus projects. The Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) authorized the New Starts program through fiscal year 2009 and made a number of changes to the program, including creating a separate program commonly called Small Starts. This program is intended to offer an expedited and streamlined evaluation and rating process for smaller-scale transit projects. FTA subsequently introduced a separate eligibility category within the Small Starts program for "Very Small Starts" projects. Very Small Starts projects are simple, low-risk projects that FTA has determined qualify for a simplified evaluation and rating process. This testimony discusses GAO's preliminary findings on (1) FTA's implementation of SAFETEA-LU changes to the New Starts program, (2) the extent to which the New Starts pipeline (i.e., projects in the preliminary engineering and final design phases) has changed over time, and (3) future trends for the New Starts and Small Starts pipelines. To address these objectives, GAO surveyed 215 project sponsors and interviewed FTA officials, 15 project sponsors, and 3 industry groups. Our survey response rate was 77 percent. FTA has made progress in implementing SAFETEA-LU changes, but more work remains. Project sponsors frequently identified two key issues for FTA to consider as it moves forward in implementing SAFETEA-LU changes: (1) further streamline the Small Starts program and (2) fully incorporate economic development as a criterion in the New Starts and Small Starts evaluation and rating processes. According to our analysis of the number and types of requirements for New Starts and Small Starts application processes, the Small Starts process has fewer requirements. However, project sponsors said that FTA should further streamline the process by, for example, eliminating requests for duplicate information requested in required worksheets. SAFETEA-LU added economic development to the list of project justification evaluation criteria that FTA must use to evaluate and rate projects. However, FTA currently assigns a weight of 50 percent each to cost-effectiveness and land use in calculating a project's overall rating--the other 4 statutorily identified criteria, including economic development, are not weighted. We previously reported that FTA's reliance on two evaluation criteria to calculate a project's overall rating is drifting away from the multiple-measure evaluation and rating process outlined in statute. Further, without a weight for economic development, project sponsors say, the evaluation and rating process does not reflect an important benefit of certain projects. FTA officials said they are currently working to develop an appropriate economic development measure as part of their upcoming rulemaking. The New Starts pipeline--that is, projects in different stages of planning--has changed in size and composition since the fiscal year 2001 evaluation and rating cycle, and a variety of factors have contributed to these changes. Since then, the number of projects in the New Starts pipeline has decreased by more than half. Additionally, the types of projects in the pipeline have changed during this time frame, as bus rapid transit projects are now more common than commuter or light rail projects. FTA officials attributed the decrease in the pipeline to their increased scrutiny of applications to help ensure that only the strongest projects enter the pipeline, and to their efforts to remove projects from the pipeline that were not advancing or did not adequately address identified problems. Project sponsors GAO interviewed provided other reasons for the pipeline's decrease, including that the New Starts process is too complex, time-consuming, and costly. Our survey results reflect many of these same reasons for the decline in the pipeline. Despite these concerns, GAO's survey of project sponsors indicates future demand for New Starts, Small Starts, and Very Small Starts funding. The sponsors GAO surveyed reported having 137 planned projects and intend to seek New Starts, Small Starts, or Very Small Starts funding for almost three-fourths of these projects. Project sponsors GAO surveyed also reported considering a range of project type alternatives in their planning. The most commonly cited alternatives were bus rapid transit and light rail.

CMS has made progress strengthening provider enrollment to try to better ensure that only legitimate providers and suppliers are allowed to bill Medicare. However, CMS has not completed other actions that could help prevent individuals intent on fraud from enrolling, including implementation of some relevant PPACA provisions. Our previous work found persistent weaknesses in Medicare's enrollment standards and procedures that increased the risk of enrolling entities intent on defrauding the Medicare program. We, CMS, and the HHS Office of Inspector General (OIG) have previously identified two types of providers whose services and items are especially vulnerable to improper payments and fraud--home health agencies (HHA) and suppliers of durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS). We found weaknesses in oversight of these providers' and suppliers' enrollment. For example, in 2008, we identified weaknesses when we created two fictitious DMEPOS companies, which were subsequently enrolled by CMS's contractor and given permission to begin billing Medicare. In 2009, we found that CMS's contractors were not requiring HHAs to resubmit enrollment information for re-verification every 5 years as required by CMS. To strengthen the Medicare enrollment process, in 2006 CMS began requiring all providers and suppliers--including those that order HHA services or DMEPOS for beneficiaries to be enrolled in Medicare. The agency also required all providers and suppliers to report their National Provider Identifiers (NPI) on enrollment applications, which can help address fraud because providers and suppliers must submit either their Social Security Number or their employer identification number and state licensing information to obtain an NPI. In 2007, CMS initiated the first This phase of a Medicare competitive-bidding program for DMEPOS.program requires suppliers' bids to include new financial documentation for the year prior to submitting the bids. Because CMS can now disqualify suppliers based in part on new scrutiny of their financial documents, competitive bidding can help reduce fraud. Finally, in 2010, CMS also required that all DMEPOS suppliers be accredited by a CMS-approved accrediting organization to ensure that they meet certain quality standards. Such accreditation also increased scrutiny of these businesses. PPACA authorized CMS to implement several actions to strengthen provider enrollment. As of April 2012, the agency has completed some of these actions. Screening Provider Enrollment Applications by Risk Level: CMS and OIG issued a final rule with comment period in February 2011 to implement some 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. To determine which providers to place in these risk levels, CMS considered issues such as past occurrences of improper payments and fraud among different categories of providers. Based in part on our work and that of the OIG, CMS designated newly enrolling HHAs and DMEPOS suppliers as high risk and designated other providers at lower levels. (See table 1.) 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 additionally subject to unannounced site visits. Further, depending on the risks presented, PPACA authorizes CMS to require fingerprint-based criminal history checks, and the posting of surety bonds for certain providers. CMS may also provide enhanced oversight for specific periods for new providers and for initial claims of DMEPOS suppliers. CMS indicated that the agency will continue to review the criteria for its screening levels on an ongoing basis and would publish changes if the agency decided to update the assignment of screening levels for categories of Medicare providers. This may become necessary because fraud is not confined to HHAs and DMEPOS suppliers. We are currently examining the types of providers involved in fraud cases investigated by the OIG and the Department of Justice (DOJ), which may help illuminate risk to the Medicare program from different types of providers. Further, in their 2011 annual report on the Health Care Fraud and Abuse Control Program, DOJ and HHS reported convictions or other legal actions, such as exclusions or civil monetary penalties, against several types of Medicare providers other than DMEPOS suppliers and HHAs, including pharmacists, orthopedic surgeons, infusion and other types of medical clinics, and physical therapy services. CMS also has established triggers for adjustments to an individual provider's risk level. For example, CMS regulations state that an individual provider or supplier at the limited- or moderate-risk level that has had its billing privileges revoked by a Medicare contractor within the last 10 years and is attempting to re- enroll, would move to the high-risk level for screening. New National Enrollment Screening and Site Visit Contractors: In a further effort to strengthen its enrollment processes, CMS contracted with two new entities at the end of 2011 to assume centralized responsibility for automated screening of provider and supplier enrollment and for conducting site visits of providers. Automated-screening contractor. In December 2011, the new contractor began to establish systems to conduct automated screening of providers and suppliers to ensure they meet Medicare eligibility criteria (such as valid licensure, accreditation, a valid NPI, and no presence on the OIG list of providers and suppliers excluded from participating in federal health care programs). Prior to the implementation of this new automated screening, such screening was done manually for the 30,000 enrollees each month by CMS's Medicare Administrative Contractors (MAC), which enroll Medicare providers, and the National Supplier Clearinghouse (NSC), which enrolls DMEPOS suppliers. According to CMS, the old screening process was neither efficient nor timely. CMS officials said that in 2012, the automated-screening contractor began automated screening of the licensure status of all currently enrolled Medicare providers and suppliers. The agency said it expects the automated- screening contractor to begin screening newly enrolling providers and suppliers later this year. CMS expects that the new, national contractor will enable better monitoring of providers and suppliers on a continuous basis to help ensure they continue to meet Medicare enrollment requirements. The new screening contractor will also help the MACs and the NSC maintain enrollment information in CMS's Provider Enrollment Chain and Ownership System (PECOS)--a database that contains details on enrolled providers and suppliers. In addition, CMS officials said the automated-screening contractor is developing an individual risk score for each provider or supplier, similar to a credit risk score. Although these individual scores are not currently used to determine an individual provider's placement in a risk level, CMS indicated that this risk score may be used eventually as additional risk criteria in the screening process. Site visits for all providers designated as moderate and high risk. Beginning in February 2012, a single national site-visit contractor began conducting site visits of moderate- and high-risk providers to determine if sites are legitimate and the providers meet certain Medicare standards. The contractor collects the same information from each site visit, including photographic evidence that will be available electronically through a Web portal accessible to CMS and its other contractors. The national site-visit contractor is expected to validate the legitimacy of these sites. CMS officials told us that the contractor will provide consistency in site visits across the country, in contrast to CMS relying on different MACs to conduct any required site visits. Implementation of other enrollment screening actions authorized by PPACA that could help CMS reduce the enrollment of providers and suppliers intent on defrauding the Medicare program remains incomplete, including: Surety bond--PPACA authorizes CMS to require a surety bond for certain types of at-risk providers, which can be helpful in recouping erroneous payments. CMS officials expect to issue a proposed rule to require surety bonds as conditions of enrollment for certain other types of providers. Extending the use of surety bonds to these new entities would augment a previous statutory requirement for DMEPOS suppliers to post a surety bond at the time of enrollment. CMS issued final instructions to its MACs, effective February 2012, for recovering DMEPOS overpayments through surety bonds. CMS officials reported that as of April 19, 2012, they had issued notices to 20 surety bond companies indicating intent to collect funds, but had not collected any funds as of that date. Fingerprint-based criminal background checks--CMS officials told us that they are working with the Federal Bureau of Investigation to arrange contracts to help conduct fingerprint-based criminal background checks of high-risk providers and suppliers. On April 13, 2012, CMS issued a request for information regarding the potential solicitation of a single contract for Medicare provider and supplier fingerprint-based background checks. The agency expects to have the contract in place before the end of 2012. Providers and suppliers disclosure--CMS officials said the agency is reviewing options to include in regulations for increased disclosures of prior actions taken against providers and suppliers enrolling or revalidating enrollment in Medicare, such as whether the provider or supplier has been subject to a payment suspension from a federal health care program. In April 2012, agency officials indicated that they were not certain when the regulation would be published. CMS officials noted that the additional disclosure requirements are 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 and ethics program--CMS officials said that the agency was studying criteria found in OIG model plans as it worked to address the PPACA requirement that the agency establish the core elements of compliance programs for providers and suppliers.April 2012, CMS did not have a projected target date for implementation. Increased efforts to review claims on a prepayment basis can better prevent payments that should not be made, while improving systems used to review claims on a post-payment basis could better identify patterns of fraudulent billing for further investigation. Having robust controls in claims payment systems to prevent payment of problematic claims can help reduce loss. As claims go through Medicare's electronic claims payment systems, they are subjected to automated prepayment controls called "edits," instructions programmed in the systems to prevent payment of incomplete or incorrect claims. Some edits use provider enrollment information, while others use information on coverage or payment policies, to determine if claims should be paid. Most of these controls 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 if 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 staff. Having effective pre-payment edits that deny claims for ineligible providers and suppliers depends on having timely and accurate information about them, such as whether the providers are currently enrolled and have the appropriate license or accreditation to provide specific services. We previously recommended that CMS take action to ensure the timeliness and accuracy of PECOS--the database that maintains Medicare provider and supplier enrollment information. We noted that weaknesses in PECOS data may result in CMS making improper payments to ineligible providers and suppliers. These weaknesses are related to the frequency with which CMS's contractors update enrollment information and the timeliness and accuracy of information obtained from outside entities, such as state licensing boards, the OIG, and the Social Security Administration's Death Master File, which contains information on deceased individuals that can be used to identify deceased providers in order to terminate those providers' Medicare billing privileges. These sources vary in the ease in which CMS contractors have been able to access their data and the frequency with which they are updated. CMS has indicated that its new national- screening contractor should improve the timeliness and accuracy of the provider and supplier information in PECOS by centralizing the process, increasing automation of the process, continuously checking databases, and incorporating new sources of data, such as financial, business, tax, and geospatial data. However, it is too soon to tell if these efforts will better prevent payments to ineligible providers and suppliers. Having effective edits to implement coverage and payment policies before payment is made can also help to deter fraud. The Medicare program has defined categories of items and services eligible for coverage and excludes from coverage items or services that are determined not to be "reasonable and necessary for the diagnosis and treatment of an illness or injury or to improve functioning of a malformed body part." its contractors set policies regarding when and how items and services will be covered by Medicare, as well as coding and billing requirements for payment, which also can be implemented in the payment systems through edits. We have previously found Medicare's payment systems did not have edits for items and services unlikely to be provided in the normal course of medical care. CMS has since implemented edits to flag such claims--called Medically Unlikely Edits. We are currently assessing Medicare's prepayment edits based on coverage and payment policies, including the Medically Unlikely Edits. 42 U.S.C. SS 1395y(a)(1)(A). Additionally, suspending payments to providers suspected of fraudulent billing can be an effective tool to prevent excess loss to the Medicare program while suspected fraud is being investigated. For example, in March 2011, the OIG testified that payment suspensions and pre- payment edits on 18 providers and suppliers stopped the potential loss of more than $1.3 million submitted in claims by these individuals. Furthermore, HHS recently reported that it imposed payment suspensions on 78 home health agencies in conjunction with arrests related to a multimillion-dollar health care fraud scheme. While CMS had the authority to impose payment suspensions prior to PPACA, the law specifically authorized CMS to suspend payments to providers pending the CMS officials reported that investigation of credible allegations of fraud.the agency had imposed 212 payment suspensions since the regulations implementing the PPACA provisions took effect. Agency officials indicated that almost half of these suspensions were imposed this calendar year, representing about $6 million in Medicare claims. CMS is replacing its legacy Program Safeguard Contractors (PSC) with seven ZPICs. While the PSCs were responsible for program integrity for specific parts of Medicare, such as Part A, the ZPICs are responsible for Medicare's fee-for-service program integrity in their geographic zones. For simplicity, we refer to these program integrity contractors as ZPICs throughout the testimony. suspicious patterns or abnormalities in Medicare provider networks, claims billing patterns, and beneficiary utilization. According to CMS, FPS may enhance CMS's ability to identify potential fraud because it analyzes large numbers of claims from multiple data sources nationwide simultaneously before payment is made, thus allowing CMS to examine billing patterns across geographic regions for those that may indicate fraud. The results of FPS are used by the ZPICs to initiate investigations that could result in payment suspensions, implementation of automatic claim denials, identification of additional prepayment edits, or the revocation of Medicare billing privileges. CMS began using FPS to screen all FFS claims nationwide prior to payment as of June 30, 2011, and CMS has been directing the ZPICs to investigate high priority leads generated by the system. Because FPS is relatively new and we have not completed our work, it is too soon to determine whether FPS will improve CMS's ability to address fraud. Questions have also been raised about CMS's ability to adequately assess ZPICs' performance and we have been asked to examine CMS's management of the ZPICs, including criteria used by CMS to evaluate their effectiveness. "Bust-out" fraud schemes in which providers or suppliers suddenly bill very high volumes of claims to obtain large payments from Medicare could be addressed by adding a prepayment edit. Such an edit would set thresholds to stop payment for atypically rapid increases in billing thus helping them to stem losses from these schemes. In our prior work on DMEPOS, we recommended that CMS require its contractors to develop thresholds for unexplained increases in billing and use them to develop pre-payment controls that could suspend these claims for further review before payment. CMS officials told us that they are currently considering developing analytic models in FPS that could help CMS and ZPICs identify and address billing practices suggestive of bust outs. Further actions are needed to improve use of two CMS information technology systems that could help CMS and program integrity contractors identify fraud after claims have been paid. The Integrated Data Repository (IDR) became operational in September 2006 as a central data store of Medicare and other data needed to help CMS's program integrity staff, ZPICs, and other contractors prevent and detect improper payments of claims. However, we found IDR did not include all the data that were planned to be incorporated by fiscal year 2010, because of technical obstacles and delays in funding. Further, as of December 2011 the agency had not finalized plans or developed reliable schedules for efforts to incorporate these data, which could lead to additional delays. One Program Integrity (One PI) is a Web portal intended to provide CMS staff, ZPICs, and other contractors with a single source of access to data contained in IDR, as well as tools for analyzing those data. While One PI is operational, we reported in December 2011 that CMS had trained few program integrity analysts and that the system was not being widely used. GAO recommended that CMS take steps to finalize plans and reliable schedules for fully implementing and expanding the use of both IDR and One PI. Although the agency told us in April 2012 that it had initiated activities to incorporate some additional data into IDR and expand the use of One PI, such as training more ZPIC and other staff, it has not fully addressed our recommendations. Having mechanisms in place to resolve vulnerabilities that lead to improper payments is critical to effective program management and could help address fraud. A number of different types of program integrity contractors are responsible for identifying and reporting vulnerabilities to CMS. However, our work and the work of OIG have shown weaknesses in CMS's processes to address vulnerabilities identified by these contractors. CMS's Recovery Audit Contractors (RAC) are specifically charged with identifying improper payments and vulnerabilities that could lead to such payment errors. However, 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 such identified vulnerabilities in Medicare; further, the majority of the most significant vulnerabilities identified during the demonstration were not addressed. recommended that CMS develop and implement a corrective action process that includes policies and procedures to ensure the agency promptly (1) evaluates findings of RAC audits, (2) decides on the appropriate response and a time frame for taking action based on established criteria, and (3) acts to correct the vulnerabilities identified. GAO, Medicare Recovery Audit Contracting: Weaknesses Remain in Addressing Vulnerabilities to Improper Payments, Although Improvements Made to Contractor Oversight, GAO-10-143 (Washington, D.C.: Mar. 31, 2010). by other contractors were resolved. CMS had not resolved or taken significant action to resolve 38 of 44 vulnerabilities (86 percent) reported in 2009 by ZPICs. Only 1 vulnerability had been fully resolved by January 2011. The OIG made several recommendations, including that CMS have written procedures and time frames to assure 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. We are currently examining aspects of CMS's vulnerability tracking process and will be reporting on it soon. Although CMS has taken some important steps to identify and prevent fraud, including implementing provisions in PPACA and the Small Business Jobs Act, more remains to be done to prevent making erroneous Medicare payments due to fraud. In particular, we have found CMS could do more to strengthen provider enrollment screening to avoid enrolling those intent on committing fraud, improve pre- and post- payment claims review to identify and respond to patterns of suspicious billing activity more effectively, and identify and address vulnerabilities to reduce the ease with which fraudulent entities can obtain improper payments. It is critical that CMS implement and make full use of new authorities granted by recent legislation, as well as incorporate recommendations made by us, as well as the OIG in these areas. Moving from responding once fraud has already occurred to preventing it from occurring in the first place is key to ensuring that federal funds are used efficiently and for their intended purposes. As all of these new authorities and requirements become part of Medicare's operations, additional evaluation and oversight will be necessary to determine whether they are implemented as required and have the desired effect. We have several studies underway that assess efforts to fight fraud in Medicare and that should continue to help CMS refine and improve its fraud detection and prevention efforts. Notably, we are assessing the effectiveness of different types of pre-payment edits in Medicare and of CMS's oversight of its contractors in implementing those edits to help ensure that Medicare pays claims correctly the first time. We are also examining the use of predictive analytics by CMS and the ZPICs to improve fraud prevention and detection. ZPICs play an important role in detecting and investigating fraud and identifying vulnerabilities, and FPS will likely play an increasing role in how ZPICs conduct their work. Additionally, we have work under way to identify the types of providers and suppliers currently under investigation and those that have been found to have engaged in fraudulent activities. These studies may enable us to point out additional actions for CMS that could help the agency more systematically reduce fraud in the Medicare program. Due to the amount of program funding at risk, fraud will remain a continuing threat to Medicare, so continuing vigilance to reduce vulnerabilities will be necessary. Individuals who want to defraud Medicare will continue to develop new approaches to try to circumvent CMS's safeguards and investigative and enforcement efforts. Although targeting certain types of providers that the agency has identified as high risk may be useful, it may allow other types of providers committing fraud to go unnoticed. We will continue to assess efforts to fight fraud and provide recommendations to CMS, as appropriate, that we believe will assist the agency and its contractors in this important task. We urge CMS to continue its efforts as well. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions you or other members of the committee may have. For 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. Thomas Walke, Assistant Director; Michael Erhardt; Eden Savino; and Jennifer Whitworth were key contributors to this statement. Medicare Program Integrity: CMS Continues Efforts to Strengthen the Screening of Providers and Suppliers. GAO-12-351. Washington, D.C.: April 24, 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. 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. Medicare: Program Remains at High Risk Because of Continuing Management Challenges. GAO-11-430T. Washington, D.C.: March 2, 2011. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 2011. Medicare Part D: CMS Conducted Fraud and Abuse Compliance Plan Audits, but All Audit Findings Are Not Yet Available. GAO-11-269R. Washington, D.C.: February 18, 2011. Medicare Fraud, Waste, and Abuse: Challenges and Strategies for Preventing Improper Payments. GAO-10-844T. Washington, D.C.: June 15, 2010. Medicare Recovery Audit Contracting: Weaknesses Remain in Addressing Vulnerabilities to Improper Payments, Although Improvements Made to Contractor Oversight. GAO-10-143. Washington, D.C.: March 31, 2010. Medicare Part D: CMS Oversight of Part D Sponsors' Fraud and Abuse Programs Has Been Limited, but CMS Plans Oversight Expansion. GAO-10-481T. Washington, D.C.: March 3, 2010. Medicare: CMS Working to Address Problems from Round 1 of the Durable Medical Equipment Competitive Bidding Program. GAO-10-27. Washington, D.C.: November 6, 2009. Improper Payments: Progress Made but Challenges Remain in Estimating and Reducing Improper Payments. GAO-09-628T. Washington, D.C.: April 22, 2009. Medicare: Improvements Needed to Address Improper Payments in Home Health. GAO-09-185. Washington, D.C.: February 27, 2009. Medicare Part D: Some Plan Sponsors Have Not Completely Implemented Fraud and Abuse Programs, and CMS Oversight Has Been Limited. GAO-08-760. Washington, D.C.: July 21, 2008. Medicare: Covert Testing Exposes Weaknesses in the Durable Medical Equipment Supplier Screening Process. GAO-08-955. Washington, D.C.: July 3, 2008. 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. Since 1990, every two years GAO has provided Congress with an update on this program, which highlights government operations that are at high risk for waste, fraud, abuse mismanagement or in need of broad reform. Medicare has been included in this program in part because its complexity makes it particularly vulnerable to fraud. Fraud involves an intentional act or representation to deceive with the knowledge that the action or representation could result in gain. 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. Reducing fraud could help rein in the escalating costs of the program. 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 2012 using a variety of methodologies, such as analyses of Medicare claims, review of relevant policies and procedures, and interviews with officials. The Centers for Medicare & Medicaid Services (CMS)--the agency that administers 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 : GAO's previous work found persistent weaknesses in Medicare's enrollment standards and procedures that increased the risk of enrolling entities intent on defrauding the program. CMS has strengthened provider enrollment--for example, in February 2011, CMS designated three levels of risk--high, moderate, and limited--with different screening procedures for categories of providers at each level. However, CMS has not completed other actions, including implementation of some relevant provisions of the Patient Protection and Affordable Care Act (PPACA). Specifically, CMS has not (1) determined which providers will be required to post surety bonds to help ensure that payments made for fraudulent billing can be recovered, (2) contracted for fingerprint-based criminal background checks, (3) issued a final regulation to require additional provider disclosures of information, and (4) established core elements for provider compliance programs. Pre- and Post-payment Claims Review : GAO had previously found that increased efforts to review claims on a prepayment basis can prevent payments from being made for potentially fraudulent claims, while improving systems used by CMS and its contractors to review claims on a post-payment basis could better identify patterns of potentially fraudulent billing for further investigation. CMS has controls in Medicare's claims-processing systems to determine if claims should be paid, denied, or reviewed further. These controls require timely and accurate information about providers that GAO has previously recommended that CMS strengthen. GAO is currently examining CMS's new Fraud Prevention System, which uses analytic methods to examine claims before payment to develop investigative leads for Zone Program Integrity Contractors (ZPIC), the contractors responsible for detecting and investigating potential fraud. Additionally, CMS could improve its post-payment claims review to identify patterns of fraud by incorporating prior GAO recommendations to develop plans and timelines for fully implementing and expanding two information technology systems it developed. Robust Process to Address Identified Vulnerabilities : Having mechanisms in place to resolve vulnerabilities that lead to erroneous payments is critical to effective program management and could help address fraud. Such vulnerabilities are service- or system-specific weaknesses that can lead to payment errors--for example, providers receiving multiple payments as a result of incorrect coding. GAO has previously identified weaknesses in CMS's process for addressing identified vulnerabilities and the Department of Health and Human Services' Office of Inspector General recently reported on CMS's inaction in addressing vulnerabilities identified by its contractors, including ZPICs. GAO is evaluating the current status of the process for assessing and developing corrective actions to address vulnerabilities.

Children who have suffered a severe and potentially life threatening physical injury as a result of an event such as a motor vehicle crash or a fall need specialized care because of their unique anatomical, physiological, and psychological characteristics. Trauma centers--a key part of a region's trauma system--have specialized resources to care for traumatically injured patients, with pediatric trauma centers having dedicated resources specific to the treatment of traumatically injured children. Responsibility for developing and operating emergency care systems, including trauma systems, primarily rests at the state and local level, with some involvement at the federal level. Children typically require specialized resources--both equipment and personnel--wherever they receive care due to unique anatomical, physiological, and psychological needs. For example, the use of specially sized equipment or the adjustment of medication dosages based on a child's weight are required when treating children with traumatic injuries. In its 2006 report on emergency care for children, the Institute of Medicine recommended that all emergency departments appoint certain personnel who would address the resources that children need. Specifically, it recommended that all emergency departments have two part-time pediatric emergency coordinators--one a physician--who would have a number of responsibilities, including ensuring that fellow emergency department and other providers have adequate skills and knowledge to treat children, overseeing pediatric care quality improvement initiatives, and ensuring the availability of pediatric medications, equipment, and supplies. Additionally, the National Pediatric Readiness Project found that emergency departments with a pediatric emergency coordinator were more than twice as likely to have important policies in place related to treating children. Trauma centers have specialized resources to care for traumatically injured patients. Most emergency departments across the United States do not qualify as trauma centers because they do not have the optimal resources to treat severely-injured patients. Trauma center levels. Trauma centers across the United States are designated as one of five levels, which refer to the kinds of resources available in the trauma center and the number of patients admitted yearly. Making this designation is the responsibility of state or sometimes local entities, such as a state's office of emergency medical services. While the criteria used to designate a trauma center's level can vary from state to state, most states have adopted guidelines that are either the same as or similar to the guidelines developed by the American College of Surgeons Committee on Trauma (ACS-COT). Table 1 summarizes the general criteria for trauma centers based on the ACS-COT guidelines. Types of trauma centers. There are two types of trauma centers-- pediatric and adult. Some trauma centers are only an adult trauma center, some are only a pediatric trauma center, and some are both. Pediatric trauma centers have dedicated resources to treat injured children and can be either stand-alone children's hospitals or distinct units within larger hospitals. A pediatric trauma center must meet all the same requirements that an adult trauma center must meet, as well as additional requirements. For example, according to ACS-COT guidelines, a level I pediatric trauma center must have at least two surgeons who are board certified in pediatric surgery and must admit 200 or more injured children younger than 15 annually; and a level II pediatric trauma center must have at least one board- certified pediatric surgeon and must admit 100 or more injured children younger than 15 annually. Pediatric trauma centers are expected to provide trauma care for the most severely injured children and have a leadership role in education, research, and planning with other trauma centers and non-trauma center hospitals in their geographic area with regards to care for injured children. ACS-COT recommends that pediatric trauma centers be used to the fullest extent feasible to treat traumatically injured children; however, due to the limited number and geographic distribution of these centers, ACS- COT recognizes that adult trauma centers or non-trauma centers must provide initial care for injured children in areas where specialized pediatric resources are not available. Research shows that even in states that designate trauma centers, nearly half of injured children--45 percent-- are treated at non-trauma centers. Many of these non-trauma centers where injured children receive treatment do not treat a high volume of pediatric patients and may not have the equipment recommended for treating children. The National Pediatric Readiness Project's 2013 assessment of over 4,100 hospitals across the United States found that about 69 percent of hospitals see fewer than 14 children per day and that at least 15 percent of hospitals lacked one or more specific pieces of equipment recommended for treating children. Within trauma systems, coordinated trauma care activities occur across a broad continuum, ranging from injury prevention activities and pre- hospital care to hospital-based trauma care and rehabilitation (see fig. 1). Trauma care is an essential component of emergency care, which encompasses all services involved in emergency medical care--both injury and illness. A comprehensive trauma system may involve public health officials and departments, emergency medical services personnel, emergency departments and trauma centers, stakeholder and advocacy groups, and families, among others. Such a system typically organizes the delivery of trauma care across the continuum at the local, regional, state, or national level. Responsibility for developing and operating trauma systems and the broader emergency care efforts of which they are a part primarily rests at the state and local level, with some support from federal programs. Generally, federal involvement in trauma care has addressed trauma care system development or research. For example, the Department of Health and Human Services (HHS) Secretary can make grants and enter into cooperative agreements and contracts to conduct and support research, training, evaluations, and demonstration projects related to trauma care and to foster the development of trauma care systems. Additionally, in 2006, HHS' Health Resources and Services Administration (HRSA) released the Model Trauma System Planning and Evaluation document, a guide for trauma system development across the United States. The guide has helped provide a foundation to create and maintain systems of trauma care for communities, regions, and states. We found that 57 percent of children in the United States lived within 30 miles of a high-level pediatric trauma center during the period 2011-2015. Some of the studies we reviewed suggest that children treated at pediatric trauma centers have a lower risk of mortality compared to children treated at other types of facilities, while other studies found no difference in mortality. Our analysis of data from the American Trauma Society and the Census Bureau's American Community Survey shows that 57 percent, or 41.9 million, of the estimated 73.7 million children in the United States lived within 30 miles of a high-level pediatric trauma center during the period 2011-2015. These centers have the dedicated resources necessary to treat all injuries, regardless of severity. Among states, the proportion of children who lived within 30 miles of a high-level pediatric trauma center varied widely, ranging from no children in eight states to more than 90 percent of children in four states (see fig. 2). While an estimated 41.9 million children lived within 30 miles of a high- level pediatric trauma center, an estimated 31.8 million children did not. In areas without high-level pediatric trauma centers, children may have to rely on adult trauma centers with the resources to treat injured patients, even though these facilities are not specialized to treat children. When we consider both adult and pediatric trauma centers, the percentage of children living within 30 miles of the nearest high-level trauma center increases to 80 percent. When we consider all high- and mid-level trauma centers, the percentage of children living within 30 miles of one of these facilities increases to 88 percent, or 65.1 million. The proportion of children who lived within 30 miles of high- or mid-level trauma centers during the period 2011-2015 varied by state (see fig. 3). The findings from our analysis of children's proximity to trauma centers are similar to the findings from other assessments of access to trauma care for all U.S. residents (adults and children). For example, one study found that in 2005, about 84 percent of residents could reach a high-level trauma center within an hour, and about 89 percent could reach a high- or mid-level trauma center in this time. Five of the studies we reviewed, including studies based on national data, suggest that children treated at pediatric trauma centers have a lower risk of mortality compared to children treated at other types of facilities. Three studies, which each analyzed data from a different state, found no significant differences in mortality. In addition, seven studies examined other outcome measures, such as imaging use or the rates of certain surgical procedures for severely injured children. However, some of the studies we reviewed and stakeholders we interviewed suggested that data on pediatric outcomes is limited and that more information is needed on outcomes other than mortality for children treated at pediatric trauma centers. More information is needed, in part, because mortality can be a limited measure since overall mortality is low among severely injured children. Mortality at pediatric trauma centers compared to other types of facilities. Five of the studies that we reviewed show that children treated at pediatric trauma centers had a lower risk of mortality compared with children treated at adult trauma centers or children transferred to a pediatric trauma center for treatment after initial treatment at another facility. For example, a 2015 study that examined hospitalizations nationwide among children ages 18 and under found that children treated at pediatric trauma centers had a lower risk of mortality compared with children treated at adult trauma centers or mixed trauma centers. Another study from 2016 that examined hospitalizations nationwide for injured adolescents aged 15 to 19 had a similar finding. A third study, from 2008, found that treatment in a pediatric trauma center compared to an adult trauma center was associated with an almost 8 percent reduction in the likelihood of mortality among pediatric trauma patients in Florida. Finally, two studies examined whether there were differences in outcomes based on whether children were transported directly to a pediatric trauma center following injury. Both studies found that after adjusting for injury severity, mortality was lower for children who were taken directly to a pediatric trauma center compared with children who were initially taken to a local hospital. In contrast, three of the studies we reviewed did not find a significant difference in the risk of mortality for children treated at pediatric trauma centers compared to children treated at adult trauma centers. All three of these studies were state-level analyses rather than analyses based on a national sample. For example, two studies, which each examined data for adolescents from a single state, did not identify significant differences in mortality among adolescents treated at pediatric and adult trauma centers. While the third study found no difference in mortality among children treated at pediatric and adult trauma centers, it also found that children treated at trauma centers had a 0.79 percentage point decrease in mortality compared to children treated at non-trauma hospitals. Data on other outcomes. Seven studies examined outcomes other than mortality, but according to some of the studies we reviewed and stakeholders we interviewed, more information is needed on outcomes other than mortality for children treated at pediatric trauma centers. Further, as some studies note, mortality can be a limited measure for determining quality of care or a trauma center's contribution to survival, because overall mortality is low among severely injured children. One 2015 study found that adding a pediatric trauma center in Delaware decreased the frequency of pediatric splenectomies--a procedure that removes a child's spleen. Another study found that pediatric trauma centers performed less imaging than adult trauma centers when treating severely injured adolescents. Information on other outcomes was limited. One study from 2016 that we reviewed noted that in the pediatric trauma literature there are no longitudinal studies on the long-term effects--both physical and psychological--of trauma on children. In addition, another study we reviewed indicated that the selection of outcome measures for analysis was constrained by what was available in the dataset used for the study. One stakeholder we interviewed told us that mortality is one of the few outcomes related to pediatric trauma that is captured in databases, because most trauma registries and other databases were initially developed to capture data for adult patients. Moreover, a few stakeholders told us that the pediatric trauma system is not as well developed as the adult trauma system and that both pediatric trauma care and research have tended to occur in isolation. One of these stakeholders said that because of this fragmentation, it has been difficult for researchers to use or build on the outcome measures that other researchers have developed in their work. Hospital-based pediatric trauma care activities are supported primarily through grants from two agencies within HHS--HRSA and the National Institutes of Health (NIH). Officials from these agencies reported that activities related to pediatric trauma care are coordinated through an interagency group focused broadly on emergency care, as well as through arrangements between individual agencies. Two agencies within HHS--HRSA and NIH--have grant programs and other activities that support hospital-based pediatric trauma care (see table 2). Within HRSA, the Emergency Medical Services for Children (EMSC) program, established in 1984, provides funding to states and academic medical institutions. It does so primarily through six grant programs and cooperative agreements that aim to enhance the capacity of emergency care--including hospital-based trauma care--to address the needs of children. The program's annual appropriation is authorized at $20.2 million per fiscal year from fiscal years 2015 through 2019. According to HRSA officials, EMSC is the only federal program that focuses specifically on improving emergency care for children. Within NIH, the Pediatric Trauma and Critical Illness Branch supports research and training focused on preventing, treating, and reducing all forms of childhood trauma, injury, and critical illnesses. According to NIH officials, the Branch--which is part of the Eunice Kennedy Shriver National Institute of Child Health and Human Development--was established in 2012 to help unify research in pediatric trauma. Our analysis of data on all NIH-funded research in fiscal year 2015 shows that the Branch provided nearly $9 million in funding for 32 grants related to injuries. Beyond these two agencies, a few other federal efforts more broadly address emergency care, including trauma care. While they are not focused on pediatric trauma care, these efforts may indirectly address the needs of pediatric populations. For example, the Emergency Care Coordination Center within the HHS Office of the Assistant Secretary for Preparedness and Response (ASPR) aims to strengthen the day-to-day emergency care system to better prepare the nation for times of crisis and to support the federal coordination of in-hospital emergency medical care activities. Agency officials reported that the Center was funded at $820,000 per fiscal year in fiscal years 2015 and 2016. According to officials, the Center recently worked on two initiatives related to trauma-- preparing a report requested by Congress on the nation's capacity to respond to mass casualty events and issuing a request for proposals to award a contract for the development of an inventory of emergency departments, trauma centers, and burn centers and their capabilities across the United States. Recent federal funding to specifically support hospital-based trauma care activities or to develop trauma care systems has been limited as well. The Patient Protection and Affordable Care Act both continued existing and established new discretionary trauma care grant programs to help develop trauma care systems. However, according to HHS officials, no appropriations were made for these new programs and no grants have been made under these new authorities. HRSA and NIH officials reported that activities related to hospital-based trauma care and other emergency care, including pediatrics, are coordinated through an interagency group and through arrangements between individual agencies (see table 3). Both HRSA and NIH representatives are executive committee members of the Council on Emergency Medical Care, a federal interagency group led by ASPR's Emergency Care Coordination Center, a center specially created as the policy lead for emergency care activities across the federal government. ASPR officials told us that the Council on Emergency Medical Care is the central meeting place for agencies across the federal government on issues related to emergency care, including pediatric care. HRSA and NIH officials reported using a variety of arrangements to collaborate with other federal agencies on hospital based pediatric trauma, such as supporting a program liaison position within another agency, establishing interagency agreements, and presenting at conferences and meetings. We provided a draft of this report to HHS for comment. The department provided technical comments, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of HHS 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 IV. Various types of training and resources are available for physicians and nurses on the delivery of pediatric trauma care. The training and resources are provided by stakeholder groups, such as professional, research and advocacy organizations. The training and resources from these groups supplement any training that physicians and nurses may receive during medical or nursing school or during any residencies or fellowships that may include or be completely focused on pediatric care. The available training includes standardized courses that stakeholder groups have developed as well as more ad-hoc training on pediatric trauma care topics of interest. Stakeholder groups also have developed resources on pediatric trauma care that physicians and nurses can access and consult when needed. The resources available include both policy statements that detail the infrastructure or resources needed to provide pediatric trauma care at the facility-level and other more individualized and clinical practice resources for physicians and nurses about the delivery of pediatric trauma care. To identify examples of the training and resources available to physicians and nurses on the delivery of pediatric trauma care, we interviewed stakeholder group representatives or received written responses from the following stakeholder groups: the American Academy of Pediatrics, the American Association of Neurological Surgeons/Congress of Neurological Surgeons, the American College of Emergency Physicians, the American College of Surgeons, the Childress Institute for Pediatric Trauma, the Emergency Nurses Association, the Pediatric Orthopaedic Society of North America, the Pediatric Trauma Society, and the Society of Trauma Nurses. We selected the groups to represent the perspectives of trauma care physicians and nurses, pediatric specialists, and research and advocacy organizations involved in or focusing on hospital-based pediatric trauma care. We asked all stakeholder groups a series of open- ended questions and, to the extent possible, corroborated statements with information available on stakeholder group websites. Many of the stakeholder groups we interviewed have developed standardized training courses on the evaluation, management, and treatment of trauma patients. In addition to standardized courses, stakeholder groups also offer other training opportunities related to pediatric trauma care on an ad-hoc basis (see table 4). These courses are generally available to all providers, but whether a provider must take any of these courses depends on the facility or system in which the provider works and its specific education or credentialing requirements. However, stakeholder representatives stated that these are all courses that any provider who treats trauma patients, including pediatric patients, generally should, and most likely will, take. For example, the American College of Surgeons Committee on Trauma (ACS-COT) publication, Resources for Optimal Care of the Injured Patient states that courses like the Advanced Trauma Life Support course, the Trauma Nursing Core Course, and the Advanced Trauma Care for Nursing course, among others, have become basic trauma education for providers. These courses have both classroom-based lectures and interactive components. Most of the courses are general trauma courses with pediatric elements rather than courses that are specific to pediatric trauma. One stakeholder representative noted that all providers should learn the baseline principles of trauma care from these courses and then build on that baseline to learn principles that are specific to pediatric trauma. Representatives from stakeholder groups said that these courses usually include a lecture and a trauma simulation exercise for a pediatric patient, even if the overall focus of the course is on emergency or trauma care for the general adult patient population. For example, representatives from the Emergency Nurses Association told us that the Trauma Nursing Core Course includes a participant skill station that is specific to pediatric trauma. In addition, the manual for this course includes a chapter on pediatric trauma. In addition to training, stakeholder groups have also developed resources for physicians and nurses related to pediatric trauma. The resources that these groups have developed, often in collaboration with each other, include 1) policy statements detailing the system-level infrastructure that must be in place to ensure that providers and facilities are prepared to care for injured children; and 2) other more individualized clinical resources, such as checklists, forums, and journal articles, that physicians and nurses can access to improve their individual knowledge and readiness to treat pediatric patients (see table 5). In addition to the contact named above, Karin Wallestad, Assistant Director, Alison Goetsch, Analyst-in-Charge, and Summar Corley made key contributions to this report. Also contributing were Leia Dickerson, Krister Friday, Giselle Hicks, Vikki Porter, and Jennifer Whitworth.

Pediatric trauma--a severe and potentially disabling or life threatening injury to a child resulting from an event such as a motor vehicle crash or a fall--is the leading cause of disability for children in the United States. More children die of injury each year than from all other causes combined. GAO was asked to examine issues related to pediatric trauma care. This report examines (1) what is known about the availability of trauma centers for children and the outcomes for children treated at different types of facilities, and (2) how, if at all, federal agencies are involved in supporting pediatric trauma care and how these activities are coordinated. GAO analyzed data on the number of pediatric and adult trauma centers in the United States relative to the pediatric population under 18 years of age. GAO used 2015 data on trauma centers from the American Trauma Society's Trauma Information Exchange Program and 5-year population estimates for 2011-2015 from the U.S. Census Bureau's American Community Survey, which were the latest available data at the time of GAO's analysis. GAO also reviewed the existing peer-reviewed, academic literature on outcomes for pediatric trauma patients, interviewed stakeholder group representatives and federal agency officials involved in activities related to hospital-based pediatric trauma care, and reviewed available agency documentation. HHS provided technical comments on a draft of this report, which GAO incorporated as appropriate. GAO estimates that 57 percent of the 73.7 million children in the United States during the period 2011-2015 lived within 30 miles of a pediatric trauma center that can treat all injuries regardless of severity. Among states, the proportion of children who lived within 30 miles of these pediatric trauma centers varied widely. In areas without pediatric trauma centers, injured children may have to rely on adult trauma centers or less specialized hospital emergency departments for initial trauma care. Some studies GAO reviewed, including nationwide studies, found that children treated at pediatric trauma centers have a lower mortality risk compared to children treated at adult trauma centers and other facilities, while other state-level studies GAO reviewed found no difference in mortality. Further, some studies GAO reviewed and stakeholders GAO interviewed suggest that more information is needed on outcomes other than mortality for children treated at pediatric trauma centers because mortality can be a limited outcome measure, as overall mortality is low among severely injured children. Two agencies within the Department of Health and Human Services (HHS)--the Health Resources and Services Administration (HRSA) and the National Institutes of Health (NIH)--have grant programs and other activities that support hospital-based pediatric trauma care. For example, HRSA's Emergency Medical Services for Children Program provides grants to integrate pediatric emergency care--which encompasses care for both traumatic injury and illness--into states' larger emergency medical services systems. GAO also found that federal activities related to hospital-based pediatric trauma care and other emergency care are coordinated through an interagency group and arrangements among agencies. For example, HRSA and NIH staff participate in the Council on Emergency Medical Care, an interagency group established to coordinate emergency care activities across the federal government by promoting information sharing and policy development.

HUD, through FHA, provides insurance that protects private lenders from financial losses stemming from borrowers' defaults on mortgage loans for both single-family homes and multifamily rental housing properties for low- and moderate-income households. When a default occurs on an insured loan, a lender may "assign" the mortgage to HUD and receive payment from FHA for an insurance claim. According to the latest data available from HUD, FHA insures mortgage loans for about 15,800 multifamily properties. These properties contain just under 2 million units and have a combined unpaid mortgage principal balance of $46.9 billion.These properties include multifamily apartments and other specialized properties, such as nursing homes, hospitals, student housing, and condominiums. In addition to mortgage insurance, many FHA-insured multifamily properties receive some form of direct assistance or subsidy from HUD, such as below-market interest rates or Section 8 project-based assistance. HUD's Section 8 program provides rental subsidies for low-income families. These subsidies are linked either to multifamily apartment units (project-based) or to individuals (tenant-based). Under the Section 8 program, residents in subsidized units generally pay 30 percent of their income for rent and HUD pays the balance. According to HUD, its restructuring proposals apply to 8,636 properties that both have mortgages insured by FHA and receive project-based Section 8 rental subsidies for some or all of their units. Data provided by HUD in April 1996 show that, together, these properties have unpaid principal balances totaling $17.8 billion and contain about 859,000 units, of which about 689,000 receive project-based Section 8 subsidies. According to HUD's data, about 45 percent of the insured Section 8 portfolio (3,859 properties, 303,219 assisted units, and $4.8 billion in unpaid loan balances) consist of what are called the "older assisted" properties. These are properties that were constructed beginning in the late 1960s under a variety of mortgage subsidy programs, to which project-based Section 8 assistance (Loan Management Set Aside) was added later, beginning in the 1970s, to replace other subsidies and to help troubled properties sustain operations. About 55 percent of the insured Section 8 portfolio (4,777 properties, 385,931 assisted units, and $13.0 billion in unpaid loan balances) consists of what are called the "newer assisted" properties. These properties generally were built after 1974 under HUD's Section 8 New Construction and Substantial Rehabilitation programs and received project-based Section 8 subsidies based on formulas with automatic annual adjustments, which tended to be relatively generous to encourage the production of affordable housing. There is great diversity among the properties in HUD's insured Section 8 portfolio, as illustrated by 10 properties that we studied in greater depth as part of our current assignment (see app. I). These properties differ in a number of important respects, such as the amount of their remaining unpaid mortgage debt; the types and amounts of assistance they receive from HUD; and their financial health, physical condition, rents, types of residents served, and surrounding neighborhoods and rental housing markets. These factors can influence the effect that HUD's or other reengineering proposals would have on the properties. The insured Section 8 portfolio suffers from three basic problems--high subsidy costs, high exposure to insurance loss, and in the case of some properties, poor physical condition. A substantial number of the properties in the insured Section 8 portfolio now receive subsidized rents above market levels, many substantially above the rents charged for comparable unsubsidized units. This problem is most prevalent in (but not confined to) the "newer assisted" segment of the portfolio, where it stems from the design of the Section 8 New Construction and Substantial Rehabilitation programs. The government paid for the initial development or rehabilitation of these properties under these programs by initially establishing rents above market levels and then raising them regularly through the application of set formulas that tended to be generous to encourage the production of new affordable housing. It has become difficult to continue the high subsidies in the current budget environment. A second key problem affecting the portfolio is the high risk of insurance loss. Under FHA's insurance program, HUD bears virtually all the risk in the event of loan defaults. A third, closely related problem is the poor physical condition of many properties in the portfolio. A 1993 study of multifamily rental properties with FHA-insured or HUD-held mortgages found that almost one-fourth of the properties were "distressed." Properties were considered to be distressed if they failed to provide sound housing and lacked the resources to correct deficiencies or if they were likely to fail financially. The problems affecting HUD's insured Section 8 portfolio stem from several causes. These include (1) program design flaws that have contributed to high subsidies and put virtually all the insurance risk on HUD; (2) HUD's dual role as mortgage insurer and rental subsidy provider, which has resulted in the federal government averting claims against the FHA insurance fund by supporting a subsidy and regulatory structure that has masked the true market value of the properties; and (3) weaknesses in HUD's oversight and management of the insured portfolio, which have allowed physical and financial problems at a number of HUD-insured multifamily properties to go undetected or uncorrected. In May, 1995 HUD proposed a mark-to-market process to address the three key problems and their causes by decoupling HUD's mortgage insurance and project-based rental subsidy programs and subjecting the properties to the forces and disciplines of the commercial market. HUD proposed to do this by (1) eliminating the project-based Section 8 subsidies as existing contracts expired (or sooner if owners agreed), (2) allowing owners to rent apartments for whatever amount the marketplace would bear, (3) facilitating the refinancing of the existing FHA-insured mortgage with a smaller mortgage if needed for the property to operate at the new rents, (4) terminating the FHA insurance on the mortgage, and (5) providing the residents of assisted units with portable Section 8 rental subsidies that they could use to either stay in their current apartment or move to another one if they wanted to or if they no longer could afford to stay in their current apartment. Recognizing that many properties could not cover their expenses and might eventually default on their mortgages if forced to compete in the commercial market without their project-based Section 8 subsidies, the mark-to-market proposal set forth several alternatives for restructuring the FHA-insured mortgages in order to bring income and expenses in line. These alternatives included selling mortgages, engaging third parties to work out restructuring arrangements, and paying full or partial FHA insurance claims to reduce mortgage debt and monthly payments. The proposed mark-to-market process would likely affect properties differently, depending on whether their existing rents were higher or lower than market rents and on their funding needs for capital items, such as deferred maintenance. If existing rents exceeded market rents, the process would lower the mortgage debt, thereby allowing a property to operate and compete effectively at lower market rents. If existing rents were below market, the process would allow a property to increase rents, potentially providing more money to improve and maintain the property. HUD recognized, however, that some properties would not be able generate sufficient income to cover expenses even if their mortgage payments were reduced to zero. In those cases, HUD proposed using alternative strategies, including demolishing the property and subsequently selling the land to a third party, such as a nonprofit organization or government entity. After reviewing HUD's proposal, various stakeholders raised questions and concerns about the proposal, including the effect that it would have on different types of properties and residents, and the long-term financial impact of the proposal on the government. In response to stakeholders' concerns, HUD made several changes to its proposal and also renamed the proposal "portfolio reengineering." The changes HUD made included (1) giving priority attention for at least the first 2 years to properties with subsidized rents above market; (2) allowing state and local governments to decide whether to continue Section 8 project-based rental subsidies at individual properties after their mortgages are restructured or switch to tenant-based assistance; and (3) allowing owners to apply for FHA insurance on the newly restructured mortgage loans. In addition, HUD stated a willingness to discuss with the Congress mechanisms to take into account the tax consequences related to debt forgiveness for property owners who enter into restructuring agreements. More recently, HUD has also suggested that action should be deferred on properties that would not be able to generate sufficient income to cover operating expenses after reengineering until strategies are developed that address the communities' and residents' needs relating to the properties. On April 26, 1996, HUD received legislative authority to conduct a demonstration program to test various methods of restructuring the financing of properties in the insured Section 8 portfolio. Participation in the program is voluntary and open only to properties that have rents which exceed HUD's fair market rent (FMR) for their locality. The purpose of the demonstration is to test the feasibility and desirability of properties meeting their financial and other obligations with and without FHA insurance, with and without above-market Section 8 assistance, and using project-based assistance or, with the consent of the property owner, tenant-based assistance. The demonstration program is limited by law to mortgages covering a total of 15,000 units or about 2 percent of the total units in the insured Section 8 portfolio. An appropriation of $30 million was provided to fund the cost of modifying loans under the program, which remains available until September 30, 1997. HUD believes that this funding level could limit the number of properties that can be reengineered under the demonstration. On July 2, 1996, HUD issued a public notice announcing the program and providing initial guidance on how it plans to operate the program. On May 21, 1996, the Senate Committee on Banking, Housing, and Urban Affairs issued a Staff Discussion Paper to outline a general strategy for addressing the problems with HUD's insured Section 8 portfolio. Among other things, the staff proposed to continue project-based Section 8 assistance and to subsidize rents at 90 percent of FMR (or at higher budget-based rents in certain cases if the FMR-based rents would not cover the costs of operation). On June 27, 1996, the Subcommittee on Housing Opportunity and Community Development held a hearing on the staff's proposals, and as of mid-July the Subcommittee was drafting a restructuring bill. In May 1995, when HUD proposed the mark-to-market initiative, the Department did not have current or complete information on the insured Section 8 portfolio upon which to base assumptions and estimates about the costs and impact of the proposal. For example, HUD lacked reliable, up-to-date information on the market rents the properties could be expected to command and the properties' physical conditions--two variables that strongly influence how properties will be affected by the mark-to-market proposal. To obtain data to better assess the likely outcomes and costs of the mark-to-market proposal, HUD contracted with Ernst & Young LLP in 1995 for a study on HUD-insured properties with Section 8 assistance to (1) determine the market rents and physical condition of the properties and (2) develop a financial model to show how the proposal would affect the properties and to estimate the costs of subsidies and claims associated with the mark-to-market proposal. The study was conducted on a sample of 558 of 8,363 properties and extrapolated to the total population of 8,563 properties identified by HUD at that time as representing the population subject to its mark-to-market proposal. The sample was designed to be projectible to the population with a relative sampling error of no more than plus or minus 10 percent at the 90-percent confidence level. A briefing report summarizing the study's findings was released by HUD and Ernst & Young on May 2, 1996. It provides current information on how the assisted rents at the properties compare with market rents, the physical condition of the properties, and how the properties are expected to be affected by HUD's proposal as the proposal existed while the study was underway. As such, it is important to note that the study's results do not reflect the changes that HUD made to its proposal in early 1996. Ernst & Young estimates that the majority of the properties have assisted rents exceeding market rents and that the properties have significant amounts of immediate deferred maintenance and short-term and long-term capital needs. Specifically, Ernst & Young's study estimates that a majority of the properties--between 60 and 66 percent--have rents above market and between 34 and 40 percent are estimated to have below-market rents. Ernst & Young's data also indicate a widespread need for capital--between $9.2 billion and $10.2 billion--to address current deferred maintenance needs and the short- and long-term requirements to maintain the properties. The study estimates that the properties have between $1.3 billion and $1.6 billion in replacement and cash reserves that could be used to address these capital needs, resulting in total net capital needs of between $7.7 billion and $8.7 billion. The average per-unit cost of the total capital requirements, less the reserves, is estimated to be between $9,116 and $10,366. Ernst & Young's analysis also indicates that about 80 percent of the properties would not be able to continue operations unless their debt was restructured. Furthermore, for approximately 22 to 29 percent of the portfolio, writing the existing debt to zero would not sufficiently reduce costs for the properties to address their immediate deferred maintenance and short-term capital needs. The study estimates that between 11 and 15 percent of the portfolio would not even be able to cover operating expenses. The study was designed to use the information on market rents and the properties' physical condition gathered by Ernst & Young, as well as financial and Section 8 assistance data from HUD's data systems, in a financial model designed to predict the proposal's effects on the portfolio as a whole. Specifically, the model estimates the properties' future cash flows over a 10-year period on the basis of the assumption that they would be reengineered (marked to market) when their current Section 8 contracts expire. The model classifies the loans into four categories--performing, restructure, full write-off, and nonperforming--that reflect how the properties would be affected by HUD's proposal. Placement in one of the four categories is based on the extent to which income from the reengineered properties would be able to cover operating costs, debt service payments, deferred maintenance costs, and short-term capital expenses. Table 1 shows the results of Ernst & Young's analysis of how properties would be affected by HUD's proposal. We are currently evaluating Ernst & Young's financial model and expect to issue our report late this summer. Our preliminary assessment is that the model provides a reasonable framework for studying the overall results of portfolio reengineering, such as the number of properties that will need to have their debt restructured and to estimate the related costs of insurance claims and Section 8 subsidies. In addition, we did not identify any substantive problems with Ernst & Young's sampling and statistical methodology. However, our preliminary assessment of the study indicates that some aspects of Ernst & Young's financial model and its assumptions may not reflect the way in which insured Section 8 properties will actually be affected by portfolio reengineering. Also, some of the assumptions used in the model may not be apparent to readers of Ernst & Young's May 1996 briefing report. For example, Ernst & Young's assumptions about the transition period that properties go through in the reengineering process may be overly optimistic. During the transition, a reengineered property changes from a property with rental subsidies linked to its units to an unsubsidized property competing in the marketplace for residents. The model estimates that the entire transition will be completed within a year after the first Section 8 contract expires. In addition, the model assumes that during this year, the property's rental income will move incrementally toward stabilization over 9 months. Lenders with whom we consulted on the reasonableness of the model's major assumptions generally believed that a longer transition period of 1 to 2 years is more likely. They also anticipated an unstable period with less income and more costs during the transition rather than the smooth transition assumed in the model. An Ernst & Young official told us that the 9-month period was designed to reflect an average transition period for reengineered properties. While he recognized that some properties would have longer transition periods than assumed in the model, he believed that the transition periods for other properties could be shorter than 9 months. In addition, Ernst & Young's May 1996 report does not detail all of the assumptions used in the firm's financial model that are useful to understanding the study's results. In particular, the model assumes that the interest subsidies some properties currently receive will be discontinued after the first Section 8 contract expires, including those in the performing category whose debts do not require restructuring. We are currently examining how the assumptions contained in the Ernst & Young study affect its estimates of the effects of portfolio reengineering. In addition, we are assessing how the use of alternative assumptions would affect the study's results. We also observed that although Ernst & Young's study provided information on the cost to the government of the portfolio reengineering proposal, the May report did not provide these results. We are currently examining Ernst & Young's data and will provide cost estimates derived from Ernst & Young's model covering changes in the Section 8 subsidy costs and FHA insurance claims. Our preliminary review of this information indicates that the costs of claims will be significant. On average, the data indicate that mortgage balances for the properties needing mortgage restructuring--including those in the full write-off and nonperforming categories that would have their mortgages totally written off--would need to be reduced by between 61 and 67 percent. This reduction would result in claims against FHA's multifamily insurance funds. As we discussed in our testimony before this Subcommittee last year, the Congress faces a number of significant and complex issues in evaluating HUD's portfolio reengineering proposal. Since last year there has been considerable discussion on the issues we noted, but there is still disagreement on how many of them should be addressed. New issues have also been raised. Key issues include the following. One key cause of the current problems affecting the insured Section 8 portfolio has been HUD's inadequate management of the portfolio. HUD's original proposal sought to address this situation by subjecting properties to the disciplines of the commercial market by converting project-based subsidies to tenant-based assistance, adjusting rents to market levels, and refinancing existing insured mortgages with smaller, uninsured mortgages if necessary for properties to operate at the new rents. However, to the extent that the final provisions of reengineering perpetuate the current system of FHA insurance and project-based subsidies, HUD's ability to manage the portfolio will remain a key concern. Thus, it will be necessary to identify other means for addressing the limitations that impede HUD's ability to effectively manage the portfolio, particularly in light of the planned staff reductions that will further strain HUD's management capacity. An issue with short-term--and potentially long-term--cost implications is whether HUD should continue to provide FHA insurance on the restructured loans and, if so, under what terms and conditions. If FHA insurance is discontinued when the loans are restructured as originally planned, HUD would likely incur higher debt restructuring costs because lenders would set the terms of the new loans, such as interest rates, to reflect the risk of default that they would now assume. The primary benefits of discontinuing insurance are that (1) the government's dual role as mortgage insurer and rent subsidy provider would end, eliminating the management conflicts associated with this dual role, and (2) the default risk borne by the government would end as loans were restructured. However, the immediate costs to the FHA insurance fund would be higher than if insurance, and the government's liability for default costs, were continued. If, on the other hand, FHA insurance were continued, another issue is whether it needs to be provided for the whole portfolio or could be used selectively. For example, should the government insure loans only when owners cannot obtain reasonable financing without this credit enhancement? Also, if FHA insurance were continued, the terms and conditions under which it is provided would affect the government's future costs. Some lenders have indicated that short-term (or "bridge") financing insured by FHA may be needed while the properties make the transition to market conditions, after which time conventional financing at reasonable terms would be available. Thus, the government could insure loans for 3 to 5 years, in lieu of the current practice of bearing default risk for 40 years. Finally, the current practice of the government's bearing 100 percent of the default risk could be changed by legislation requiring state housing finance agencies or private-sector parties to bear a portion of the insurance risk. In addressing the problems of the insured Section 8 portfolio, one of the key issues that will need to be decided is whether to continue project-based assistance, convert the portfolio to tenant-based subsidy, or use some mix of the two subsidy types. On one hand, the use of tenant-based assistance can make projects more subject to the forces of the real estate market, which can help control housing costs, foster housing quality, and promote resident choice. On the other hand, by linking subsidies directly to property units, project-based assistance can help sustain those properties in housing markets that have difficulty in supporting unsubsidized rental housing, such as inner-city and rural locations. In addition, residents who would likely have difficulty finding suitable alternative housing, such as the elderly or disabled and those living in tight housing markets, may prefer project-based assistance to the extent that it gives them greater assurance of being able to remain in their current residences. If a decision is made to convert Section 8 assistance from project-based to tenant-based as part of portfolio reengineering, decisions must also be made about whether to provide additional displacement protection for current property residents. HUD's April 1996 reengineering strategy contains several plans to protect the residents affected by rent increases at insured properties. For example, the residents currently living in project-based Section 8 units that are converted to tenant-based subsidy would receive enhanced vouchers to pay the difference between 30 percent of their income and the market rent for the property in which they live, even if it exceeds the area's fair market rent ceiling. The residents of reengineered properties who currently live in units without Section 8 subsidy would receive similar assistance if the properties' new rents require them to pay more than 30 percent of income. Such provisions are clearly important to help limit residents' rent burdens and reduce the likelihood of residents being displaced, but they also reduce Section 8 savings, at least in the short run. The Ernst & Young study's cost estimates assume that HUD would cover Section 8 assistance costs for existing residents, even if a property's market rents exceed fair market rent levels set by HUD. However, it does not include any costs for providing Section 8 subsidy to residents who are currently unassisted. The decision about which properties to include in portfolio reengineering will likely involve trade-offs between addressing the problem of high subsidy costs and addressing the problems of poor physical condition and exposure to default. On one hand, reengineering only those properties with rents above market levels would result in the greatest subsidy cost savings. On the other hand, HUD has indicated that also including those properties with rents currently below market levels could help improve these properties' physical and financial condition and reduce the likelihood of default. However, including such properties would decrease estimated Section 8 subsidy cost savings. Although HUD's latest proposal would initially focus on properties with rents above market, it notes that many of the buildings with below-market rents are in poor condition or have significant amounts of deferred maintenance which will need to be addressed at some point. Selecting a mortgage restructuring process that is feasible and that balances the interests of the various stakeholders will be an important, but difficult, task. Various approaches have been contemplated, including payment of full or partial insurance claims by HUD, mortgage sales, and the use of third parties or joint ventures to design and implement specific restructuring actions at each property. Because of concerns about HUD's ability to carry out the restructuring process in house, HUD and others envision relying heavily on third parties, such as State Housing Financing Agencies (HFAs) or teams composed of representatives from HFAs, other state and local government entities, nonprofit organizations, asset managers, and capital partners. These third parties would be empowered to act on HUD's behalf, and the terms of the restructuring arrangements that they work out could to a large extent determine the costs to, and future effects of restructuring on, stakeholders such as the federal government, property owners and investors, mortgage lenders, residents, and state and local government housing agencies. Some, however, have questioned whether third parties would give adequate attention to the interests of owners or to the public policy objectives of the housing. On the other hand, with the proper incentives, third parties' financial interests could be aligned with those of the federal government to help minimize claims costs. Who should pay for needed repairs, and how much, is another important issue in setting restructuring policy. As discussed previously, Ernst & Young's study found a substantial amount of unfunded immediate deferred maintenance and short-term capital replacement needs across the insured Section 8 portfolio, but particularly in the "older assisted" properties. Ernst & Young's data indicate that between 22 and 29 percent of the properties in the portfolio could not cover their immediate deferred maintenance and short-term capital needs, even if their mortgage debt were fully written off. HUD proposes that a substantial portion of the rehabilitation and deferred maintenance costs associated with restructuring be paid through the affected properties' reserve funds and through FHA insurance claims in the form of debt reduction. Others have suggested that HUD use a variety of tools, such as raising rents, restructuring debt and providing direct grants, but that per-unit dollar limits be set on the amount that the federal government pays, with the expectation that any remaining costs be paid by the property owners/investors or obtained from some other source. According to Ernst and Young's assessment, between 22 and 29 percent of HUD's insured portfolio would have difficulty sustaining operations if market rents replaced assisted rents. Furthermore, between 11 and 15 percent of the portfolio would not even be able to cover operating costs at market rents. If additional financial assistance is not provided to these properties, a large number of low-income residents would face displacement. While HUD has not yet developed specific plans for addressing these properties, it appears likely that different approaches may be needed, depending on a property's specific circumstances. For example, properties in good condition in tight housing markets may warrant one approach, while properties in poor condition in weak or average housing markets may warrant another. Further analysis of these properties should assist the Department in formulating strategies for addressing them. HUD's portfolio reengineering proposal is likely to have adverse tax consequences for some project owners. These tax consequences can potentially result from either reductions in the principal amounts of property mortgages (debt forgiveness) or actions that cause owners to lose the property (for example, as a result of foreclosure). We have not assessed the extent to which tax consequences are likely to result from portfolio reengineering. However, HUD has stated that it believes tax consequences can be a barrier to getting owners to agree to reengineer their properties proactively. While HUD has not formulated a specific proposal for dealing with the tax consequences of portfolio reengineering, it has stated that it is willing to discuss with the Congress mechanisms to take into account tax consequences related to debt forgiveness for property owners who enter into restructuring agreements. The multifamily demonstration program that HUD recently received congressional authority to implement provides for a limited testing (on up to 15,000 multifamily units) of some of the aspects of HUD's multifamily portfolio reengineering proposal. As such, the program can provide needed data on the impacts of reengineering on properties and residents, the various approaches that may be used in implementing restructuring, and the costs to the government before a restructuring program is initiated on a broad scale. However, because of the voluntary nature of the program, it may not fully address the broad range of impacts on the properties or the range of restructuring tools that the Department could use. For example, owners may be reluctant to participate in the program if HUD plans to enter into joint ventures with third-party entities because of concerns they may lose their properties and/or suffer adverse tax consequences. Another potential limitation on the program is that the funding provided to modify the multifamily loans may not be sufficient to cover the limited number of units authorized under the demonstration program. How these issues are resolved will, to a large degree, determine the extent to which the problems that have long plagued the portfolio are corrected and prevented from recurring and the extent to which reengineering results in savings to the government. HUD's portfolio reengineering initiative recognizes a reality that has existed for some time--namely, that the value of many of the properties in the insured Section 8 portfolio is far less than the mortgages on the properties suggest. Until now, this reality has not been recognized and the federal government has continued to subsidize the rents at many properties above the level that the properties could command in the commercial real estate market. As the Congress evaluates options for addressing this situation, it will be important to consider each of the fundamental problems that have affected the portfolio, and their underlying causes. Any approach implemented should address not only the high Section 8 subsidy costs, but also the high exposure to insurance loss, poor physical condition, and the underlying causes of these long-standing problems with the portfolio. As illustrated by several of the key issues discussed above, questions about the specific details of the reengineering process, such as which properties to include and whether or not to provide FHA insurance, will require weighing the likely effects of various options and the trade-offs involved when proposed solutions achieve progress on one problem at the expense of another. Changes to the insured Section 8 portfolio should also be considered in the context of a long-range vision for the federal government's role in providing housing assistance, and assistance in general, to low-income individuals, and how much of a role the government is realistically able to have, given the current budgetary climate. Addressing the problems of the portfolio will inevitably be a costly and difficult process, regardless of the specific approaches implemented. The overarching objective should be to implement the process in the most efficient and cost-effective manner possible, recognizing not only the interests of the parties directly affected by restructuring but also the impact on the federal government and the American taxpayer. As indicated earlier in our statement, we are continuing to review the results of Ernst & Young's study and other issues associated with portfolio reengineering, and we will look forward to sharing the results of our work with the Subcommittee as it is completed.

GAO discussed the Department of Housing and Urban Development's (HUD) efforts to reengineer its multifamily rental housing portfolio. GAO noted that: (1) the portfolio's excessive subsidy costs, high exposure to insurance loss, and poor physical condition stem from program design flaws, HUD dual role as loan insurer and rental subsidy provider, and weaknesses in HUD oversight and management; (3) in 1995, HUD proposed allowing property owners to set rents at market levels, terminating Federal Housing Administration (FHA) mortgage insurance, and replacing project-based rent subsidies with portable tenant-based subsidies; (4) although the proposal could lower mortgage debt, it would result in substantial FHA insurance claims; (5) HUD has made several proposal changes in 1996 due to concerns about the lack of data, effects on properties and existing residents, and the long-term financial impact on the government; (6) a 1996 contractor's report confirmed that most properties have assisted rents that are higher than estimated market rents and significant maintenance and capital improvement needs; (7) the study also indicates that most portfolio properties need to have their debt reduced to continue operating; and (8) reengineering issues requiring congressional consideration include HUD portfolio management problems, FHA insurance for restructured loans, project- versus tenant-based rent subsidies, protection for displaced households, inclusion of properties with below-market rents, mortgage restructuring, government financing of rehabilitation costs, and property owners' tax relief.

PBGC was established by ERISA to pay participants in private defined benefit plans in the event that the sponsor could not. PBGC is financed through insurance premiums paid by sponsors and by investment returns on held assets. Sponsors are responsible for making legally required contributions to pension trust funds that are intended to be sufficient to fund the promised benefits over time. Plan assets are then invested on behalf of participating employees. The precise calculations for determining annual minimum funding requirements are set forth in ERISA, and compliance is monitored by the IRS. These requirements are designed to provide reasonable assurance that a plan's assets will be sufficient to fund the accrued benefits owed to participants when they retire. In 2005, we found that, of the 100 largest defined benefit pension plans (including many underfunded plans), on average 62.5 percent had received no cash contributions each year from 1995 to 2002. These plans were able to meet minimum funding requirements through the use of accounting credits. Compliance with the minimum funding requirements is recorded through the plan's funding standard account (FSA). The FSA tracks events that affect the financial health of a plan during that plan year: credits, which reflect improvements to the plan's assets, such as contributions, amortized experience gains, and interest; and charges, which reflect an increase in the plan's financial requirements, such as the plan's normal cost and amortized charges such as the initial actuarial liability, experience losses, and increases in a plan's benefit formula. If FSA credits exceed charges in a given plan year, the plan's FSA registers a net increase. Compliance with the minimum funding standard requires that the FSA balance at the end of the year is non-negative. An existing credit balance accrues interest and may be drawn upon to help satisfy minimum funding requirements for future plan years, and may offset the need for future cash contributions. In 2006, Congress enacted the Pension Protection Act (PPA) to address some identified deficiencies in funding requirements. Because these changes in funding requirements are applicable to plan years beginning after 2007, we are unable to comment on what impact, if any, the act would have had on our case studies. For defined benefit plans, the accrued benefit is the amount that the plan participants would receive as a life annuity beginning at the normal retirement age, as defined by the plan. It is determined by a plan's benefit formula and is recalculated annually as participants complete an additional year of service. ERISA requires sponsors to provide information to the federal government regarding plan benefits, summary financial information, and funding information. Sponsors must estimate their liabilities each year to determine whether their plans are fully funded or underfunded, with the assumption that the sponsor will continue to maintain the plan in its current form for the foreseeable future. If a sponsor needs to terminate a plan, it must conduct a valuation of plan assets and liabilities to determine whether it is fully funded. The valuation assumes that no further benefits will accrue and no further contributions will be made. If this valuation finds the plan to be underfunded, the sponsor must meet certain criteria set by ERISA in order to file a claim with PBGC. If the sponsor meets these criteria, PBGC becomes trustee of the plan and will assume responsibility for paying guaranteed benefits to plan participants. However, payments to an individual beneficiary are subject to a maximum annual dollar limit, as set in accordance with ERISA. For 2009, this limit is $54,000. Executives at 10 companies received approximately $350 million in pay and other benefits in the years leading up to the termination of their companies' underfunded pension plans. We identified the salaries, bonuses, and benefits provided to small groups of high-ranking executives at these companies. Executives at some companies received salaries in excess of $10 million dollars in the years leading up to bankruptcy. We also found that some executives at these companies received millions of dollars combined in other financial benefits such as income tax reimbursements, retention bonuses, severance packages, split-dollar life insurance, and supplemental retirement plans. Along with financial compensation received, some executives were provided other benefits such as apartments, personal trips on company airplanes and helicopters, club memberships, legal fee reimbursement, and automobiles. We did not attempt to determine whether these benefits were customary. Further, for each of the 10 selected companies, at least one executive we reviewed sat on the company's Board of Directors. We did not find any illegal activity related to executive compensation on the part of either the 10 companies or the 40 executives under review. Table 1 shows details of our 10 case study companies where we reviewed salaries, bonuses, and benefits paid to executives. Some companies sponsored multiple plans which were terminated; for these companies the details of their pension plans are presented in aggregate. Further detail on 4 of these cases follows the table. Case 1: In September 2002, this airline hired a new CEO, who also served as President and Chairman of the Board, to help lead the company through potentially difficult times ahead. Three months later, the company declared bankruptcy and did not emerge until February 2006. During bankruptcy, the company terminated four pension plans from December 2004 to June 2005 that according to PBGC were underfunded by a total of $7.8 billion. This airline missed or waived nearly $1 billion in required minimum contributions. During this CEO's tenure, through the termination of the company's four pension plans, the CEO and two other executives received a total of $55.5 million in salary, benefits, and other compensation. See table 2 below for the components of compensation received by these three executives. The new CEO received a $3 million signing bonus, and the company established a supplemental retirement trust fund worth $4.5 million in his name "in consideration of retirement benefits foregone as a result of resignation from his former employer." Upon the airline's reorganization, the COO also received $2.6 million to set up an irrevocable trust in his name, along with a separate $100,000 in 401(k)-related payments. All officers were given unlimited free travel on the airline or its subsidiaries, along with a complimentary membership in the company's VIP travel club. The company also reimbursed its executives for any income taxes which they might have owed on this free travel. In addition to these travel benefits, according to the company's Officer Benefits Statement, executives would be reimbursed for the cost of "social and business club memberships...where there is a benefit to be realized to the company" and offered payments for financial advisory services. PBGC's takeover of these plans in such an underfunded state had significant consequences for some of the company's pilots, who lost large portions of their pensions due to PBGC's statutorily mandated benefit caps. We spoke to several retirees, including one pilot who lost two-thirds of his monthly pension payments when his pension plan was turned over to PBGC. Prior to the pension termination, he had made the decision to retire 2 years early at age 58 to spend more time at home after 35 years of routine flights to and from Southeast Asia. He told us that he made this decision after careful consideration of numerous retirement benefit estimates he had received over the years from the airline. Within 2 years of his retirement, PBGC had taken control of his plan and his benefits payments had been reduced to a third of what he had been promised at retirement. Case 2: This airline went through four CEOs and two bankruptcies during its struggle to survive in the face of considerable financial losses beginning in 2000. During the course of its two bankruptcies (the first in August 2002 and the second in September 2004), the airline turned over four pension plans to PBGC. It had missed or waived $206.8 million in required minimum contributions, with a total of $2.8 billion in underfunding reported by PBGC. The plan covering the company's pilots was terminated during the first bankruptcy. The remaining three plans, which covered mechanics, flight attendants, and others, were terminated during the company's second bankruptcy. From 1998 to 2005, four CEOs received over $120 million in total compensation. See table 3 below for the components of compensation provided to these four executives. For example, one executive received $16 million in stock and an additional $16 million in related income tax reimbursements during his tenure as CEO and Chairman of the Board. He also received a lump-sum payment in excess of $14 million for his pension plan holdings at the time of his resignation. His successor, who previously served as COO, received $1.2 million in incentive awards, as well as nearly $17 million in stock when he was promoted to CEO, a position which he held for 3 years. At the time of his resignation, he received over $15 million in supplemental executive retirement benefits. Another executive, whose tenure as CEO lasted 25 months, was provided a severance package that included triple his annual salary and bonuses plus over $1 million in payments related to a supplemental defined contribution retirement plan. These executives also received millions of dollars in other benefits. For example, the airline paid the four CEOs a combined total of nearly $500,000 for living and relocation expenses during their tenures. And, as in case 1, the executives were provided unlimited free transportation on the airline and were reimbursed for any income taxes incurred on such travel. In addition, they received a lifetime benefit of membership in the airline's frequent flyer program, which grants unlimited free first-class travel upgrades. They further received hundreds of thousands of dollars worth of benefits for split-dollar life insurance, and reimbursements for financial planning services and automobile expenses. Case 3: In December 1995, this electronics company's newly hired CEO and Chairman of the Board stated it was "clear to that the company could achieve meaningful growth." He announced a broad restructuring plan to improve the company's profitability which eventually resulted in the termination of nearly 3,000 employees. However, the company experienced a net loss for the next 6 years before declaring bankruptcy in October 2001. When PBGC took over the company's pension plan in July 2002, it was underfunded by $318 million, though the company had not missed or waived any required contributions. See table 4 below for components of compensation provided to three executives. In the 5 years leading up to its bankruptcy, the company paid three of its executives salaries totaling over $4 million and granted them bonuses equal to more than half that amount. Further, these executives received $6 million in stock awards, along with nearly 1 million stock options. When the Chief Financial Officer (CFO) resigned 10 months before the company declared bankruptcy, her severance package included 2 years' salary and bonuses, continuation of medical benefits, and $600 thousand for her holdings in the company's supplemental pension plan. Soon after, the CEO received a $1.4 million retention bonus because, according to the company's bankruptcy filings, " did not want him to have his attention distracted from the core problem of keeping the company moving along the track and wanted him not to be worrying about time spent or uncertainty for him and his family personally." These executives also were reimbursed for expenses such as foreign taxes, rent, utilities, shipping, health club memberships, and legal advice to help protect their interests during bankruptcy. One executive received a $380,000 loan to help with the purchase of a new home near the company's headquarters. This loan and related interest were to be forgiven completely over the course of 4 years if the executive remained employed by the company. In addition, some executives were provided with company car usage, along with coverage for all car-related business expenses. The company not only provided these benefits for its executives, but also provided additional benefits for families of executives. One executive received thousands of dollars for his wife's continuing education, as well as assistance to help her purchase a new car, and reimbursements for some of his wife and daughter's travel. Case 4: This insurance company and its parent company were owned and run largely by a single family whose members served on the boards of directors of both companies, as well as in senior officer positions such as CEO and COO. The insurance company was taken over by its state regulators during May 2001, resulting in the termination of its pension plan that was underfunded by $108 million, to PBGC in February 2002. The parent company declared bankruptcy in June 2001, soon after the takeover of the insurance company, leaving behind a second, smaller pension plan, underfunded by $13 million in January 2004. These two plans missed or waived a combined $29.2 million in required minimum contributions. In the 5 years leading up to the company's failure, five executives received a total of nearly $70 million in salary, bonuses, and benefits. See table 5 below for components of compensation provided to these five executives. In the 5 years leading to the companies' downfall, five executives received nearly $60 million in salaries and bonuses. This figure includes nearly $20 million for the CEO and a comparable amount for his brother, who served as the COO. According to the companies' compensation committees, executive compensation is meant to "establish a relationship between compensation and the attainment of corporate objectives." However, in 1 year, an executive failed to meet his target objectives, yet received a $1.5 million bonus "given continued confidence that he will achieve superior results in the future." In addition to salaries and bonuses, the executives also received over $10 million in other benefits. The CEO received split-dollar life insurance benefits in some years in excess of $1 million. Combined, these five executives received nearly 12 million stock options. The CEO and COO together received free personal travel on corporate aircraft valued at over $200,000, as reported by the companies. We reviewed documents provided by the companies and found extensive personal use of corporate aircraft: a Boeing 727-100 airplane and a Sikorsky helicopter. One executive described the plane as "nicely appointed" with multiple rooms. From 1997-1999, we found personal trips by the CEO, COO, and their families to China, Spain, Greece, Miami, Hawaii, Puerto Rico, and Mexico. In addition, the CEO took over 80 trips to his home in Quogue, N.Y. using the company's helicopter, of which more than 20 trips were solely for the transport of his wife and children. Further, the CEO and COO used both the company aircraft during the course of a family trip to Europe. Figure 1 below shows the same make and model of the helicopter used by company executives. In June 2002, the insurance company's Board of Directors was sued for breach of fiduciary duties. In the complaint against them, "excessive compensation and preferential transfers" were cited as factors in the company's failure. A separate lawsuit was filed in 2003 against the company's COO, alleging that he had improperly received millions of dollars in compensation. These suits were both settled for a total of $85 million in May 2005. All but one of the executives described in this case study are currently receiving monthly pension payments from PBGC in amounts ranging between $4,400 and $8,200. During our review of case studies, we noted that PBGC has little to no oversight authority regarding executive compensation. Companies are not required to report specific executive compensation details in financial disclosures to PBGC prior to plan termination. Further, while many plan terminations occur during bankruptcy, PBGC's ability to recover payments made to executives is limited by bankruptcy law. Companies are required to disclose certain financial information to PBGC, such as financial statements and projections, prior to terminating a defined benefit pension plan. The PBGC officials we spoke with indicated that these disclosures do not normally separate executive compensation from general companywide salary and benefits information. They further indicated that PBGC has no authority to demand that adjustments be made to salaries, although general adjustments to large categories of discretionary spending (which may include overall salaries) may be considered during evaluations of the company's ability to maintain a pension plan. During bankruptcy, PBGC has little power to recover amounts paid as compensation to executives. Any executive compensation paid during the course of a bankruptcy must be approved by the court, and once approved, cannot be recovered. Like any other creditor, PBGC can object to specific executive compensation plans, but the final decision regarding such plans is made by the bankruptcy judge, who is responsible for determining whether the plan is justified by the facts and circumstances of the situation. For executive compensation paid within the 2 years prior to a company's bankruptcy petition, creditors have extremely limited ability to recover some amounts, but generally only in situations where extreme mismanagement of funds has occurred. In addition, since PBGC is normally considered a general unsecured creditor during bankruptcy procedures, the agency has low priority for the payment of any such recoveries. In written comments on a draft of this report, PBGC agreed with our assessment that ERISA does not provide it with any oversight power regarding payments to company executives prior to a company's bankruptcy. Further, PBGC agreed that it has limited power over executive compensation during bankruptcy, as such payments are under the purview of the bankruptcy court. We have reprinted PBGC's written comments in appendix II. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the date of this letter. We will then send copies of this report to interested congressional committees and the Acting Director of the Pension Benefit Guaranty Corporation. The report also will be available at no charge on the GAO Web site at http://www.gao.gov. For further information about this report, please contact Gregory D. Kutz 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 report. GAO staff who made major contributions to this report are listed in appendix III. To determine pay and other compensation received by executives in the years preceding their company's termination of an underfunded defined benefit pension plan, we first obtained a database from the Pension Benefit Guaranty Corporation (PBGC) identifying companies that had terminated underfunded pension plans from 1999 to 2008. This database contained information on 1,246 terminated pension plans. We focused on identifying companies that (1) were publicly traded prior to the termination of their pension plan(s), (2) had significant unfunded pension liabilities on a termination basis ($100 million or more), (3) had a high unfunded liability per plan participant ratio ($10,000 or more per participant), and (4) had more than 5,000 plan participants. Of the 1,246 underfunded plans terminated from 1999 to 2008, we selected 10 companies from approximately 30 companies that sponsored plans which met our criteria. The 10 case study companies we selected were not meant to be representative of all companies whose plans have been taken over by PBGC in the past decade. We requested and reviewed documents provided by selected companies related to the compensation of their executives. We reviewed Securities and Exchange Commission (SEC) filings and PBGC documents disclosing plan underfunding at the time of termination and missed contributions. We also interviewed PBGC and company officials, as well as plan participants. In addition, we requested documentation from all selected executives under review, including tax returns. We attempted to interview all selected executives, but some could not be reached or declined our interview request. Findings related to executive pay and benefits were limited by the availability of public documents and information voluntarily provided by companies, executives, and other entities (e.g., professional sports teams, golf clubs). Because some companies and executives did not provide information, declined to be interviewed, and/or did not consent to granting GAO access to copies of their tax returns from the Internal Revenue Service, we were not able to document all details concerning pay and benefits received beyond the details available in public documents or otherwise voluntarily provided. Thus, the executive compensation information in this report represents what we were able to determine and may be understated. All values listed for restricted stock awards were determined by reviewing SEC filings which list the value of stock awards as of the date of the award, and therefore may not represent their ultimate exercised value. We did not attempt to determine the market value of stock options at the time of their award, nor their exercised value. We limited our review to the time period beginning 5 years prior to a company's first pension plan termination and ending with the company's final pension plan termination. Since some companies terminated multipl pension plans over a period of time, for those companies our review may cover more than 5 years. Due to the high turnover of executives at thes companies, information regarding the total compensation of the executives discussed in this report may not have been available for the entire time period under review. We did not conduct an exhausti of each company's executive pay and benefit practices; we reviewed information related to executive pay and compensation in the years preceding the termination of a defined benefit pension plan. To assess the reliability of PBGC data related to the termination of defined benefit pension plans from 1999 through 2008, we (1) interviewed PBGC officials familiar with the data related to terminated pension plans and (2) matched the data provided by PBGC for the pension plans in each case study against records available on the agency's Web site to verify that the data we were provided were exported correctly. We found the data to be sufficiently reliable to identify case studies for further investigation. We conducted our audit and investigative work from January 2009 through September 2009. We conducted our audit work in accordance with U.S. 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 finding and conclusions based on our audit objective. We performed our investigative work in accordance with standards prescribed by the Council of the Inspectors General on Integrity and Efficiency. In addition to the contact named above, the individuals who made major contributions to this report were Christopher Backley, Gary Bianchi, Robert Graves, Rebecca Guerrero, Matthew Harris, Ken Hill, Leslie Kirsch, Flavio Martinez, Vicki McClure, Jonathan Meyer, Sandra Moore, George Ogilvie, and Barry Shillito.

When sponsors terminate underfunded plans during bankruptcy, it can deplete resources of the Pension Benefit Guaranty Corporation (PBGC), which protects the pensions of almost 44 million American workers and retirees who participate in over 29,000 defined benefit pension plans. In 2009, PBGC reported an estimated deficit of over $30 billion. GAO was asked to determine what pay and other compensation executives received in the years preceding their company's termination of an underfunded defined benefit pension plan. To identify case study examples GAO analyzed a listing of the 1,246 underfunded plans that were terminated from 1999 to 2008 and selected public companies with large unfunded liabilities, large unfunded liabilities per participant, and a large number of plan participants. GAO reviewed documents provided by companies and executives, and interviewed PBGC and company officials. GAO also reviewed Securities and Exchange Commission (SEC) filings and PBGC documents disclosing plan underfunding at the time of termination and missed contributions. Executive compensation figures may be understated because some company executives could not be located, did not respond to document requests, declined interviews, and did not give GAO access to their tax records. GAO found that 40 executives for 10 companies received approximately $350 million in pay and other compensation in the years leading up to the termination of their companies' underfunded pension plans. GAO identified salaries, bonuses, and benefits provided to small groups of high-ranking executives at these companies during the 5 years leading up to the termination of their pension plans. For example, beyond the tens of millions in base salaries received, GAO found that executives also received millions of dollars in stock awards, income tax reimbursements, retention bonuses, severance packages, and supplemental executive-only retirement plans. In some cases, plan participants had their benefits reduced due to the underfunding of the plan when it was terminated. For example, a retired pilot saw his monthly pension payment reduced by two-thirds. The reduction in benefits occurred because federal law caps the benefits PBGC can guarantee when it takes over an underfunded pension plan. In addition, PBGC has no oversight power with regard to executive compensation prior to a company's bankruptcy. During bankruptcy, executive compensation must be approved by the bankruptcy court, and after this approval PBGC has extremely limited ability to recover those payments to executives. GAO did not find any illegal activity with respect to executive compensation on the part of either the 10 companies or the 40 executives under review.

Identity thieves can obtain a legitimate taxpayer's name and Social Security number (SSN) in a variety of ways. They can obtain identity information by hacking into a computer system or paper files at one of the many entities that use names and SSNs in their records (e.g., employers, schools, or financial institutions). Thieves can trick the taxpayer into revealing such information, or they can steal it from the taxpayer. Armed with the stolen identity, the thief can then file a fraudulent tax return seeking a refund. The thief typically files a return claiming a refund early in the filing season, before the legitimate taxpayer files. If IRS determines the name and SSN on the tax return appear valid (IRS checks all returns to see if filers' names and SSNs match before issuing refunds) and it passes through IRS's other filters, IRS will issue the refund to the thief. IRS often becomes aware of a problem after the legitimate taxpayer files a return. At that time, IRS discovers that two returns have been filed using the same name and SSN, as shown in figure 1. The legitimate taxpayer's refund is delayed while IRS spends time determining who is legitimate. As we have previously reported, IRS has taken multiple steps to detect, resolve, and prevent identity theft-based refund fraud. IRS developed new filtering processes in 2012 to detect identity theft based on the characteristics of incoming tax returns that do not rely on a duplicate filing or self-identification by filers. Identity theft indicators--also known as account flags--are a key tool used to resolve and detect identity theft. Identity theft indicators speed resolution by making a taxpayer's identity theft problems visible to all IRS personnel with account access. In some cases, IRS uses its identity theft indicators to screen tax returns filed in the names of known identity theft victims. If a return fails the screening, it is subject to additional IRS manual review, including contacting employers to verify that the income reported on the tax return was legitimate. IRS uses the Identity Protection Personal Identification Number (IP PIN)--a single-use identification number sent to victims of identity theft that have validated their identities with IRS--to prevent refund fraud. When screening returns for possible identity theft, IRS excludes returns with an IP PIN, which helps avoid the possibility of a "false positive" and a delayed tax refund. If a taxpayer was issued an IP PIN and does not use it when filing electronically, IRS rejects the electronically filed return and prompts the taxpayer to file on paper. Taxpayers that do not use an IP PIN or enter an incorrect IP PIN filing on paper experience processing delays as IRS verifies the taxpayers' identity. As of June 30th, IRS reported providing more than 251,500 IP PINs to taxpayers in 2012 and of those, 150,506 taxpayers filed using an IP PIN. Of filers that filed using an IP PIN, 8.6 percent (12,936) used an invalid IP PIN. IRS officials told us their review of a sample of these cases found that the majority of the invalid IP PINs were due to transposition or keying errors. Details on other IRS actions can be found in our previous reports. Other steps taken in 2012 include temporarily reallocating hundreds of staff from other business units to resolve duplicate filing cases and issue refunds to legitimate taxpayers. Officials in IRS's accounts management function told us that in October 2012 there were more than 1,700 staff working to resolve identity theft cases. Also, in April 2012, IRS began the Law Enforcement Assistance Pilot Program in Florida to help state and local law enforcement agencies obtain tax return data vital to local identity theft investigations. The pilot allows taxpayers to give their permission for IRS to provide state and local law enforcement with the returns submitted using their SSN in certain cases. IRS expanded the pilot to eight additional states in October 2012. As of September 2012, 49 state and local agencies participated in the pilot. We did not independently assess IRS's 2012 efforts. The full extent and nature of identity theft-based refund fraud is not known, but IRS data indicate that it is a large and growing problem. The data show that in the first 9 months of 2012, the number of known tax- related identity theft incidents has already more than doubled over 2011 (see table 1). Understanding the extent and nature of identity theft-related refund fraud is important to crafting a response to it. Program officials said that one of the challenges they face in combating this type of fraud is its changing nature. The officials said that when they discover and shut down one vulnerability, thieves often change tactics. The hidden nature of the crime means it is not reasonable to expect perfect knowledge about cases and who is committing the crime. However, the better IRS managers' understanding of the problem, the better they can respond and the better Congress can oversee IRS's efforts. IRS officials described several areas where the extent and nature of identity theft is unknown. Total number and cost of fraudulent returns. IRS does not know the full extent of the occurrence of identity theft. Officials said that they count the refund fraud cases that IRS identifies but that they do not estimate the number of identity theft cases that go undetected. IRS officials explained that "we don't know what we don't know," because if a fraudulent return goes through IRS's identity theft models and other programs, they are unable to tell if they failed to detect the fraudulent return. Officials explained that it is very difficult to detect a fraudulent return when an identity thief uses a correct SSN and has enough identifying information to make the return "look" like it came from the legitimate tax filer. The tax return appears to be legitimate as it has been filed with a name and SSN that match. Detecting identity theft can also be challenging because some legitimate filers mistakenly file duplicate returns. For example, IRS officials told us that in some cases, taxpayers intending to amend their return are confused and file a second Form 1040. In such a case, IRS has to investigate whether the duplicate filing is due to taxpayer confusion or identity theft. IRS captures data on the amount of money it recovers from all types of fraudulent returns, but it does not distinguish whether the type of fraud was identity theft or some other type of fraud. In some cases, external entities, such as banks or other agencies, may notify IRS of potential refund fraud, including suspected identity theft-based refund fraud. IRS reported it had received information from 116 banks and external leads on more than 193,000 accounts between January 1 and September 30, 2012, for all types of refund fraud. IRS reported that banks and other external entities returned almost $754 million dollars during this period. These cases are ones where fraudulent returns passed through IRS processes and refunds were issued. W&I officials told us they analyze data from such cases to identify characteristics of the fraudulent returns to improve their screening for identity theft and other types of refund fraud. The officials told us that the procedure for banks to notify IRS of suspected refund fraud is not new, but more financial institutions have now begun doing so. Identity of the thieves. Unless IRS pursues a criminal investigation, IRS generally does not know the real identity of the thieves. An investigation is necessary because the only identity information IRS has on the fraudulent tax return is that of the identity theft victim, not the thief. Officials responsible for processing returns said that they do not have the sort of information that would be needed to even begin such an investigation. CI has substantially increased efforts to criminally investigate identity theft cases in fiscal year 2012; however, as with other forms of fraud, CI focuses its investigative resources on the most serious cases. The number of identity theft investigations opened and time spent investigating identity theft cases have increased from fiscal year 2010 to fiscal year 2012, as shown in table 2. Although identity theft is one of CI's investigative priorities, the number of investigations initiated is substantially less than the number of identity theft incidents confirmed by IRS in 2012. CI officials told us that while other IRS functions share leads with CI, not all of these leads meet CI's criteria for developing a case for prosecution. CI officials told us they generally focus their investigative resources on the most egregious and significant identity theft cases, as measured by volume and refund amounts. Whether a fraudulent return is an individual attempt or part of a broader scheme. W&I and CI officials told us the two units work closely to utilize the information they obtain from identity theft cases. They use this information to improve their measures to identify new identity theft-based refund attempts and to identify especially significant or egregious cases to consider for possible criminal investigations. When either W&I's analysis of identity theft cases or CI investigations lead to the identification of new schemes, that information is reported to the Return Integrity and Correspondence Services unit so it can strengthen its identity theft filters. Identifying new schemes or significant cases, such as one identity thief using numerous taxpayer identities, depends on analysts noticing patterns or other indications that a few cases may be part of a larger scheme. As a result, some schemes or cases involving multiple taxpayers may go undetected. Characteristics of known identity theft returns. IRS officials told us that the agency does not systematically track characteristics of known identity theft returns, including the type of return preparation (e.g. paid preparer or software), whether the return is filed electronically or on paper, or how the individual claimed a refund (e.g. check, direct deposit, or debit card). They added that the form in which a refund is claimed would be particularly hard to track using the current processes. Officials noted that they can identify the Internet protocol address of computers used to electronically file returns, which is helpful in detecting potential identity theft. While much remains unknown about identity theft, IRS has taken steps to collect program data on its identity theft detection and resolution efforts. IRS developed the internal Refund Fraud and Identity Theft Global Report (Global Report) in July 2012 to consolidate and track existing information about identity theft incidents from multiple sources within IRS. IRS officials said that the information in the report is not new, but that they saw the need for consistency in identity theft-related information drawn from several data sources. The report is used to provide information to IRS senior management and the Identity Theft Advisory Councilidentity theft metrics and to provide a standard source of information for responding to data requests from external entities, according to PGLD officials. Officials also stated that because the Global Report is new, they are working to improve its quality. In a selective review of the Global Report, we found that it had many of the attributes we have previously found to be useful for program monitoring. For example, the report covers key program activities and generally provides names, definitions, and data sources. However, we also found some areas where additional information or clarification of information currently in the report could make it more useful, as explained in table 3. The Global Report is a useful step towards providing IRS management and other entities with up-to-date, consistent information about identity theft-based refund fraud and IRS efforts to address it. However, it could be improved with the inclusion of additional information about data limitations, definitions, data sources, and the frequency of data updates in some areas. With such additional information, IRS management or other entities that use the report would have a clearer picture of not only what is known about identity theft-based refund fraud, but the strengths and limitations of the available information. The quality of the report will also be enhanced by the institution of process controls to help ensure consistency in how the data in the report are compiled, verified, and validated. Identity theft-related tax fraud is a terrible problem for the victims and a growing problem for tax administration. For this reason, legislators, government officials, and the public want to know about IRS efforts to address identity theft. The nature of identity theft-related tax fraud means that it will be very difficult, if not impossible, to develop a complete picture of the extent and nature of the problem, which in turn makes it difficult to assess IRS's progress in combating it. While not a direct attack on the problem itself, IRS's new Global Report could be a useful management tool. It is a recognition of the fact that IRS is devoting significant resources to the identity theft problem and that consolidated and more consistent program information could assist in management oversight and decision making. In reading the report, we identified some improvements that could help users better understand the information provided. To improve the identity theft information available to IRS management and Congress, we recommend that the Acting Commissioner of Internal Revenue update the Refund Fraud and Identity Theft Global Report to: provide definitions, data sources, and the frequency of data updates for data elements where such information is missing; document procedures used to compile and validate data; and describe limitations of the data presented. IRS officials provided oral comments in response to our draft findings, conclusions, and recommendations. The Director of PGLD stated that she agreed with our recommendations and plans on implementing our recommendations to improve the information provided in the Global Report. The Director of CI, Refund Crimes said that the discussion of CI's investigation of identity theft could be interpreted to suggest that CI is expected to work every case of identity theft. We revised language in the report to emphasize that, like other forms of fraud, CI focuses its identity theft-related refund fraud investigations on the most serious cases. Chairman Platts, Ranking Member Towns, and Members of the Subcommittee, this completes my prepared statement. I would be happy to respond to any questions you may have at this time. For further information on this testimony, please contact James R. White at (202) 512-9110 or [email protected]. 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, David Lewis, Assistant Director; Shannon Finnegan, Analyst-in-Charge; Michele Fejfar; Sarah McGrath; Donna Miller; Amy Radovich; and Sabrina Streagle made key contributions to this report. 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.

Identity theft is a growing and evolving problem that imposes a financial and emotional toll on its victims. As of September 30, 2012, IRS had identified almost 642,000 incidents of identity theft that impacted tax administration in 2012 alone, a large increase over prior years. A taxpayer may have his or her tax refund delayed if an identity thief files a fraudulent tax return seeking a refund using a legitimate taxpayer's identity information. GAO was asked to describe identity theft issues at IRS and limits to what is known about the extent of identity theft. GAO updated its analysis on identity theft with current data on identity theft cases and interviewed IRS officials. GAO also reviewed past GAO reports to identify key attributes of successful performance measures and compare information provided by the Global Report Understanding the extent and nature of identity theft-related refund fraud is important to crafting a response to it, but Internal Revenue Service (IRS) managers recognize that they do not have a complete picture. Program officials said that one of the challenges they face in combating this type of fraud is its changing nature and how it is concealed. While perfect knowledge about cases and who is committing the crime will never be attained, the better IRS understands the problem, the better it can respond and the better Congress can oversee IRS's efforts. IRS officials described several areas where the extent and nature of identity theft is unknown. Total number and cost of fraudulent returns. IRS does not know the full extent of the occurrence of identity theft. Officials said that they count the refund fraud cases that IRS identifies but that they do not estimate the number of identity theft cases that go undetected. Identity of the thieves. Unless IRS pursues a criminal investigation, IRS generally does not know the real identity of the thieves. Whether a fraudulent return is an individual attempt or part of a broader scheme. Identifying new schemes or significant cases, such as one thief using numerous taxpayer identities, depends on analysts noticing patterns or other indications that a few cases may be part of a larger scheme. As a result, some schemes or cases involving multiple taxpayers may go undetected. Characteristics of known identity theft returns. IRS officials told us that the agency does not systematically track characteristics of known identity theft returns, including the type of return preparation (e.g., paid preparer or software), whether the return is filed electronically or on paper, or how the individual claimed a refund (e.g., check, direct deposit, or debit card). While much remains unknown about identity theft, IRS has taken steps to organize what it knows in a newly developed Refund Fraud and Identity Theft Global Report (Global Report). The Global Report consolidates and tracks information about identity theft incidents and IRS detection and resolution efforts from multiple sources within IRS. The report provides information to IRS senior management and a standard source of information for responding to data requests from external entities. GAO's selected review of the Global Report against key attributes of successful performance measures found that it had many of the attributes useful for program monitoring, but also had some areas where additional information or clarification would make the report more helpful. Updating the Global Report to provide information on definitions, data sources, and limitations such as the unknown number of undetected fraudulent returns, could help ensure users have a more complete picture of the data and its strengths and limitations. The quality of the report will also be enhanced by the institution of process controls to help ensure consistency in how the data in the report are compiled, verified and validated. To improve information available to IRS management and Congress, GAO recommends that IRS update the Global Report to provide definitions and data sources, where such information is missing; document procedures used to compile and validate the data; and describe limitations of the data presented. IRS officials agreed with our recommendations. Based on their comment, we revised language in the report to clarify that, like other forms of fraud, IRS conducts criminal investigations only in the most serious identity theft-related refund fraud cases.

Federal law and policy have established roles and responsibilities for federal agencies to work with industry in enhancing the physical and cyber-security of critical government and industry infrastructures. For example, consistent with law, presidential policies stress the importance of coordination between the government and industry to protect the nation's cyber critical infrastructure. In addition, policies establish DHS as the focal point for the security of cyberspace--including analysis, warning, information sharing, vulnerability reduction, mitigation efforts, and recovery efforts for government and industry critical infrastructure and information systems. Federal policy also establishes critical infrastructure sectors, assigns federal agencies responsibilities over each sector (known as sector-specific agencies), and encourages industry involvement. A fundamental component of DHS's efforts to protect and secure our nation's infrastructure is its partnership approach, whereby it engages in partnerships among government and industry stakeholders. In 2006, DHS issued the National Infrastructure Protection Plan (NIPP), which provides the overarching approach for integrating the nation's critical infrastructure protection and resilience activities into a single national effort. The NIPP also outlines the roles and responsibilities of DHS with regard to critical infrastructure protection and resilience and sector-specific agencies-- federal departments and agencies responsible for critical infrastructure protection and resilience activities in 16 critical infrastructure sectors-- such as the dams, energy, and transportation sectors. Appendix I lists the 16 critical infrastructure sectors and their sector-specific agencies. The NIPP emphasizes the importance of collaboration, partnering, and voluntary information sharing among DHS and industry owners and operators, and state, local, and tribal governments. The NIPP also stresses a partnership approach between the federal and state governments, and industry stakeholders for developing, implementing, and maintaining a coordinated national effort to manage the risks to critical infrastructure. Specific laws and directives have guided DHS's role in critical infrastructure protection, including the Homeland Security Act of 2002, as amended; Homeland Security Presidential Directive/HSPD-7; Presidential Policy Directive/PPD-21, which was issued on February 12, 2013; and Executive Order 13636, which was also issued on February 12, 2013. PPD-21 directs DHS to, among other things, coordinate the overall federal effort to promote the security and resilience of the nation's critical infrastructure. PPD-21 also recognizes that DHS, in carrying out its responsibilities under the Homeland Security Act, evaluates national capabilities, opportunities, and challenges in protecting critical infrastructure; analyzes threats to, vulnerabilities of, and potential consequences from all hazards on critical infrastructure; identifies security and resilience functions that are necessary for effective stakeholder engagement with all critical infrastructure sectors; integrates and coordinates federal cross-sector security and resilience activities; and identifies and analyzes key interdependencies among critical infrastructure sectors, among other things. Executive Order 13636 directs DHS to, among other things, develop a voluntary cybersecurity framework; promote and incentivize the adoption of cybersecurity practices; increase the volume, timeliness, and quality of cyber threat information sharing; and incorporate privacy and civil liberties protections into every initiative to secure our critical infrastructure. Within DHS, the National Protection and Programs Directorate (NPPD) is responsible for working with public and industry infrastructure partners and leads the coordinated national effort to mitigate risk to the nation's infrastructure through the development and implementation of the infrastructure protection program. Using a partnership approach, NPPD works with owners and operators of the nation's infrastructure to develop, facilitate, and sustain strategic relationships and information sharing, including the sharing of best practices. NPPD also works with government and industry partners to coordinate efforts to establish and operate various councils intended to protect infrastructure and provide infrastructure functions to strengthen incident response. Our prior work has found that DHS and its partners have taken a number of steps intended to improve the security of our critical infrastructure. However, we have also identified a number of additional steps DHS could take to further improve its partnerships aimed at protecting our critical infrastructure. Specifically, our work has identified three key factors that can affect the implementation of the partnership approach used by DHS: (1) recognizing and addressing barriers to sharing information; (2) sharing the results of DHS assessments with industry and other stakeholders; and (3) measuring and evaluating the performance of DHS's partnership efforts. Addressing pervasive and sustained computer-based and physical attacks to systems and operations and the critical infrastructures they support depends on effective partnerships between the government and industry owners and operators of critical infrastructure. Recognizing and addressing barriers to information sharing includes, among other things, identifying barriers to sharing information with partners, understanding information requirements, and determining partners' reasons for participating in voluntary programs. Identifying barriers to industry sharing information with federal partners. In a July 2010 report examining, among other things, government stakeholders' expectations for cyber-related, public- private partnerships we identified some barriers to industry's sharing of cyber threat information with federal partners.of the government entities we contacted reported that industry partners were mostly meeting their expectations in several areas, including sharing timely and actionable cyber threat information, though the extent to which this was happening varied by sector. However, we found that federal officials also reported that improvements could be made. For example, while timely and actionable cyber threat and alert information was being received from industry partners, federal officials noted there were limits to the depth and specificity of the information provided by industry partners. Among other issues, we found that industry partners did not want to share their sensitive, proprietary information with the federal government. For example, information security companies had concerns that they could lose a competitive advantage by sharing information with the government if, in turn, this information was shared with those companies' competitors. In addition, despite special protections and sanitization processes, we found that industry partners were unwilling to agree to all of the terms that the federal government or a government agency requires to share certain information. On the basis of our findings, we recommended, among other things, that DHS, in collaboration with industry partners, use the results of our July 2010 report to continue to focus its information- sharing efforts on the most desired services. DHS concurred with this recommendation and described steps underway to address it, including the initiation of several pilot programs intended to enable the mutual sharing of cybersecurity information at various classification levels. Identifying barriers to the government's sharing information with industry partners. Federal efforts to meet the information-sharing expectations of industry partners are equally important in managing effective public-private partnerships to successfully protect cyber- reliant critical assets from a multitude of threats. In July 2010, we also examined industry partners' expectations for cyber-related, public- private partnerships and identified some barriers to the federal government's sharing of cyber threat information with its industry partners. We reported that federal partners were not consistently meeting industry's information sharing expectations, including providing timely and actionable cyber threat information and alerts, according to industry partners we contacted at the time. We found that this was, in part, due to restrictions on the type of information that can be shared with industry partners. We reported that according to federal officials, DHS's ability to provide information is affected by restrictions that do not allow individualized treatment of one industry partner over another industry partner--making it difficult to formally share specific information with entities that are being directly affected by a cyber threat. In addition, we reported in July 2010 that because DHS has responsibility for serving as the nation's cyber analysis and warning center, it must ensure that its warnings are accurate. DHS vulnerability assessments are conducted during site visits at individual assets and are used to identify security gaps and provide options for consideration to mitigate these identified gaps. DHS security surveys are intended to gather information on an asset's current security posture and overall security awareness. Security surveys and vulnerability assessments are generally asset-specific and are conducted at the request of asset owners and operators. assets crucial to national security, public health and safety, and the economy. We recommended, and DHS concurred, that it design and implement a mechanism for systematically assessing why owners and operators of high-priority assets decline to participate, and develop a road map, with time frames and milestones, for completing this effort. DHS stated that it had implemented a tracking system in October 2013 to capture data on the reason for declinations by owners and operators. Although DHS reports that it has taken or begun to take action on the open recommendations discussed above, we have not verified DHS's progress implementing all of our recommendations. We will continue to monitor DHS's efforts to implement these recommendations. Another important factor for DHS's implementation of its partnership approach is sharing information on the results of its security assessments and surveys with industry partners and other stakeholders. Timely sharing of assessment results at the asset level. DHS security surveys and vulnerability assessments can provide valuable insights into the strengths and weaknesses of assets and can help asset owners and operators that participate in these programs make decisions about investments to enhance security and resilience. In our May 2012 report, we found that, among other things, DHS shares the results of security surveys and vulnerability assessments with asset owners or operators.security survey and vulnerability assessment results could be enhanced by the timely delivery of these products to the owners and operators and that the inability to deliver these products in a timely manner could undermine the relationship DHS was attempting to develop with these industry partners. Specifically, we reported that, based on DHS data from fiscal year 2011, DHS was late meeting its (1) 30-day time frame--as required by DHS guidance--for delivering the results of its security surveys 60 percent of the time and (2) 60- day time frame--expected by DHS managers for delivering the results of its vulnerability assessments--in 84 percent of the instances. DHS officials acknowledged the late delivery of survey and assessment results and said they were working to improve processes and However, we also found that the usefulness of protocols. However, DHS had not established a plan with time frames and milestones for managing this effort consistent with standards for project management. We recommended, and DHS concurred, that it develop time frames and specific milestones for managing its efforts to ensure the timely delivery of the results of security surveys and vulnerability assessments to asset owners and operators. DHS stated that, among other things, it deployed a web-based information-sharing system for facility-level information in February 2013, which, according to DHS, has since resulted in a significant drop in overdue deliveries. Sharing information with critical infrastructure partners at the sector level. Critical infrastructures rely on networked computers and systems, thus making them susceptible to cyber-based risks. Managing such risk involves the use of cybersecurity guidance that promotes or requires actions to enhance the confidentiality, integrity, and availability of computer systems. In December 2011, we reported on cybersecurity guidance and its implementation and we found, among other things, that DHS and the other sector-specific agencies have disseminated and promoted cybersecurity guidance among and within sectors. However, we also found that DHS and the other sector-specific agencies had not identified the key cybersecurity guidance applicable to or widely used in each of their critical infrastructure sectors. In addition, we reported that most of the sector- specific critical infrastructure protection plans for the sectors we reviewed did not identify key guidance and standards for cybersecurity because doing so was not specifically suggested by DHS guidance. Therefore, we concluded that given the plethora of guidance available, individual entities within the sectors could be challenged in identifying the guidance that is most applicable and effective in improving their security and that improved knowledge of the available guidance could help both federal and industry partners better coordinate their efforts to protect critical cyber-reliant assets. We recommended that DHS, in collaboration with government and industry partners, determine whether it is appropriate to have cybersecurity guidance listed in sector plans. DHS concurred with our recommendation and stated that it will work with its partners to determine whether it is appropriate to have cybersecurity guidance drafted for each sector and, in addition, would explore these issues with the cross-sector community. Sharing certain information with critical infrastructure partners at the regional level. Our work has shown that over the past several years, DHS has recognized the importance of and taken actions to examine critical infrastructure asset vulnerabilities, threats, and potential consequences across regions. In a July 2013 report, we examined DHS's management of its Regional Resiliency Assessment Program (RRAP)--a voluntary program intended to assess regional resilience of critical infrastructure by analyzing a region's ability to adapt to changing conditions, and prepare for, withstand, and rapidly recover from disruptions--and found that DHS has been working with states to improve the process for conducting RRAP projects, including more clearly defining the scope of these projects. We also reported that DHS shares the project results of each RRAP project report with the primary stakeholders--officials representing the state where the RRAP was conducted--and that each report is generally available to certain staff, such as sector-specific agencies and protective security advisors within DHS. However, we found that DHS did not share individual RRAP reports more widely with others in similar industry lines, including other stakeholders and sector-specific agencies outside of DHS. We also reported that DHS had been working to conceptualize how it can develop a product or products using multiple sources--including RRAP reports--to more widely share resilience lessons learned to its critical infrastructure partners, including federal, state, local, and tribal officials. DHS further reported using various forums, such as regional conferences or during daily protective security advisor contacts, to solicit input from critical infrastructure partners to gauge their resilience information needs. Due to DHS's ongoing efforts, we did not make a related recommendation in the report. However, we noted that through continued outreach and engagement with its critical infrastructure partners, DHS should be better positioned to understand their needs for information about resilience practices, which would in turn help clarify the scope of work needed to develop and disseminate a meaningful resilience information-sharing product or products that are useful across sectors and assets. Sharing information with sector-specific agencies and state and local governments. Federal sector-specific agencies and state and local governments are key partners that can provide specific expertise and perspectives in federal efforts to identify and protect critical infrastructure. In a March 2013 report, we reviewed DHS's management of the National Critical Infrastructure Prioritization Program (NCIPP)--which identifies and prioritizes a list of nationally significant critical infrastructure each year--to include how DHS worked with states and sector-specific agencies to develop the list. We reported that DHS had taken actions to improve its outreach to sector-specific agencies and states in an effort to address challenges associated with providing input on nominations and changes to the NCIPP list. For example, in 2009, we reported that DHS revised its list development process to be more transparent and provided states with additional resources and tools for developing their NCIPP nominations. Furthermore, DHS provided on-site assistance from subject matter experts to assist states with identifying infrastructure, disseminated a lessons-learned document providing examples of successful nominations to help states improve justifications, and was more proactive in engaging sector-specific agencies in ongoing dialog on proposed criteria changes, among other efforts. However, we also found that most state officials we contacted continued to experience challenges with nominating assets to the NCIPP list using the consequence-based criteria developed by DHS. We reported that DHS officials told us that they recognized that some states are facing challenges participating in the NCIPP program and have taken additional steps to address the issue, including working to minimize major changes to the consequence-based NCIPP criteria; enhancing state participation; and working collaboratively with the State, Local, Tribal and Territorial Government Coordinating Council to develop a guide to assist states with their efforts to identify and prioritize their critical infrastructure. Furthermore, in our January 2014 report reviewing the extent to which federal agencies coordinated with state and local governments regarding enhancing cybersecurity within public safety entities, we determined that DHS shared cybersecurity-related information, such as threats and hazards, with state and local governments through various entities. For example, we found that DHS collected, analyzed, and disseminated cyber threat and cybersecurity-related information to state and local governments through its National Cybersecurity and Communications Integration Center and through its relationship with the Multi-State Information Sharing and Analysis Center. In addition, we reported that DHS's State, Local, Tribal, and Territorial Engagement Office's Security Clearance Initiative facilitated the granting of security clearances to state chief information officers and chief information security officers which allowed these personnel to receive classified information about current and recent cyber attacks and threats. For example, we reported that, according to DHS officials, they have issued secret clearances to 48 percent of state chief information officers and 84 percent of state chief information security officers. Moreover, we reported that DHS provides unclassified intelligence information to fusion centers, which then share the information on possible terrorism and other threats and issue alerts to state and local governments. For example, in March 2013, a fusion center issued a situational awareness bulletin specific to public safety entities. Although DHS reports that it has taken or begun to take action on the open recommendations discussed above, we have not verified DHS's progress implementing all of our recommendations. We will continue to monitor DHS's efforts to implement these recommendations. Measuring and evaluating the performance of DHS partnerships--by among other things, obtaining and assessing feedback, evaluating why certain improvements are made, and measuring the effectiveness of partnerships and assessment--is another important factor in DHS's implementation of its partnership approach. Obtaining and assessing feedback from industry partners. Taking a systematic approach to gathering feedback from industry owners and operators and measuring the results of these efforts could help focus greater attention on targeting potential problems and areas needing improvement. In April 2013, we examined DHS's Chemical Facility Anti-Terrorism Standards (CFATS) program and assessed, among other things, the extent to which DHS has communicated and worked with owners and operators to improve security. Specifically, we reported that DHS had increased its efforts to communicate and work with industry owners and operators to help them enhance security at their facilities since 2007. We found that as part of their outreach program, DHS consulted with external stakeholders, such as private industry and state and local government officials to discuss issues that affect the program and facility owners and operators. However, despite increasing its efforts to communicate with industry owners and operators, we also found that DHS had an opportunity to obtain systematic feedback on its outreach. We recommended that DHS explore opportunities and take action to systematically solicit and document feedback on facility outreach. DHS concurred with this recommendation and has actions underway to explore such opportunities to make CFATS-related outreach efforts more effective for all stakeholders. Evaluating why facility-level improvements are made or not made. According to the NIPP, the use of performance measures is a critical step in the risk management process to enable DHS to objectively and quantitatively assess improvement in critical infrastructure protection and resiliency at the sector and national levels. In our May 2012 report on DHS's efforts to conduct surveys and assessments of high-priority infrastructure assets and share the results, we found that, consistent with the NIPP, DHS has taken action to follow up with participants to gather feedback from asset owners and operators that participated in the program regarding the effect these programs have had on asset security. However, we also found that DHS could consider using this follow-up tool to capture key information that could be used to understand why certain improvements were or were not made by asset owners and operators that have received surveys and assessments. For example, the follow-up tool could ask asset representatives what factors--such as cost, vulnerability, or perception of threat--influenced the decision to implement changes, either immediately or over time, if they chose to make improvements. We concluded that obtaining this information would be valuable to understanding the obstacles asset owners or operators face when making security investments. We recommended, and DHS concurred, that it consider the feasibility of expanding the follow-up program to gather and act upon data, as appropriate, on (1) security enhancements that are ongoing and planned that are attributable to DHS security surveys and vulnerability assessments and (2) factors, such as cost and perceptions of threat, that influence asset owner and operator decisions to make, or not make, enhancements based on the results of DHS security surveys and vulnerability assessments. DHS reported that it had modified the follow-up program to capture data on whether ongoing and planned security enhancements are attributable to security surveys and vulnerability assessments. Furthermore, DHS stated that it had also completed additional modifications to the follow-up tools to more accurately capture all improvements to resilience as well as information on factors influencing owner and operator decisions to make or not make enhancements. Measuring the effectiveness of sector-level partnerships. Ensuring the effectiveness and reliability of communications networks is essential to national security, the economy, and public health and safety. In an April 2013 report, we found that while DHS has multiple components focused on assessing risk and sharing threat information, DHS and its sector partners do not consistently measure the outcome of efforts to improve cybersecurity at the sector level. For example, we found that DHS and its partners had not developed outcome- based performance measures related to the cyber protection of key parts of the communications infrastructure sector. We concluded that outcome-based metrics related to communications networks and critical components supporting the Internet would provide federal decision makers with additional insight into the effectiveness of partner protection efforts at the sector level. We recommended that DHS collaborate with its partners to develop outcome-oriented measures for the communications sector. DHS concurred with our recommendation and stated that it is working with industry to develop plans for mitigating risks that will determine the path forward in developing outcome-oriented performance measures for cyber protection activities related to the nation's core and access communications networks. Measuring the effectiveness of regional-level assessments. Similarly, in our July 2013 report examining DHS's management of its RRAP program, we found that DHS had taken action to measure efforts to enhance security and resilience among facilities that participated in these regional-level assessments, but faced challenges measuring the results associated with these projects. Consistent with the NIPP, DHS performs periodic follow-ups among industry partners that participate in these regional assessments with the intent of measuring their efforts to make enhancements arising out of these surveys and assessments. However, we found that DHS did not measure how industry partners made enhancements at individual assets that participate in a RRAP project contribute to the overall results of the project. DHS officials stated at the time that they faced challenges measuring performance within and across RRAP projects because of the unique characteristics of each, including geographic diversity and differences among assets within projects. However, we concluded that DHS could better position itself to gain insights into projects' effects if it were to develop a mechanism to compare facilities that have participated in a RRAP project with those that have not, thus establishing building blocks for measuring its efforts to conduct RRAP projects. We recommended that DHS develop a mechanism to assess the extent to which individual projects influenced partners to make RRAP-related enhancements. DHS concurred with our recommendation and reported that it had actions underway to review alternatives, including possibly revising its security survey and vulnerability assessment follow-up tool, to address this recommendation. Although DHS reports that it has taken or begun to take action on the open recommendations discussed above, we have not verified DHS's progress implementing all of our recommendations. We will continue to monitor DHS's efforts to implement these recommendations. In closing, the federal government has taken a variety of actions that are intended to enhance critical infrastructure cybersecurity. Improving federal capabilities--through partnerships with industry, among other things--is a step in the right direction, and effective implementation can enhance federal information security and the cybersecurity and resilience of our nation's critical infrastructure. However, more needs to be done to accelerate the progress made in bolstering the cybersecurity posture of the nation. The administration and executive branch agencies need to fully implement the hundreds of recommendations made by GAO and agency inspectors general to address cyber challenges. Until then, the nation's most critical federal and private sector infrastructure systems will remain at increased risk of attack from our adversaries. Chairman Carper, Ranking Member Coburn, and members of the committee, this completes my prepared statement. I would be happy to respond to any questions you may have at this time. For information about this statement please contact Stephen L. Caldwell, at (202) 512-9610 or [email protected], or 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. Other individuals making key contributions to this work included Edward J. George, Jr., Assistant Director; Michael W. Gilmore, Assistant Director; Hugh Paquette, Analyst-in-Charge; Jose Cardenas; Tom Lombardi; and Erin McLaughlin. This appendix provides information on the 16 critical infrastructure (CI) sectors and the federal agencies responsible for sector security. The National Infrastructure Protection Plan (NIPP) outlines the roles and responsibilities of the Department of Homeland Security (DHS) and its partners--including other federal agencies. Within the NIPP framework, DHS is responsible for leading and coordinating the overall national effort to enhance protection via 16 critical infrastructure sectors. Consistent with the NIPP, Presidential Decision Directive/PPD-21 assigned responsibility for the critical infrastructure sectors to sector-specific agencies (SSAs). As an SSA, DHS has direct responsibility for leading, integrating, and coordinating efforts of sector partners to protect 10 of the 16 critical infrastructure sectors. Seven other federal agencies have sole or coordinated responsibility for the remaining 6 sectors. Table 1 lists the SSAs and their sectors.

Federal efforts to protect the nation's critical infrastructure from cyber threats has been on GAO's list of high-risk areas since 2003. Critical infrastructure is assets and systems, whether physical or cyber, so vital to the United States that their destruction would have a debilitating impact on, among other things, national security and the economy. Recent cyber attacks highlight such threats. DHS, as the lead federal agency, developed a partnership approach with key industries to help protect critical infrastructure. This testimony identifies key factors important to DHS implementation of the partnership approach to protect critical infrastructure. This statement is based on products GAO issued from October 2001 to March 2014. To perform this work, GAO reviewed applicable laws, regulations, and directives as well as policies and procedures for selected programs. GAO interviewed DHS officials responsible for administering these programs and assessed related data. GAO also interviewed and surveyed a range of other stakeholders including federal officials, industry owners and operators, industry groups, and cybersecurity experts. GAO's prior work has identified several key factors that are important for the Department of Homeland Security (DHS) to implement its partnership approach with industry to protect critical infrastructure. DHS has made some progress in implementing its partnership approach, but has also experienced challenges coordinating with industry partners that own most of the critical infrastructure. Recognizing and Addressing Barriers to Sharing Information. Since 2003, GAO has identified information sharing as key to developing effective partnerships. In July 2010, GAO reported some barriers affecting the extent to which cyber-related security information was being shared between federal and industry partners. For example, industry partners reported concerns that sharing sensitive, proprietary information with the federal government could compromise their competitive advantage if shared more widely. Similarly, federal partners were restricted in sharing classified information with industry officials without security clearances. GAO recommended that DHS work with industry to focus its information-sharing efforts. DHS concurred and has taken some steps to address the recommendation, including sponsoring clearances for industry. Sharing Results of DHS Assessments with Industry. GAO has found that DHS security assessments can provide valuable insights into the strengths and weaknesses of critical assets and drive industry decisions about investments to enhance security. In a May 2012 report, GAO found that DHS was sharing the results of its assessments with industry partners, but these results were often late, which could undermine the relationship DHS was attempting to develop with these partners. GAO recommended that DHS develop time frames and milestones to ensure the timely delivery of the assessments to industry partners. DHS concurred and reported that it has efforts underway to speed the delivery of its assessments. Measuring and Evaluating Performance of DHS Partnerships . GAO's prior work found that taking a systematic approach to gathering feedback from industry owners and operators and measuring the results of these efforts could help focus greater attention on targeting potential problems and areas needing improvement. In an April 2013 report, GAO examined DHS's chemical security program and assessed, among other things, the extent to which DHS has communicated and worked with industry owners and operators to improve security. GAO reported that DHS had increased its efforts to communicate and work with industry to help them enhance security at their facilities. However, GAO found that DHS was not obtaining systematic feedback on its outreach. GAO recommended that DHS explore opportunities and take action to systematically solicit and document feedback on industry outreach. DHS concurred and reported that it had taken action to address the recommendation. However, the cyber security of infrastructure remains on GAO's high-risk list and more needs to be done to accelerate the progress made. DHS still needs to fully implement the many recommendations on its partnership approach (and other issues) made by GAO and inspectors general to address cyber challenges. GAO has made recommendations to DHS in prior reports to strengthen its partnership efforts. DHS generally agreed with these recommendations and reports actions or plans to address many of them. GAO will continue to monitor DHS efforts to address these recommendations.

All 50 states and the District of Columbia submitted strategic highway safety plans to FHWA before October 2007, a deadline established by SAFETEA-LU. Additionally, the 25 state strategic highway safety plans we reviewed generally contained the key elements specified in SAFETEA-LU, such as consideration of all three approaches to improving highway safety, including infrastructure improvement, behavioral approaches (education and enforcement), and emergency medical service improvements, and evidence of involvement by a broad set of stakeholders. For example: All 25 plans included infrastructure improvement and behavioral approaches among the emphasis areas or key strategies that states identified to address their top priorities. Twenty-two of the plans included emergency medical services improvements. Our review of the plans indicated that 20 of 25 states consulted with at least five of the eight specified types of stakeholders, including representatives of the state agencies that administer NHTSA and FMCSA safety grants. As a result, the new planning process helped break down the separation between engineering and behavioral program planning that existed prior to SAFETEA-LU. Highway safety officials in states we visited said the extent of cooperation between stakeholders that occurred when developing the strategic highway safety plan was a largely new development after SAFETEA-LU. FHWA officials told us that they believe this change in planning is the most important result to date of the changes in HSIP. Likewise, officials responsible for safety programs at NHTSA, FMCSA, and in the states we visited agreed that HSIP's strategic highway safety planning process facilitated more integrated safety planning than had occurred in the past. While the state plans we reviewed indicated general compliance with SAFETEA-LU's requirements for preparing strategic highway safety plans, states do not yet have the crash data analysis systems needed to identify and select possible safety improvements as set forth in SAFETEA-LU. These systems include crash location data in a geographic format suitable for mapping and roadway characteristics data--such as lane and shoulder dimensions--for all public roads, together with software that can analyze the data. With these components, states can identify hazardous locations, develop appropriate remedies, and target resources to the greatest hazards. The requirement to obtain and analyze data for all public roads is a significant departure from past practice for many states. Before SAFETEA-LU, states generally had such information only on the roads they owned, because that information was useful for managing the maintenance and operation of their state-owned roads. However, state- owned roads account for a relatively small proportion of the public road miles in most states, averaging 20 percent nationwide. In the six states we visited, the state-owned portion of all public roads ranged from about 8 percent in Iowa to about 33 percent in Pennsylvania, and the remaining roads were locally owned. This data gap presents a challenge for states that may be costly for many to address, but the increased funding authorized for HSIP is generally available for data improvements as well as safety projects. Our review of 25 state strategic highway safety plans and six site visits indicated that, to varying degrees, states lack key components of crash data analysis systems: All 50 states maintain data on the crashes that occur on all public roadways in the state, but in the 25 states we reviewed, the information on crash locations was typically not in a geographic format (GIS or GPS) suitable for mapping. Safety engineers use crash location data to determine if accidents recur, or cluster, at specific sites. Among the states we visited, Iowa and California had crash data in a geographic format that allowed accidents to be located precisely on any public road in the state, but the other four states did not have such data for nonstate roads. According to our review of 25 states' strategic highway safety plans, some states are working toward improving their crash location data by upgrading their crash reporting systems with GPS capabilities, yet it is still common for crash location data to come from handwritten crash reports that use mile-post markers, intersections, or street addresses to identify crash locations. Most of the 25 states included in our review did not have data on roadway characteristics for all publicly owned roads, especially locally owned roads. As noted, states generally maintain these data only for roads they are responsible for maintaining and operating. For example, the Pennsylvania Department of Transportation originally established, and now maintains the data for, a roadway characteristics database to support its management and operation of state-owned roads. The department still uses the database primarily for this purpose, but the data can also be used for safety analyses. Furthermore, because it is costly and time consuming to gather and maintain roadway characteristics data, states generally have not expanded their roadway characteristics databases to include locally owned roads. For example, Florida officials estimated that it would initially cost $300 million and could take 3 years to develop such a database. In addition, they noted there would be annual maintenance costs to keep the data current. Of the six states we visited, only Iowa had roadway characteristics data for all public roads. Most of the 25 states we reviewed have not developed software or other analytic tools to use the crash location and roadway characteristics data to perform the analysis required by SAFETEA-LU. FHWA is developing a software system, known as "Safety Analyst," that is designed to help states use crash location and roadway characteristics data to determine their most hazardous locations, rank them, identify possible remedies, and estimate the costs of implementing the remedies. FHWA estimates that it will complete the development of this software and release it to the states later in 2008. In the meantime, some states may also be developing their own approaches. For example, Mississippi is developing its own software, which is similar to Safety Analyst. Until states have obtained the necessary data and software, they cannot conduct the kind of data analysis specified by SAFETEA-LU--namely, identifying and ranking hazardous locations on all public roads, determining appropriate remedies, and estimating project costs. This kind of analysis is also necessary to generate 5 percent reports that fully meet the requirements for these reports set forth in SAFETEA-LU, including requirements for information on remedies and costs. Many of the 5 percent reports we reviewed lack this required information. FHWA provided guidance and technical assistance to states in preparing strategic highway safety plans, and FHWA division officials participated in each state's planning process. FHWA's guidance included memorandums describing new HSIP program procedures and a reference guide on strategic planning. Furthermore, FHWA held training symposiums and provided technical assistance through its division offices and resource center. According to our review of 25 strategic highway safety plans and six site visits, FHWA division staffs were actively involved in the state planning efforts that resulted in states' adoption of strategic highway safety plans and FHWA's acceptance of these plans. In its guidance to states on implementing HSIP, FHWA stopped short of requiring states to gather all the data needed for the type of safety analysis specified in SAFETEA-LU. FHWA set August 31, 2009, as a deadline for states to develop the crash location data needed to map crashes on all public roads. FHWA officials told us that they believe that states will meet this deadline. However, recognizing the data limitations many states face, FHWA has not set a date for states to have the other required data on roadway characteristics for all public roads. Without roadway characteristics data, states cannot identify remedies and estimate the costs of infrastructure projects using analytic tools, such as Safety Analyst, but must instead rely on older approaches that combine data analysis with field surveys of potential improvement locations, roadway safety audits, or other information sources. In its guidance on the 5 percent report, FHWA gave states leeway in interpreting the act's requirements and did not specify a methodology. Recognizing the states' data limitations, FHWA advised the states to prepare their 5 percent report using available data. Consequently, states prepared widely varying 5 percent reports. For example, some reports included remedies and costs for each location while others showed remedies and costs only for certain locations or for none at all. In our review of the 2007 reports for 25 states, the number of locations reported ranged from 5 to 880, with 3 states reporting 10 or fewer locations and 6 states reporting over 100. Additionally, many reports list locations in a format that the general public may find difficult to use. For example, the public may find it hard to identify a hazardous location when it is identified in the report by the roadway mile marker, as is done in several reports we reviewed. We found that some states were using their 5 percent reports to help identify projects for funding, but where the format for identifying the sites was not readily accessible to the public, it was not clear whether the reports would enhance public awareness of highway safety, as intended. As previously noted, federal and state officials told us that the strategic highway safety planning process improved collaboration and safety planning, but it is too early to evaluate the results of states' efforts to carry out HSIP since SAFETEA-LU's enactment, especially the results of infrastructure projects identified through the strategic highway safety planning process. However, preliminary evidence from our review of 25 states' plans and six site visits indicates that three provisions in SAFETEA- LU may not be aligned with states' safety priorities. First, states have generally not taken advantage of HSIP's flexible funding provision, which allows them to use HSIP funding for noninfrastructure projects. Second, the rail-highway crossing set-aside may target a low-priority type of project for some states, although other states continue to emphasize this area. Third, states have just begun to implement the high-risk rural road program, but data limitations may be making it difficult for some states to allocate program funds to qualifying projects. Too little time has passed for states to select and build infrastructure projects identified in their strategic highway safety plans and, as a result, it is too soon to evaluate the results of HSIP projects funded under SAFETEA-LU's authorization. Given the October 2007 deadline for states to submit their strategic highway safety plans to FHWA, states finalized their plans relatively recently--28 states did so in 2006, and the remaining 22 states, plus the District of Columbia, did so in 2007. Because infrastructure projects can take a year or more to select and build, and subsequent project evaluations require 3 years' worth of crash data after the projects have been implemented, it is too soon to assess the effectiveness of projects undertaken under the new program. States made limited use of the HSIP flexible funding provision that allows them to transfer up to 10 percent of their HSIP funds to behavioral and emergency medical services projects if they have adopted a strategic highway safety plan and certified that they have met all their safety infrastructure needs. As of the end of June 2008, seven states had applied to FHWA, and been granted approval, to transfer about $13 million in HSIP funds to behavioral or emergency medical services projects (see table 1), according to FHWA data. Though none of the six states we visited has requested approval to transfer HSIP funds, officials in two of those states did express interest in doing so. However, these officials noted that their states could not meet the certification requirement because of ongoing infrastructure needs and concerns about the potential legal liability a state could incur by certifying that all its infrastructure safety needs have been met. Officials in the other states we visited agreed that certification would be difficult, but did not express interest in transferring funds because they had enough infrastructure projects to use all the available HSIP funds. At least in part because of these conditions attached to transferring funds, most HSIP funding remains focused on infrastructure. In some instances, the funding allocated between approaches may not be aligned with the emphasis areas laid out in the state strategic highway safety plan. Nevertheless, states may use NHTSA and FMCSA grants as well as transfer HSIP funds to address behavioral and emergency medical services approaches to improving highway safety. In contrast to HSIP funding, though, grants from related NHTSA and FMCSA programs are not formally aligned with the strategic highway safety plan developed as part of HSIP. In our interviews with federal officials at FHWA, NHTSA, and FMCSA, we found that stakeholders from those three organizations were collaborating, usually informally, but to date, the flexible funding provision in HSIP has not significantly altered the sources of federal funding states use to fund infrastructure, behavioral, and emergency medical services safety projects. Additionally, because states' NHTSA and FMCSA grant awards are not formally aligned with states' strategic highway safety plans, it is unclear to what extent states have aligned their total federal highway safety funding with priorities identified in their strategic highway safety plans. HSIP's funding set-aside for rail-highway crossing improvements may target projects that are a low priority and yield low safety benefits for some states, but other states continue to emphasize rail-highway crossing improvements. Our review of 25 strategic highway safety plans showed that improving rail-highway crossings was often a low priority for states. As noted earlier, states designate their top safety priorities as emphasis areas in their strategic highway safety plans and identify their most hazardous locations in their 5 percent reports. Seventeen of 25 states had not identified rail-highway crossings as an emphasis area. In our review of the 5 percent reports submitted by these 25 states in 2007, we found that Oregon alone identified a rail-highway crossing in its 5 percent report of most hazardous locations. States' relatively low emphasis on safety improvements at rail-highway crossings may be related to their evaluations of the effectiveness of recent improvements. In reviewing our 25 selected states' rail-highway crossing program annual reports for 2007, we found 21 reports that included before-and-after crash data for rail-highway crossing improvement locations. In 15 of these 21 states, almost all of the improved locations showed zero incidents both before and after the improvement. Nevertheless, West Virginia's annual crossing report noted that as long as federal funding through the set-aside program continues, the state's strategic highway safety plan will address rail-highway crossings despite low project benefits. The six states we visited varied in their views on the set-aside for rail- highway crossing improvements. Officials in two of the states said that the set-aside may be disproportionately high given the low risk rail-highway crossings pose compared with other hazardous locations. FHWA Office of Safety officials agreed that the program's funding, which accounts for approximately 17 percent of HSIP authorizations, was high based on the number of fatalities that occur at rail-highway crossings. Conversely, officials in Illinois noted that rail-highway crossings are a safety priority for the state. Additionally, Mississippi demonstrated the importance of improving crossings through their safety programs by augmenting federal set-aside funds with state funds. The SAFETEA-LU Technical Corrections Act provides states with flexibility to use rail-highway crossing set-aside funds for other types of HSIP projects if they certify that they have met all their rail-highway crossing needs. While it remains to be seen how states will respond to this amendment, they may be reluctant to certify that they have met all their needs. As noted earlier, some states have been reluctant to make use of HSIP's flexible funding provision because they may still have some infrastructure needs or may have legal concerns about the potential liabilities of such a certification. Many states are still in the early stages of implementing the set-aside program for high-risk rural roads and have yet to obligate significant funds for projects, and data limitations may be hindering their ability to target program funds to eligible projects. SAFETEA-LU created this program because over half of highway fatalities occur on rural roads. The act authorizes $90 million per year to address hazards on rural roads defined as high risk. Projects on roadways that meet the act's definition are eligible for funding under the program. According to reports on the program to FHWA by the 25 states we selected, 23 of these states had implemented the program to some extent by the end of fiscal year 2007. Of these 23 states, 16 had already identified projects and approved, funded, or contracted for at least one infrastructure project, and 7 were still identifying potential projects, gathering data, or performing other preliminary activities. Because states remain in the early stages of implementing the program, obligations made to date are low; for example, through June 2008, program obligations for all years under SAFTETEA-LU totaled $50.3 million, compared with almost $270 million authorized through that time period. Limited data on rural roads--including data on crash locations and local roadway characteristics--may be hindering the program's implementation by making it difficult for some states to identify roads that conform to the definition of high-risk rural roads in SAFETEA-LU. Officials in 5 states we visited noted that limitations in their crash location and roadway characteristics data made it difficult for them to identify qualifying roadways and appropriate remedies. Additionally, in our review of 25 state reports, we found states cited data limitations as a difficulty in implementing the program. For example, at the end of fiscal year 2007, Texas had yet to implement the program due to data limitations. Chairman Boxer and Members of the Committee, this concludes my prepared statement. We plan to report in more detail on changes in the Highway Safety Improvement Program and may have recommendations at that time. I would be pleased to respond to any questions that you or other Members of the Committee might have. For further information on this statement, please contact Katherine A. Siggerud at (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony were Rita Grieco, Assistant Director; Richard Calhoon; Elizabeth Eisenstadt; Bert Japikse; Sara Ann Moessbauer; John W. Stambaugh; and Frank Taliaferro. 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.

About 43,000 traffic fatalities occur annually, and another 290,000 people are seriously injured on the nation's roads. To reduce these numbers, the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) nearly doubled funding for the Federal Highway Administration's (FHWA) Highway Safety Improvement Program (HSIP), authorizing $5.1 billion for 2006 through 2009. SAFETEA-LU also added requirements for states to develop strategic highway safety plans that cover all aspects of highway safety, including infrastructure, behavioral (education and enforcement), and emergency medical services projects; develop crash data analysis systems; and publicly report on the top 5 percent of hazardous locations on all their public roads. SAFETEA-LU also set aside funds for a legacy rail-highway crossing program and a new high-risk rural road program. This testimony provides preliminary information on the implementation of HSIP since SAFETEA-LU. It is based on ongoing work that addresses (1) states' implementation of HSIP following SAFETEA-LU, (2) FHWA's guidance and assistance for states, and (3) results of HSIP to date, including for the two set-aside programs. To conduct this study, GAO visited 6 states, judgmentally selected based on highway safety attributes, analyzed plans and reports from these 6 states and 19 randomly selected states, and interviewed FHWA and state safety officials. All states submitted strategic highway safety plans and reports listing the top 5 percent of their hazardous locations, according to FHWA. The 25 state plans GAO reviewed generally cover all aspects of highway safety, but the 25 states have not fully developed the required crash data analysis systems. FHWA and state safety officials cited the collaboration that occurred among safety stakeholders in developing the plans as a positive influence on state safety planning. Many of the 25 states lacked key components of crash data analysis systems, including crash location data, roadway characteristics data, and software for analyzing the data. As a result, most states cannot identify and rank hazardous locations on all public roads, determine appropriate remedies, and estimate costs, as required by SAFETEA-LU, and their 5 percent reports often lack required information on remedies and costs. FHWA provided written guidance and training to assist the states, especially in preparing their strategic highway safety plans, and participated in every state's strategic safety planning process. However, FHWA has not required states to submit schedules for obtaining complete roadway characteristics data, and because states lack complete data, FHWA's guidance on the 5 percent reports did not specify a methodology. As a result, states' 5 percent reports vary widely, raising questions about how this report can be used. It is too soon to evaluate the results of HSIP as carried out under SAFETEA-LU because states need more time to identify, implement, and evaluate projects they have undertaken since adopting their strategic highway safety plans. However, preliminary evidence indicates that some HSIP provisions may not be aligned with states' safety priorities. First, most states have not taken advantage of a new spending provision that allows states to use some HSIP funds for behavioral or emergency medical services projects, partly because a certification requirement--that all state highway safety infrastructure needs have been met--may make them reluctant to do so. Second, the rail-highway crossing set-aside program does not target the top safety priorities of some states. Lastly, states are still in the early stages of implementing the high-risk rural road set-aside program, and data limitations may make it difficult for some of them to identify qualifying projects, especially for locally owned rural roads. FHWA agreed with GAO's findings.

The NGJ is DOD's program to replace the ALQ-99 tactical jamming system. The ALQ-99 is a five-pod jamming system that is capable of automatically processing, and jamming radio frequency signals. It counters a variety of threats in low-, mid-, and high-band frequency ranges. Figure 1 shows the radars that operate in different frequency bands and ranges. The ALQ-99 was originally flown on EA-6B aircraft, which are expected to be fully retired in 2019, and is transitioning to the EA-18G, an electronic attack variant of the Navy's F/A-18 fighter jet. Figure 2 shows the ALQ-99 on the EA-18G. EA-6B and EA-18Gs can be based on aircraft carriers or in expeditionary squadrons that are deployed to land-based locations as needed. The ALQ-99/EA-6B combination was originally developed for use in major combat operations, and in 1995, the EA-6B was selected to become the sole tactical radar support jammer for all services after the Air Force decided to retire its fleet of EF-111 aircraft. The role of the EA-6B has continued to expand over time. According to DOD officials, when Operation Iraqi Freedom began, EA-6Bs were used in irregular warfare environments along with another aircraft, the EC-130H Compass Call, because they provided needed jamming capabilities and there were no other airborne electronic attack assets available for this role. These and other demands have strained DOD's airborne electronic attack capacity and increased the stress on systems, such as the ALQ-99. Like the ALQ-99, the NGJ will be comprised of jamming pods that will fly on the Navy's EA-18G. Its main purpose will be to counter integrated air defense systems in major combat operations. The EA-18G with NGJ is to primarily be based on aircraft carriers at sea where it is to be employed in U.S. Navy carrier strike groups to counter both sea- and land-based weapon systems. DOD also plans for it to support joint expeditionary warfare missions. The EA-18G with NGJ is currently planned to primarily serve in a modified escort role, in which it is expected to jam enemy radars while the aircraft is outside the range of known surface-to-air missiles. It is also expected to be capable of conducting stand-off jamming missions, in which the aircraft is located outside of defended airspace. In both cases, the idea is to protect or "hide" other systems from enemy radars. The EA-18G with the NGJ is also intended to be used for other purposes, such as communications jamming. Figure 3 shows the NGJ with other airborne electronic attack systems countering enemy air defense systems. In July 2013, DOD conducted a milestone A review for the NGJ program, which is a planned major defense acquisition program, and authorized it to enter the technology development phase. Subsequent to the milestone A review, the Navy awarded a $279.4 million contract to Raytheon for NGJ technology development. Figure 4 shows the time line for the milestone A review and other key NGJ events. The NGJ program plans to use an incremental approach to development in which the most critical capabilities are to be delivered first. In total, the Navy's acquisition strategy calls for three increments: mid-, low-, and high-band. The specific frequency ranges covered by these bands is classified. Both federal statute and DOD policies include provisions designed to help prevent unnecessary duplication of investments. Section 2366a of title 10 of the U.S. Code provides that a major defense acquisition program may not receive milestone A approval until the Milestone Decision Authority certifies, after consultation with the Joint Requirements Oversight Council, that if the program duplicates a capability already provided by an existing system, the duplication provided by such program is necessary and appropriate. In addition, DOD's JCIDS Manual directs that initial capabilities documents, which describe capability gaps that require a materiel solution, identify proposed capability requirements for which there exists overlaps or redundancies. Initial capabilities documents should also assess whether the overlap is advisable for operational redundancy or whether it should be evaluated as a potential trade-off or alternative to satisfy identified capability gaps. The manual also states that, when validating key requirements documents, the chair of the group responsible for that capability area is also certifying that the proposed requirements and capabilities are not unnecessarily redundant to existing capabilities in the joint force. This applies to initial capabilities documents, capability development documents, and capability production documents, which helps ensure that potential redundancies are discussed at multiple points in the acquisition process. However, assessing duplication among airborne electronic attack investments is challenging for a variety of reasons. There is a lack of documentation comparing all current existing and planned airborne electronic attack capabilities; electronic warfare investments are distributed among the services; systems in the electronic warfare portfolio are classified at multiple levels; future needs and threats and plans to address them change quickly; planned programs of record or upgrades are not always known until funding is requested; and some overlap among systems is intentional. DOD has assessed whether the planned NGJ program is duplicative using a variety of means, but none of them address all of the system's planned roles or take into account the military services' evolving airborne electronic attack investment plans. DOD's analyses of its airborne electronic attack capability gaps over the last decade, as well as the NGJ analysis of alternatives, support its conclusion that the NGJ is not duplicative of existing capabilities in its primary role - the joint suppression of enemy air defenses. However, these analyses do not address potential duplication or overlap between the NGJ and other systems being developed for other roles, such as communications jamming in irregular warfare environments. The military services also plan to invest in additional airborne electronic attack systems, so new duplication issues could emerge. Several ongoing DOD efforts could provide a mechanism for updating its analysis of potential overlap and duplication related to the NGJ. However, we found weaknesses in the execution of some of these efforts. According to DOD and Joint Staff officials, the NGJ addresses a clear capability gap and is not duplicative of other airborne electronic attack systems. It is a direct replacement for the Navy's ALQ-99 tactical jamming system and addresses validated capability gaps. DOD analyses dating back a decade have identified capability gaps and provided a basis for service investments in airborne electronic attack capabilities, such as the NGJ. DOD outlined its findings in reports that included analyses of alternatives and initial capabilities documents. None of these documents are specifically assessments of duplication; they serve other purposes. For example, the two initial capabilities documents - the 2004 Airborne Electronic Attack and 2009 Electronic Warfare Initial Capabilities Documents - identified the capability gaps that the NGJ is intended to address. Table 1 lists key documents and describes the extent to which they assessed duplication and overlap for NGJ. According to DOD and Joint Staff officials, the analyses contained in these documents provided support for the certification the department is required to make that the NGJ is not unnecessarily duplicative before receiving milestone A approval to begin technology development. In addition, Joint Staff officials stated that they reviewed the NGJ and its potential capabilities for duplication before endorsing the NGJ Analysis of Alternatives. We were not able to review the Joint Staff's analysis due to its classification level. DOD analyses of NGJ capabilities and potential duplication do not reflect all of its planned roles, particularly in irregular warfare environments, or evolving service acquisition plans. Section 2366a of title 10 of the U.S. Code provides that a major defense acquisition program may not receive milestone A approval until the Milestone Decision Authority certifies, after consultation with the Joint Requirements Oversight Council, that if the program duplicates a capability already provided by an existing system, the duplication provided by such program is necessary and appropriate. DOD's analyses support its conclusion that the NGJ is not duplicative of existing capabilities in its primary role--the joint suppression of enemy air defenses in a modified escort setting, which includes defended airspace outside the range of known surface-to-air missiles. In fact, the NGJ Analysis of Alternatives found that the planned system would complement other DOD investments in electronic warfare and stealth. However, these analyses do not address potential duplication or overlap between the NGJ and systems being developed for other roles, such as communications jamming in irregular warfare environments--an area where we have found potential duplication in our prior work. Most of these systems have been developed or incorporated into military service investment plans since these analyses were conducted. Since the preparation of key NGJ-related documents, DOD has focused on increasing its airborne electronic attack capabilities and capacity, resulting in several systems that were not considered in those analyses. When these analyses were being completed, DOD had few airborne electronic attack systems and programs of record, none of which were specifically designed for the irregular warfare environment. Table 2 shows existing and planned airborne electronic attack systems and whether they were discussed in key NGJ-related documents. Based on our analysis of DOD airborne electronic attack systems and missions, none of the systems we reviewed that have emerged since DOD's NGJ analysis was completed duplicate planned capabilities; however, there is some overlap in the roles that the systems are intended to perform. For example, according to the F-35 program office, some aircraft with electronic attack enabled AESA radar may be able to perform some jamming functions in a modified escort role. However, unlike the NGJ, they are not designed to be dedicated jamming systems. In addition, NGJ is to be capable of communications jamming in an irregular warfare type environment, like systems such as CEASAR and Intrepid Tiger II, which were fielded under rapid acquisition authorities and in very limited quantities. Army and Marine Corps officials explained that their systems are a more suitable and economic alternative to the NGJ for these missions. For example, Army officials stated that the systems the Army is investing in, such as CEASAR and Multi-Function Electronic Warfare, would provide the right amount of power for their needs, be more readily available to units, and cost less. According to DOD, these systems also provide additional capacity in an area where there has been significant demand. However, as DOD and the military services continue to invest in new additional airborne electronic attack capabilities, the potential for duplication and overlap to occur increases. DOD has several ongoing efforts that could provide a mechanism for updating its analysis of potential overlap and duplication related to the NGJ and other airborne electronic attack investments, including its annual Electronic Warfare Strategy Report to Congress, a U.S. Strategic Command review of DOD's portfolio of electronic warfare systems, and the NGJ capability development document. However, we found weaknesses in two of the three efforts. DOD could address new duplication issues as they emerge and, if necessary, explain the need for overlapping capabilities in its electronic warfare strategy report to Congress. Section 1053 of the National Defense Authorization Act for Fiscal Year 2010 requires that for each of fiscal years 2011 through 2015, the Secretary of Defense, in coordination with the Joint Chiefs of Staff and secretaries of the military departments, submit to the congressional defense committees an annual report on DOD's electronic warfare strategy. Each report must provide information on both unclassified and classified programs and projects, including whether or not the program or project is redundant or overlaps with the efforts of another military department. DOD has produced two reports in response to this requirement. In these reports, DOD assessed duplication of airborne electronic attack systems, including NGJ. However, the analysis was limited and did not examine potential overlap between capabilities or explain why that overlap was warranted. DOD officials explained that the report relied primarily on the military services to self- identify overlap and duplication. Redundancy in some of these areas may, in fact, be desirable, but pursuing multiple acquisition efforts to develop similar capabilities can also result in the same capability gap being filled twice or more, which may contribute to other warfighting needs going unfilled. This report is supposed to be submitted at the same time the President submits the budget to Congress, but DOD has not yet issued its report for fiscal year 2013 and could not provide a definitive date for when it plans to do so. The U.S. Strategic Command also has an ongoing review that could help assess duplication and overlap issues related to the NGJ and other systems. Joint Staff officials stated that, during the course of our review, they began in collaboration with U.S. Strategic Command to review DOD's portfolio of electronic warfare systems at all levels of classification. They explained that the review will examine capability requirements in select approved warfighting scenarios as well as potential redundancy within the portfolio. According to the Joint Staff, the review should be completed sometime in fiscal year 2013. Capability development documents, which define the performance requirements of acquisition programs, are another vehicle to discuss potential redundancies across proposed and existing programs. The Navy must produce and the Joint Requirements Oversight Council must validate a capability development document for the NGJ program before it can receive approval to enter system development--currently planned for fiscal year 2015. The JCIDS manual provides that, when validating capability development documents, the chair of the group responsible for that capability area is also certifying that the proposed requirements and capabilities are not unnecessarily redundant to existing capabilities in the joint force. The draft NGJ capability development document addresses potential redundancies by stating that the NGJ is fully synchronized with existing systems and will be synchronized with future systems, and that individual airborne electronic attack systems all concentrate on unique portions of the electromagnetic spectrum--frequency ranges--for different mission sets. However, the Navy did not identify the systems that it considered in its analysis, so it will be difficult for others to validate this conclusion or whether it applies to all of the NGJ's planned roles. The NGJ is not a joint acquisition program, but it is planned to provide airborne electronic attack capabilities that will support all military services in both major combat operations and irregular warfare environments. The NGJ is not intended to meet all of the military services' airborne electronic attack needs, and the services are planning to make additional investments in systems that are tailored to meet their specific warfighting roles. The military services may be able to leverage the NGJ program in support of their own acquisition priorities and programs because its current acquisition strategy is based on a modular open systems approach, which allows system components to be added, removed, modified, replaced, or sustained by different military customers or manufacturers without significantly impacting the remainder of the system. This approach could make it easier to integrate the NGJ or its technologies into other systems in the future. Despite its role in joint military operations, the NGJ program is led and funded by the Navy and is not a joint acquisition program. The definition of a joint acquisition program is related to whether it is funded by more than one DOD component, not whether other organizations have provided input on it. In the case of the NGJ, the Joint Requirements Oversight Council, which is chaired by the Vice Chairman of the Joint Chiefs of Staff, and includes one senior leader from each of the military services, such as the Vice Chief of Staff of the Army or the Vice Chief of Naval Operations, has validated that the need exists for the program. The Marine Corps, Army, Air Force, and Joint Staff have provided input into the program as part of DOD's requirements and acquisition processes. This included collaboration on requirements documents and the NGJ Analysis of Alternatives. The Air Force's 2004 Airborne Electronic Attack Initial Capabilities Document and Strategic Command's 2009 Electronic Warfare Initial Capabilities Document, which informed NGJ requirements, included input from senior-level oversight boards representing all the military services. In addition, advisors from various parts of the Office of the Under Secretary of Defense, the Joint Staff, and all services provided input into the NGJ Analysis of Alternatives through forums such as working groups, integrated product teams, and a high-level executive steering committee. DOD plans to use Navy EA-18Gs with the NGJ to support multiple military services in joint operational environments. In the joint operational environment, each service relies on the capabilities of the others to maximize its own effectiveness while minimizing its vulnerabilities. For example, in conducting military operations, U.S. aircraft are often at risk from enemy air defenses, such as surface-to-air missiles. EA-18Gs can use the NGJ jamming capabilities in these settings to disrupt enemy radar and communications and suppress enemy air defenses. Because aircraft, such as the EA-18G, are to protect aircraft of all services in hostile airspace, the joint suppression mission necessarily crosses individual service lines. The system the NGJ is replacing-ALQ-99-has also been used extensively in irregular warfare environments, including in Iraq and Afghanistan in response to electronic attack requests from all the military services. DOD has placed an emphasis on increasing airborne electronic attack capacity and capabilities. While the Navy's NGJ is expected to provide airborne electronic attack capabilities to support all military services in both major combat operations and irregular warfare environments, the other services are also planning to make additional investments in airborne electronic attack systems that are tailored to their specific warfighting roles. The services' airborne electronic attack plans vary in part because of these roles. For example, DOD officials explained that the Navy is responsible for ensuring freedom of navigation in the world's oceans and has a key role in force projection; the Marine Corps is a rapid expeditionary force; the Air Force provides long range strike and close air support and is responsible for establishing air superiority; and the Army is the primary force for land operations in war and usually enters a battle area after the Air Force has established air superiority. Military service officials characterized their airborne electronic attack plans and the role of the NGJ in them as follows: Air Force: The Air Force is focused on developing long range strike capabilities, enabling the electronic attack capabilities of its F-22A and F-35 aircraft for penetrating escort roles, and investing in improvements to self protection systems for its fighter aircraft, including the F-15 and the F-16. Air Force requirements officials stated that the planned capabilities of NGJ will complement the other systems it is developing. Army: Officials from the Army's Electronic Warfare Division stated that although the NGJ-equipped EA-18Gs would have a role in helping to establish air superiority before the Army enters an area, the Army plans to rely on its own airborne electronic attack systems to perform the necessary jamming in support of its ground forces. According to Army officials, the service plans to invest in less expensive, less powerful systems that will be readily available at the brigade combat team level. The Army developed CEASAR, a jamming pod on C-12 aircraft, and is now developing a more capable successor to CEASAR under the Multi-Function Electronic Warfare program, which is early in the acquisition process. Marine Corps: Officials from the Marine Corps' Electronic Warfare Branch stated that each Marine Air Ground Task Force commander must possess its own airborne electronic attack capabilities and the Marine Corps does not plan to rely solely on Navy EA-18G's with NGJ to support its air and ground forces. Historically, the Marines have relied on their own expeditionary EA-6B squadrons to meet joint electronic warfare requirements, but the EA-6Bs will be phased out by 2019 and the Marine Corps does not plan to acquire the EA-18G, which will be equipped with the NGJ. According to the Marine Corps, it will coordinate the use of NGJ support from the Navy when appropriate but it expects to rely on its own systems for its core missions. The Marine Corps plans to upgrade its Intrepid Tiger II jamming pods to support both communications and radar jamming, and develop a system to integrate air and ground electronic warfare units with other payloads designed to be used on any platform. The current acquisition strategy for the NGJ program calls for it to be integrated on one aircraft--the EA-18G--however, the program is planning on pursuing a modular open systems approach to development that could make it easier to integrate the NGJ or its technologies into other systems in the future. An open systems approach allows system components to be added, removed, modified, replaced, or sustained by the military customer or different manufacturers, in addition to the prime manufacturer that developed the system. It also allows independent suppliers to build components that can plug-in to the existing system through the open connections. Fundamental elements of an open systems approach include the following: Designing a system with modular components that isolate functionality. This makes the system easier to develop, maintain, and modify because components can be changed without significantly impacting the remainder of the system. Developing and using open, publicly available standards for the key interfaces, or connections, between the components. According to NGJ program officials, a modular open systems approach would allow the NGJ to be designed so that it could adapt to threat and technology changes. It also enables future growth of the system. Furthermore, Navy officials stated that the approach could make it possible for NGJ components to be used and modified for application on significantly different platforms, including unmanned aerial vehicles. This approach is encouraged by DOD guidance, including its Better Buying Power initiative, as well as Navy guidance. The NGJ Analysis of Alternatives also examined integrating the NGJ onto the F-35, which is being acquired by the Air Force, Marine Corp, and Navy, but the option was found to be too risky and costly for a near-term solution. Navy officials explained that, even with an open systems approach, integrating the NGJ with any platform is difficult. Even the integration associated with moving the ALQ-99 to the EA-18G was challenging. The cost of the effort was about $2 billion and took 5 years. Part of the integration challenge was adapting the operator workload system because the EA-6B is a four-operator aircraft while the EA-18G is a two-operator aircraft. The F-35 is a single-operator aircraft, which officials explained would cause significant integration challenges for the NGJ. Airborne electronic attack is an important enabling capability for U.S. military forces in both major combat operations and irregular warfare environments. In response to rapidly evolving threats and mission needs, DOD is making investments to increase both its airborne electronic attack capacity and capabilities. At an estimated cost of over $7 billion, the NGJ represents a significant investment in airborne electronic attack capabilities. Investments of this size must be well-justified and are required by statute and DOD policy to be examined for unnecessary redundancy. DOD's analysis of its airborne electronic attack capability gaps over the last decade, as well as the NGJ analysis of alternatives, supports its conclusion that the NGJ meets a valid need and is not duplicative of existing capabilities in its primary role. However, in the time since DOD completed some of these analyses, the investment plans of the military services have changed, particularly in the irregular warfare area. The military services are quick to differentiate their airborne electronic attack needs and justify individual service, rather than joint or common, solutions to meet them. While none of the new programs planned duplicate NGJ capabilities, new areas of overlap and potential duplication could emerge as these plans continue to evolve. Redundancy in some of these areas may, in fact, be desirable, but pursuing multiple acquisition efforts to develop similar capabilities can also result in the same capability gap being filled twice or more, lead to inefficient use of resources, and contribute to other warfighting needs going unfilled. DOD has mechanisms, such as the Electronic Warfare Strategy Report to Congress, U.S. Strategic Command Annual Electronic Warfare Assessment, and NGJ capability development document, that it can use to continue to assess overlap and duplication between the NGJ and other airborne electronic capabilities at key points in the acquisition process and communicate its evolving airborne electronic attack investment plans to Congress. Identifying existing and planned systems across all of the NGJ's planned roles in its capability development document could help ensure that DOD's analysis of potential overlap and duplication is complete. Moreover, providing Electronic Warfare Strategy Reports to Congress as required and incorporating information on potentially overlapping systems and why such overlap is warranted would provide Congress with more complete information about the relationship between electronic warfare programs. We recommend that the Secretary of Defense take the following two actions: To help ensure that the NGJ does not unnecessarily duplicate existing or planned capabilities, require the Navy, in coordination with the Joint Staff, to address overlap and duplication between the NGJ and other systems in all of its planned roles in the NGJ capability development document. The NGJ capability development document should identify the existing and planned systems that the Navy assessed for potential redundancies to help determine if its analysis was comprehensive. To provide Congress complete information about the relationship between electronic warfare programs, ensure that the Electronic Warfare Strategy Reports to Congress include information on potentially overlapping capabilities among systems, such as the NGJ and Electronically Attack Enabled AESA Radar, CEASAR, Intrepid Tiger II, and Multi-Function Electronic Warfare, and why that overlap is warranted. We provided a draft of this report to DOD for review and comment. In its written comments, which are reprinted in full in appendix II, DOD partially concurred with our first recommendation and concurred with our second recommendation. DOD also provided technical comments that were incorporated as appropriate. DOD partially concurred with our recommendation to address overlap and duplication between the NGJ and other systems in all of its planned roles in the NGJ capability development document. DOD responded that it concurs with the need to continue to assess unnecessary duplication and redundancy, but it does not concur with including the assessment in the capability development document. Rather DOD stated that it will address unnecessary duplication and redundancy in accordance with its existing processes, such as the Joint Capabilities Integration Development System (JCIDS), and statutory requirements. DOD explained that changes it made to the JCIDS process in January 2012 address the concerns about potential capability overlaps and redundancies raised in this and other GAO reports. For example, the revised JCIDS manual emphasized the role of functional capabilities board in assessing potential unnecessary capability redundancy prior to forwarding a program's requirements documents for approval. In addition, DOD stated that the Joint Staff is further improving these processes through a pending update to JCIDS that will include increased emphasis on functional area portfolio management. DOD also reiterated in its comments and in a classified enclosure that NGJ's capabilities are not unnecessarily duplicative. We acknowledged the existing JCIDS mechanisms that address potential overlap and duplication in this report and have discussed the value of effective portfolio management in prior reports. However, as we point out in our recommendation, documenting the assessments that support these processes is important because it allows others to determine if DOD's analysis was comprehensive. We identified the NGJ capability development document as the appropriate vehicle to document DOD's assessment of potential duplication because DOD already requires that potential overlap and duplication be considered before the document can be validated and the program can move forward in the acquisition process. Finally, while DOD's current analysis indicates that none of its current or planned programs duplicate NGJ capabilities, new areas of overlap and potential duplication could emerge as military service investment plans continue to evolve. DOD concurred with our second recommendation regarding providing complete information about the relationship between electronic warfare programs in its Electronic Warfare Strategy Reports to Congress. DOD did not provide details regarding how it plans to implement this recommendation. We are sending copies of this report to interested congressional committees, the Secretary of Defense, the Secretary of the Army, the Secretary of the Navy, the Secretary of the Air Force, and the Commandant of the Marine Corps. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff 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 who made key contributions to this report are listed in appendix III. To determine the extent to which the Department of Defense (DOD) assessed duplication among the Next Generation Jammer (NGJ), existing capabilities, and other acquisition programs, we reviewed key NGJ and DOD electronic warfare documents, including the 2004 Airborne Electronic Attack Initial Capabilities Document, the 2009 Electronic Warfare Initial Capabilities Document, the NGJ Analysis of Alternatives (AOA), and the DOD Annual Electronic Warfare Strategy Report to Congress, to determine whether potential duplication was considered as DOD developed NGJ requirements and prepared for initiation of the NGJ acquisition program. We interviewed DOD, military service, and program officials and the Joint Staff about how these analyses were conducted. We assessed DOD's analysis of duplication against DOD's Joint Capabilities Integration and Development System (JCIDS) Manual. In addition, we reviewed information up to the SECRET level provided by the military services regarding the capabilities and missions of existing and planned airborne electronic attack systems. Our analysis was limited to non-kinetic airborne electronic attack systems as opposed to kinetic capabilities which focus on destroying forces through the application of physical effects. To determine the extent to which the NGJ is being managed as a joint solution, we reviewed key requirements and acquisition documents reflecting military service and Joint Staff input into NGJ requirements and the acquisition program. We also interviewed DOD, military service, and program officials to determine the extent to which the military services provided input into NGJ requirements and the acquisition program. In addition, we analyzed documents, such as memorandums of agreement among the military services, and interviewed military service and Joint Staff officials to obtain an understanding of how NGJ is expected to operate in the joint force. We also reviewed the NGJ AOA and interviewed program officials to determine if the system is intended to be used on multiple platforms. We conducted this performance audit from November 2012 to August 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. Our analysis was also limited to information classified no higher than SECRET, but 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, the following individuals made key contributions to this report: Ronald E. Schwenn, Assistant Director; Teakoe Coleman; Laura Greifner; John Krump; Laura Holliday; Brian Lepore; Anh Nguyen; Madhav Panwar; Mark Pross; and Roxanna Sun.

At an estimated cost of over $7 billion, the Navy's NGJ program represents a significant investment in airborne electronic attack capabilities. Jammers, like the planned NGJ, fly on aircraft, such as Navy EA-18Gs, and transmit electronic signals that can neutralize or temporarily degrade enemy air defenses and communications, thus aiding combat aircraft and ground forces' freedom to maneuver and strike. Senate Report 112-196 mandated GAO to review the NGJ program and potential duplication. This report examines the extent to which (1) DOD assessed whether there is duplication among NGJ, existing capabilities, and other acquisition programs, and (2) NGJ is being managed as a joint solution. GAO reviewed key NGJ requirements and acquisition documents and DOD and military service documents describing airborne electronic attack capabilities. Generation Jammer (NGJ) program is duplicative using a variety of means, but none of them address all of the system's planned roles or take into account the military services' evolving airborne electronic attack investment plans. DOD analyses support its conclusion that the NGJ meets a valid need and is not duplicative of existing capabilities in its primary role--suppressing enemy air defenses from outside the range of known surface-to-air missiles. However, these analyses do not address all planned NGJ roles, such as communications jamming in irregular warfare environments, or take into account the military services' evolving airborne electronic attack investment plans. According to GAO's analysis, none of the systems that have emerged since DOD completed its NGJ analyses duplicate its planned capabilities; however there is some overlap in the roles they are intended to perform. Redundancy in some of these areas may, in fact, be desirable. However, pursuing multiple acquisition efforts to develop similar capabilities can result in the same capability gap being filled twice or more, lead to inefficient use of resources, and contribute to other warfighting needs going unfilled. Therefore, continued examination of potential overlap and duplication among these investments may be warranted. DOD has several ongoing efforts that could provide a mechanism for updating its analysis of potential overlap and duplication to address these shortcomings as the program moves forward. However, GAO found weaknesses in two of these efforts as well. Electronic Warfare Strategy Report to Congress : DOD could address new duplication issues as they emerge and, if necessary, explain the need for overlapping capabilities in this report. However, to date, the analysis of overlap and duplication in this report has been limited and did not examine potential overlap between capabilities or explain why overlap was warranted. NGJ Capability Development Document : Redundancies are required to be considered when a capability development document--which defines the performance requirements for an acquisition program--is validated. The draft NGJ capability development document does not identify the systems the Navy considered when analyzing potential redundancies, so it is difficult to evaluate whether its analysis includes existing and proposed programs across all of the NGJ's planned roles. The NGJ is not being managed as a joint acquisition program, which is a distinction related to funding, but it is expected to provide the Navy with airborne electronic capabilities that will support all military services in both major combat operations and irregular warfare environments. The NGJ's capabilities are not intended to meet all of the military services' airborne electronic attack needs and the services are planning to make additional investments in systems that are tailored to meet their specific warfighting roles. The military services might be able to leverage the NGJ program in support of their own acquisition priorities because it plans to use a modular open systems approach, which allows for components to be added, removed, or modified without significantly impacting the rest of the system. This approach could make it easier to integrate the NGJ or its technologies into other systems in the future. To help ensure that DOD's analysis of potential overlap and duplication is complete, GAO recommends that the Secretary of Defense: (1) require the NGJ capability development document to discuss potential redundancies between NGJ and existing and proposed programs across all of its planned roles and (2) ensure that the Electronic Warfare Strategy Report to Congress includes information on potentially overlapping capabilities and why that overlap is warranted. DOD agreed to continue to assess duplication and redundancies but not with using the capability development document to do so. GAO believes the recommendation remains valid as discussed in the report. DOD agreed with the second recommendation.

In recent years, federal agencies, the Advisory Committee on Human Radiation Experiments, GAO, and others have documented hundreds of secret, intentional government releases of radiation and other pollutants into the environment in connection with the Cold War. The releases occurred in the years after World War II at locations around the country, including Tennessee, New Mexico, Washington, Alaska, and Utah. (See app. I.) Such releases typically occurred at remote federal installations, in an era when there was little federal or state environmental regulation of such activities. Today, an extensive environmental oversight framework is in place. In accordance with NEPA, the Council on Environmental Quality's (CEQ) implementing regulations, and the Clean Air Act, EPA shares with CEQ the responsibility for overseeing federal agencies' environmental planning, including their classified planning. For example, under NEPA, federal agencies must assess the environmental impact of major federal actions significantly affecting the environment before they proceed and must submit environmental impact statements (EIS) for review by the public and other federal agencies; EPA is supposed to review these EISs, including those portions containing classified information. CEQ, within the Executive Office of the President, conducts administrative oversight of agencies' NEPA programs. NEPA also places public disclosure requirements on agencies. However, NEPA and its implementing regulations allow agencies to avoid public disclosure of classified proposals in the interest of national security. NEPA still requires agencies to prepare EISs and other NEPA assessments for classified actions, but CEQ regulations allow agencies to segregate information from public oversight in fully classified EIS documents or appendixes. Federal agencies are also subject to the requirements of federal pollution control laws, such as the Clean Water Act, the Clean Air Act, and the Resource Conservation and Recovery Act (RCRA). EPA has a mandate to oversee the enforcement of the environmental laws at federal facilities, including those that conduct highly classified research operations. EPA's Office of Federal Facilities Enforcement is the agency's focal point for enforcement, including developing strategies and participating in enforcement oversight and litigation. EPA has some resources for inspecting highly classified facilities and storing classified documents, including headquarters and field personnel with the appropriate security clearances. Under some laws, such as the Clean Water Act and RCRA, EPA can authorize states to carry out their own program for these laws if they meet certain requirements. Whether EPA or a state acts as the regulatory authority, federal agencies with facilities that are releasing pollutants into the environment must obtain required permits and are subject to inspections and enforcement actions. Radioactive materials regulated under the Atomic Energy Act are exempt from RCRA and the Clean Water Act. DOE regulates these materials under its Atomic Energy Act authority. Over the years, we have issued numerous reports addressing how well various EPA, DOE, and DOD programs implement this framework. (See app. II.) We found that although EPA was given many additional pollution prevention, control, abatement, and enforcement initiatives, its budget for carrying out these activities did not keep pace with the increased responsibilities. The Advisory Committee's report therefore recommended that (1) an independent panel review planned secret environmental releases and (2) EPA permanently keep key documents related to its environmental oversight of classified programs and report periodically to the Congress on its oversight of such programs. A February 1996 draft response by the Human Radiation Interagency Working Group questions the need for the recommended independent review panel but agrees that EPA should keep permanent files of key environmental documents. EPA has responsibilities for overseeing federal facilities' activities, including classified federal research planning and operations. However, the agency's capability to conduct such oversight is limited. In large measure, under NEPA and other laws, EPA relies on the agencies themselves to have their own internal environmental monitoring programs. In part because of secrecy requirements, EPA is especially dependent on the cooperation of agencies in identifying their facilities and activities and reporting on the environmental impacts of their classified research planning and operations. EPA's Office of Federal Activities reviews hundreds of EISs each year, but according to activities office staff, only a tiny fraction of these--perhaps two or three a year--are either partially or fully classified. According to EPA, classified EISs are submitted almost exclusively by DOE and DOD. The activities office has two people with high-level clearances who review these classified EISs. EPA does not keep records of classified EISs that have been sent to it for review and does not store them, although it does have some classified storage capability. Classified EISs are stored at the agencies themselves. Officials in EPA's activities office said there is little incentive to establish such recordkeeping or more such storage at EPA because classified EIS submittals are rare. Neither EPA nor CEQ has the responsibility or the resources to closely monitor and direct the EIS submittal process. Agencies are required to submit unclassified and classified EISs for EPA's review, but according to activities office officials, EPA is not charged with conducting outreach to ensure that all such EISs are submitted. Also, EPA is not responsible for reviewing the thousands of other lower level environmental planning documents--such as environmental assessments--which agencies generate each year; its review is limited to EISs, which are required for "major" actions only. As a result, EPA activities office staff said their overview of agencies' internal NEPA planning is very limited. According to EPA records and activities office officials, historically some agencies have not been sending EISs to EPA for review, either classified or unclassified, as required. Such agencies include the Central Intelligence Agency (CIA), the National Security Agency (NSA), and the Defense Intelligence Agency. According to EPA officials who have been assigned the responsibility to review EIS's for the CIA and NSA over the past several years, they have not had contact with these agencies concerning EISs and do not know who these agencies' liaisons are for NEPA matters. Furthermore, environmental compliance officials within the agencies may not be reviewing all classified research activities. According to a responsible Air Force NEPA compliance official, although his office is charged with reviewing classified EISs internally, historically the office has rarely received such documents for review. He said his office may not have a need-to-know for all such documents. He also could not recall his office receiving for review any unclassified or classified NEPA documents prepared for proposed projects at the classified Air Force operating location near Groom Lake, Nevada. Agencies may conduct environmental planning secretly, and a proposed action may proceed without prior public comment. For example, in 1994, the government conducted Project Sapphire, a classified nuclear nonproliferation action that transferred highly enriched uranium from Kazakhstan in the former Soviet Union to storage at Oak Ridge, Tennessee. DOE conducted internal NEPA planning for Project Sapphire in the form of a detailed classified environmental assessment, but because it was an environmental assessment and not an EIS, EPA was not required to review the assessment and prior public comment was not possible for national security reasons. The public was fully apprised of the Project Sapphire environmental assessment after the uranium transfer was completed. According to EPA headquarters and regional enforcement officials, EPA and the states have been conducting enforcement activities at known classified federal research facilities, but management oversight of such enforcement has not been systematic. According to EPA, known facilities are inspected and required through EPA and/or state oversight to comply with environmental laws. However, neither EPA headquarters nor its regions have complete inventories of all classified federal facilities subject to environmental requirements, either nationally or at a regional level. Instead, EPA headquarters and field enforcement officials said they depend on agencies to report the existence of their classified facilities, to report environmental monitoring data, and to cooperate with EPA and authorized states in assuring that such facilities are in compliance. They said they receive a degree of cooperation at known DOE and DOD classified facilities but are constrained by secrecy and need-to-know considerations. When they receive cooperation, they conduct appropriate field enforcement activities. In this regard, an ongoing lawsuit by former employees at an Air Force facility near Groom Lake, Nevada, alleged violations of RCRA, including EPA's failure to conduct a RCRA inspection there. EPA has affirmed that EPA field inspectors conducted an inspection of the location pursuant to RCRA from December 1994 to March 1995. In August 1995, the U.S. District Court for the District of Nevada ruled that the plaintiffs' objectives in bringing the suit had been accomplished, in that EPA had performed its duties under RCRA to inspect and inventory the site. In May 1995, EPA and the Air Force affirmed by a memorandum of agreement that EPA will continue to have access at the Groom Lake facility for purposes of administering the environmental laws and that the Air Force is committed to complying with RCRA at the location. The details of the issues resulting in the agreement are classified. According to the director of EPA's Office of Federal Facilities Enforcement, EPA is fulfilling its oversight responsibility at the facility. However, he said he was uncertain of the extent to which other such highly classified federal facilities--or areas within facilities--may exist and whether their research operations are in environmental compliance. According to the director of federal facilities enforcement, the degree of EPA's involvement in classified activities may broaden in the future. The agency is currently working with the Air Force on a broader memorandum of agreement applicable to all classified Air Force facilities. Also, the director said that EPA held a meeting in 1995 with other agencies, including intelligence agencies, concerning further possible memorandums of agreement similar to the one signed with the Air Force for Groom Lake. Also, EPA, in conjunction with agencies that have highly classified programs, is working on procedures for improved environmental regulation at classified installations. Nevertheless, it is not clear that EPA will have the resources to oversee additional environmental compliance by any federal facilities. EPA's Office of Federal Facilities Enforcement is currently responsible for overseeing the cleanup of the 154 federal sites included in the National Priorities List under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). EPA has stated that it has the resources to oversee federal facilities' overall environmental management and compliance, but few additional resources for greater oversight of classified facilities. Although federal environmental laws allow the President to provide exemptions from environmental requirements in cases involving the paramount interest of the U.S. or in the interest of national security, federal agencies appear to have rarely sought these exemptions. We found only two cases in over 15 years of federal agencies obtaining presidential exemptions from environmental laws. While it is possible that exemptions were sought and obtained in secret, those with whom we spoke, including an official of the National Security Council, generally indicated they did not know of any such exemptions. Under NEPA, numerous less formal special arrangements have been obtained through emergency agreements with CEQ. Presidential exemption provisions are contained in some environmental laws, including the Clean Water Act, the Clean Air Act, RCRA, the Safe Drinking Water Act, CERCLA, and the Noise Control Act. These provisions differ in detail but generally provide that the President can declare a facility or activity exempt from applicable environmental standards. Depending on the law, he may do so in the paramount interest of the nation or in the interest of national security. A presidential exemption can suspend the applicable pollution standards in the laws for whole facilities or specific sources of pollution. Generally, exemptions are for 1 to 2 years, may be renewed indefinitely, and must be reported to the Congress. Executive Order 12088 gives agencies guidance on complying with the laws and contains implementation procedures. Generally, the head of an executive agency may recommend to the President, through the Director of the Office of Management and Budget (OMB), that an activity or facility be exempt from an applicable pollution control standard. According to an EPA official, the exemption mechanism is a "last resort" for agencies that may not be able to comply with environmental laws. We found only two cases in which federal facilities have been exempted by the President from compliance with environmental laws. Responsible officials at several agencies and in the Executive Office of the President were aware of only these two exemptions: In October 1980, President Carter exempted Fort Allen in Puerto Rico from applicable sections of four environmental statutes--the Clean Water Act, the Clean Air Act, the Noise Control Act, and RCRA. The exemption was determined to be in the paramount interest of the U.S., allowing time for the relocation of thousands of Cuban and Haitian refugees to the fort from Florida. The exemption was renewed once, in October 1981, by President Reagan. In September 1995, President Clinton exempted the Air Force's classified facility near Groom Lake, Nevada from the public disclosure provisions of RCRA, determining that the exemption was in the paramount interest of the United States. According to OMB and the National Security Council (NSC), the most recent exemption was routed through NSC for Presidential attention, not through OMB as provided in Executive Order 12088. NEPA does not contain explicit exemption provisions related to paramount national interest or national security. The CEQ regulations implementing NEPA permit special arrangements when NEPA's procedures might impede urgent agency actions. According to CEQ's records, there have been at least 22 instances of emergency NEPA agreements between an agency and CEQ, usually for reasons of time criticality. Three of these recorded emergency arrangements concerned national policy or national security issues: In 1991, the Air Force and CEQ agreed to alternative measures instead of a written EIS--including noise abatement steps--so that aircraft launches from Westover Air Force Base, Massachusetts, toward the Persian Gulf could proceed in a timely manner. In 1991, the Air Force and CEQ agreed that an EIS was not required before conducting a Desert-Storm-related test of aerial deactivation of land mines at the Tonapah Range in Nevada. In 1993, DOE and CEQ agreed on alternative NEPA arrangements for U.S. acceptance of spent nuclear fuel from a reactor in Belgium. Subsequently, Belgium declined the U.S. offer of acceptance. This concludes our testimony. We would be pleased to respond to any questions you or other Members of the Committee may have. Nuclear Waste: Management and Technical Problems Continue to Delay Characterizing Hanford's Tank Waste (GAO/RCED-96-56, Jan. 26, 1996). Department of Energy: Savings From Deactivating Facilities Can Be Better Estimated (GAO/RCED-95-183, July 7, 1995). Department of Energy: National Priorities Needed for Meeting Environmental Agreement (GAO/RCED-95-1, Mar. 3, 1995). Nuclear Cleanup: Difficulties in Coordinating Activities Under Two Environmental Laws (GAO/RCED-95-66, Dec. 22, 1994). Environment: DOD's New Environmental Security Strategy Faces Barriers (GAO/NSIAD-94-142, Sept. 30, 1994). Nuclear Health and Safety: Consensus on Acceptable Radiation Risk to the Public is Lacking (GAO/RCED-94-190, Sept. 19, 1994). Environmental Cleanup: Better Data Needed for Radioactivity Contaminated Defense Sites (GAO/NSIAD-94-168, Aug. 24, 1994). Environmental Cleanup: Too Many High Priority Sites Impede DOD's Program (GAO/NSIAD-94-133, Apr. 21, 1994). Federal Facilities: Agencies Slow to Define the Scope and Cost of Hazardous Waste Site Cleanups (GAO/RCED-94-73, Apr. 15, 1994). Pollution Prevention: EPA Should Reexamine the Objectives and Sustainability of State Programs (GAO/PEMD-94-8, Jan. 25, 1994). Air Pollution: Progress and Problems In Implementing Selected Aspects of the Clean Air Act Amendments of 1990 (GAO/T-RCED-94-68, Oct. 29, 1993). Environmental Enforcement: EPA Cannot Ensure the Accuracy of Self-Reported Compliance Monitoring Data (GAO/RCED-93-21, Mar. 31, 1993). Environmental Enforcement: Alternative Enforcement Organizations for EPA (GAO/RCED-92-107, Apr. 14, 1992). Environmental Enforcement: EPA Needs a Better Strategy to Manage Its Cross-Media Information (GAO/IMTEC-92-14, Apr. 2, 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 its review of the Environmental Protection Agency's (EPA) capability to conduct environmental oversight of classified federal research. GAO noted that: (1) EPA conducts limited oversight of classified federal research, primarily relying on agencies' internal environmental monitoring programs; (2) although agencies are required to submit environmental impact statements (EIS) to EPA for review, EPA does not ensure that agencies submit all EIS or know the liaisons for some agencies' environmental issues; (3) environmental compliance officials within agencies may not be reviewing all classified research activities; (4) EPA conducts environmental enforcement activities at known classified federal facilities when the agencies cooperate, but it does not have a complete inventory of all facilities and is sometimes hindered by secrecy and need-to-know considerations; (6) while it is possible that federal agencies have secretly sought exemptions from environmental requirements, it appears that they have rarely sought such exemptions; and (7) agencies have occasionally sought special emergency arrangements concerning environmental standards because of national security concerns.

Under the United States Housing Act of 1937, as amended, Congress created the federal public housing program to assist communities in providing decent, safe, and sanitary dwellings for low-income families. Today, more than 4,100 public housing agencies provide housing for low- income households. Over 3,100 agencies operate low-rent or a combination of low-rent and tenant-based Section 8 units, and about 1,000 provide housing through tenant-based Section 8 units only. Public housing agencies are typically municipal, county, or state agencies created under state law to develop and manage public housing units for low-income families. Housing agencies that participate in the low-rent program contract with HUD to provide housing in exchange for federal grants and subsidies. HUD provides funding to agencies to operate and repair low- rent units through the Operating Fund and the Capital Fund. The Operating Fund provides annual subsidies to housing agencies to make up the difference between the amount they collect in rent and the cost of operating the units. The Capital Fund provides grants to public housing agencies for the major repair and modernization of the units. Under the tenant-based Section 8 program, eligible households select their own units in the private housing market and receive subsidies to cover part of the rent. Public housing agencies that participate in the tenant-based Section 8 program enter into contracts with HUD and receive HUD funds to provide rent subsidies to the owners of private housing on behalf of the assisted households. Fiscal year 2000 was the first year that public housing agencies were required to submit a five-year plan and an annual plan. This requirement only applies to public housing agencies that receive HUD funds to provide housing under the low-rent or tenant-based Section 8 programs. The five- year plan describes the agency's mission and its long-range goals and objectives for achieving its mission over the subsequent 5 years. The annual plan details the agency's immediate objectives and strategies for achieving these goals, as well as the agency's policies and procedures. For agencies that manage low-rent units, the annual plan also serves as the application for the capital fund and public housing drug elimination grant programs. HUD distributes these grants on a formula basis. The Public Housing Reform Act sets forth requirements governing the submission, review, and approval of agency plans. Plans must be submitted to HUD 75 days before the start of the agency's fiscal year. In addition, the plans are to be developed by the public housing agency in consultation with a resident advisory board and be consistent with other HUD-required community planning documents. Public housing agencies are also required to hold a public hearing on the plans and to address comments received during the hearing before submitting the plans to HUD. HUD, in turn, must review submitted plans to determine that they contain the information required by the act, agree with information from other data sources available to HUD such as community planning documents, and comply with other applicable laws. HUD must issue a written notice either approving or disapproving the plans within 75 days of its receipt of the plans. If HUD does not meet this deadline, plans are considered approved. For fiscal year 2000, 4,055 required plans had been submitted to and approved by HUD, and 89 required plans had not been approved. The 89 unapproved plans were in varying stages: 53 plans had not been submitted; 34 plans had been submitted, disapproved due to cited deficiencies, and not yet resubmitted with the deficiencies corrected; and 2 plans were in the process of being reviewed by HUD. Of the housing agencies that should have had approved plans but did not, 76 provide housing through tenant- based Section 8 units only. The remaining 13 manage low-rent units only or a combination of low-rent and tenant-based Section 8 units. HUD is considering sanctions against all public housing agencies that do not have approved fiscal year 2000 agency plans. Since agencies that manage low-rent units use the annual plan as the application for their capital fund and public housing drug elimination formula grants, HUD does not plan to release the fiscal year 2000 formula grants to agencies without approved plans. Although these grant funds have been committed to the agencies based on the formula allocation, the funds have not been released to agencies without approved fiscal year 2000 plans and are not available for those agencies' use. According to a HUD official, any agency that manages low-rent units and did not submit its annual plan to HUD by September 30, 2001, may lose its capital fund and public housing drug elimination program formula grants for fiscal year 2000. Fourteen public housing agencies may lose about $2.6 million in fiscal year 2000 capital fund grants and one of these agencies may also lose a $39,426 public housing drug elimination program grant. HUD is considering a similar sanction for those public housing agencies that administer only tenant-based Section 8 units and do not have approved fiscal year 2000 plans. While tenant-based Section 8-only agencies make up 24 percent of all housing agencies, they represent 85 percent of agencies without approved plans. For these agencies, HUD could withhold a portion of the administrative fees these public housing agencies receive for managing the tenant-based Section 8 program. In addition, HUD requires these public housing agencies to have approved fiscal year 2000 plans to be eligible for additional Section 8 vouchers in fiscal year 2002. The majority of HUD field locations reported that they experienced some problems with the fiscal year 2000 plan review process but were able to complete almost all reviews. Some of these problems were addressed in the fiscal year 2001 process. A majority of respondents reported that the fiscal year 2000 plans were useful in helping HUD field locations identify certain housing agency needs but believed the plans were more important to housing agencies with low-rent units than to housing agencies that administer only tenant-based Section-8 units. Most respondents also believed that agencies are implementing their fiscal year 2000 plans, but many also believed that agencies are having difficulty implementing some portions of the plans. Seventy-four percent of field locations that responded to our survey reported problems or difficulties with the fiscal year 2000 plan review and approval process. For example, over 50 percent of respondents said that the electronic transmission of plans from housing agencies to HUD and the conversion of plans into a readable format once received at HUD had a negative or very negative effect on their ability to review and approve plans. Respondents also reported that HUD-provided guidance on the plan process was less than adequate. One respondent reported that headquarters guidance at the beginning of the process was not very good and was delayed in getting to the field locations, while another reported that changing rules made it difficult to know what the housing agencies should do and what the field locations should look for in reviewing plans. Changes that have been made for the 2001 plan process suggest that lessons learned and experience gained during the first year resulted in some improvements, but it is too early to determine whether these changes have fully resolved the problems. For example, several respondents reported that technical data transmission and conversion problems were less frequent for fiscal year 2001. They also reported that HUD headquarters had streamlined guidance and provided it in a timelier manner. HUD headquarters officials also cited several initiatives undertaken as a result of lessons learned during the first year, including developing a database to better track agency plan information, hiring a new contractor to manage the database, and providing consolidated guidance in the form of a desk guide to assist housing agencies and field locations. Respondents reported that, for fiscal year 2000, almost half of the plans reviewed had to be resubmitted by the housing agencies because of deficiencies. The majority of field locations said that deficiencies requiring correction and resubmission commonly occurred in the plans' sections documenting capital improvement needs, the housing needs of the community, and the fulfillment of resident participation requirements. Among the problems with capital improvement sections were the omission or incompleteness of required documentation, such as plans for the use of the agency's capital funds. Regarding the sections on determining housing needs, some agencies submitted data sources on housing availability that were unclear or conflicted with other local planning documents. Regarding the sections describing resident participation, one field location that has a large number of small housing agencies in its jurisdiction reported that its agencies had trouble finding residents willing to participate in the planning process and that this was reflected in their plans. Between 60 and 72 percent of survey respondents indicated they found the plans helpful in identifying public housing agency needs relative to setting operational priorities, developing resident participation, and planning strategically. Some also reported that the planning process helped field locations provide technical assistance to housing agencies on identified problem areas. For example, one respondent reported that the plan review process enabled the field locations to provide technical assistance to public housing agencies in the areas of setting priorities and effective strategic planning. Responses to our survey suggested that field locations think that the plans are more important for agencies with low-rent units than for agencies with only tenant-based Section 8 units. Specifically, about 70 percent of respondents thought the plans were important in setting operational priorities for agencies that maintain low-rent units, while only 40 percent thought they were important in setting operational priorities for agencies with tenant-based Section 8 units only. One respondent commented that operating a tenant-based Section 8 program has substantially different planning needs than operating a low-rent housing program. According to this respondent, because tenant-based Section 8 units are located in privately-owned housing, there is no "physical asset" for the tenant-based Section 8 agency to maintain, and other problems with being a landlord or owner are not present. The fact that the plan serves as a grant application for agencies that operate the low-rent program, but not for agencies that operate the tenant-based Section 8 program only, may also contribute to the respondents' opinion that plans are less important to these agencies. About 72 percent of respondents believed that, for the most part, housing agencies can implement the plans they developed, submitted, and had approved. At the same time, about 54 percent of respondents said housing agencies are having difficulty implementing the resident participation requirement. A recurring theme from several respondents was that housing agencies had difficulty getting residents interested in forming or participating on resident advisory boards. Several respondents emphasized that getting participation in small and tenant-based Section 8 only housing agencies was especially difficult. In addition, some respondents said that it is difficult to get residents appointed to the housing agencies' board of directors in some areas, as is required. Staff at the eight public housing agencies we visited described varying experiences with the fiscal year 2000 plan process. For example, some found the process useful, while others did not; some found HUD guidance helpful, while others did not. Generally, larger agencies had more positive responses than did smaller agencies. While the information collected on our visits cannot be generalized to the universe of public housing agencies, it provides insight into individual public housing agencies' concerns. The public housing agencies we visited held varying views on the usefulness of the fiscal year 2000 process. Four had positive experiences, two did not, and two had no comment. One of the larger agencies told us that the first year of the plan process was useful because it forced the agency to review and update its policies. This agency also uses the plan as a training aid for newly hired staff and believes the plan is useful as a vehicle for obtaining resident input. The other larger agency said that the plan is useful in the agency's strategic planning. In contrast, the two small agencies we visited reported that they did not find the process useful: One said that it took time away from the staff's essential day-to-day operational duties. The other said it perceived no value in the plan process. Although the amount and type of resources that agencies devoted to the plan process for fiscal year 2000 varied, seven of the eight public housing agencies we visited told us they used additional staff or resources in developing their fiscal year 2000 plans. Three of the eight used consultants to develop their plans. One extra-large agency hired an additional staff person specifically to coordinate development of its fiscal year 2000 plans. In contrast to the other seven public housing agencies we visited, a medium-sized agency told us that it did not spend significantly more staff time or additional resources preparing the plans because most of the required updating of operational policies had been completed earlier. All eight housing agencies we visited expressed some frustration with the quantity or quality of HUD guidance for the first year, particularly regarding the agency plan template that HUD provided electronically to serve as a guide to developing and formatting the agency plans. Although each of the eight agencies had some negative feelings about the template, some balanced their comments with positive remarks. For example, one extra- large agency told us that the template provided guidance for formatting the plan submission. A large agency we visited told us that the template was sufficiently easy to use and added that, in its opinion, HUD had improved the template for fiscal year 2001. On the other hand, one of the small agencies told us that the template does not give individual housing agencies the flexibility to describe unusual situations relating to local needs. In addition, one of the medium-sized agencies told us that the template was not user friendly. Agencies also had mixed experiences with the resident participation requirement for the fiscal year 2000 plan. For example, one extra-large public housing agency, with a widely dispersed housing inventory and several different types of resident populations, had a positive experience. Staff at this agency said that the resident participation requirement brought together a cross-section of residents that would otherwise not have met and provided these residents with an appreciation of the competing needs of resident populations and the commensurate difficulty the housing agency faced in meeting those needs. The other extra-large agency told us that its experience with this requirement was positive because the planning process generally encouraged resident participation. In contrast, one of the small agencies told us that resident apathy made it difficult to meet this requirement. Our work raised questions about the relative value and burden of the planning process for two groups of public housing agencies. Survey responses highlighted questions about the value of the plans to those agencies that administer only tenant-based Section 8 units, while comments received during our visits to eight agencies suggested that small agencies may find less value in the planning process and that the process puts a greater burden on their resources. As we did not visit a representative sample of small public housing agencies, further examination of these agencies' experiences, including those that provide housing only through the tenant-based Section 8 program, would be needed to determine the value of annual plans to these agencies. As agreed with your offices, we are planning to further investigate the challenges facing small housing agencies, especially the impact and benefits of regulatory and administrative requirements. As many of the smaller agencies provide housing only through the tenant-based Section 8 program, this work might also provide some insights into the usefulness and applicability of the plans for this type of public housing agency. The mandate in Section 511 of the Quality Housing and Work Responsibility Act of 1998 required that we review and audit a representative sample of the nation's housing agencies that are required to submit agency plans. This is a universe of over 4,000 housing agencies. When we met with you and your office to clarify our reporting requirements under the mandate, we agreed that available resources and reporting deadlines would not permit us to review and audit a representative sample of these housing agencies and their plans. We also agreed that a survey of HUD field locations to assess HUD's management of the fiscal year 2000 agency plan process would serve as a proxy to auditing the universe of housing agencies, as each HUD field location has direct knowledge of all housing agencies within its respective jurisdiction and was responsible for reviewing and approving those agencies' plans. We agreed to supplement this survey by collecting data on the status of all required plans and by visiting a nonrepresentative sample of public housing agencies to gain insight into particular agencies' experiences. To determine the status of plans submitted to and approved by HUD for fiscal year 2000, we interviewed HUD Public and Indian Housing policy development, Grants Management Center, and program officials. We also obtained data from several Public and Indian Housing databases on public housing agencies and fiscal year 2000 approved plans. We analyzed the data, discussed it with HUD staff, and resolved any discrepancies in the data with HUD staff. To assess HUD's management of the fiscal year 2000 agency plan review process, we developed an automated survey instrument that we posted on our Web site. We requested that all 43 HUD Public and Indian Housing field offices and both troubled agency recovery centers complete the survey. These HUD field locations are responsible for reviewing and approving agency plans. We sent E-mail messages asking officials at these field offices and recovery centers to fill out the questionnaire. We received responses from 41 field offices and both troubled agency recovery centers, which is a 96 percent response rate. Field locations responding to our survey were responsible for reviewing 4,033 or about 97 percent of the plans required to be submitted in fiscal year 2000. Our survey results reflect the information provided by the HUD officials. We did not independently verify the field locations' responses to our questions. During the design of the questionnaire, we pretested our questionnaire with officials from two field offices and modified it on the basis of the feedback and comments we received during the pretests. In addition, we obtained comments on the questionnaire from HUD's Office of Public and Indian Housing. To assess selected public housing agencies' experiences with the fiscal year 2000 agency plan process, we visited eight geographically dispersed agencies with low-rent and tenant-based Section 8 units. We selected the eight housing agencies based on criteria such as size and performance designation, which determines the type of plans each agency is required to submit. We interviewed the executive director or other staff responsible for preparing the agency plans, residents, and resident board members. We also reviewed documents supporting the agencies' fiscal year 2000 plans. In addition, we contacted public housing industry groups to obtain their constituents' perspectives on the first year of the required planning process. We conducted our review from January 2001 through March 2002 in accordance with generally accepted government auditing standards. We provided a draft of this report to HUD to obtain comments. On May 2, 2002, the deputy assistant secretary for policy, programs, and legislative initiatives, Office of Public and Indian Housing, provided oral comments. HUD generally agreed with the draft and provided editorial and clarifying comments that were incorporated in the report, as appropriate. We are sending copies of this report to interested congressional committees and members of Congress; the secretary of HUD; and other interested parties. 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 have further questions, please call me at (202) 512-7631. The key contact and other contributors to this report are listed in appendix II. PHAs without approved plans in an effort to obtain fiscal year 2000 plans. The official added that 14 Low- Rent/Combined PHAs that did not submit fiscal year 2000 plans by September 30, 2001, may forfeit their fiscal year 2000 formula grant funds. Fourteen PHAs may forfeit about $2.6 million in capital fund program grants. One PHA also may forfeit a $39,426 public housing drug elimination program grant. not receive formula funds, HUD could not take the same action against the 76 tenant-based Section 8-only PHAs that do not have approved fiscal year 2000 plans. To address this issue, HUD could withhold a portion of the administrative fees tenant- based Section 8-only PHAs receive for managing the program, pending submission and approval of the required plans, and requires PHAs to have an approved fiscal year 2000 plan in order to apply for additional Section 8 vouchers for fiscal year 2002. Seventy-four percent of HUD field offices that responded to our survey reported they experienced problems with the fiscal year 2000 review process. Specific problems included data transmission delays. Technical problems occurred during the following steps: PHAs' transmission of plans to HUD headquarters. HUD headquarters' transmission of plans to HUD field offices. HUD headquarters' posting of plan approval notification. a general lack of guidance from HUD headquarters, including delayed guidance on how to review plans. changing guidance on how to help PHAs complete plans. HUD took action to address reported problems for fiscal year 2001 plan submissions. Specific changes included developing a new database to track plan approval and hiring a contractor to manage it, and providing more timely guidance, such as a field office desk guide for reviewing the plans. agency plans had to be resubmitted. The most common deficiencies for which plans had to be resubmitted related to PHAs' completion of the following plan components: capital improvement needs. statement of housing needs. resident participation requirement. plans were useful in helping the field office identify a number of PHA needs. Plans Moderately to Extremely Useful in Identifying Specific PHA Needs (percentage of field offices) Plan Is Important for Setting Management Priorities for Types of Units (percent of field offices) implementing their fiscal year 2000 plans. The most commonly cited problem areas concerned the following plan components. Plan Components PHAs Reported Difficulty In Implementing (percentage of field offices) implementing particular plan components: Resident participation: Resident apathy made it difficult for some PHAs, especially small and Section 8-only PHAs, to fulfill this requirement. Capital improvement plans: PHAs were affected by funding constraints or shortages. Statement of housing needs: Small and rural PHAs with limited resources had difficulty gathering the relevant information, such as local demographics. found the plan process quite difficult for fiscal year 2000, the first year. Problems cited included the following: PHAs were unable to obtain meaningful information from HUD on reasons plans were disapproved. Some PHAs found it hard to establish resident advisory boards. Small PHAs lacked the resources and staff to complete the plans. PHAs' assessment of the usefulness of the plans varied at the eight PHAs we visited. Larger PHAs generally had more positive assessments than smaller PHAs. Positive remarks: The process and plans helped the PHA get other local funding, forced the PHA to review and update policies, gave PHA residents a vehicle for input, and are used for strategic planning, as a training aid, and as an information source for HUD field offices. Negative remarks: The process and plans took time away from other duties, and are not used. staff time or resources preparing the plans because most of the required updating of policies had already been completed before HUD provided guidance for plans. template also varied. Positive remarks: The template provided guidance for formatting, was sufficiently easy to use, and was improved for fiscal year 2001. Negative remarks: The template lacked flexibility, did not sufficiently define terms such as "affordability" and "quality", and was not user friendly, as PHAs had to go to several HUD sources to complete it. PHAs' we visited assessment of the resident participation requirement also varied. Positive remarks: The resident participation requirement brought a cross-section of residents together, and encouraged resident participation. Negative remark: The resident participation requirement was difficult to sustain because of resident apathy. and value of the plans varied. Smaller PHAs we visited viewed the process and plans as consuming a larger portion of their resources, and as having limited value. Most HUD field offices and some larger PHAs we visited as a valuable tool to help PHAs define their strategic vision and monitor their progress toward management goals, and as having limited value to tenant-based Section 8-only PHAs. HUD made changes for fiscal year 2001 plans, including simplified plans for small PHAs, and modified requirements for tenant-based Section 8-only PHAs. year 2000 plans approved, tenant-based Section 8-only PHAs have a higher rate of noncompliance. Tenant-based Section 8- only PHAs are 24 percent of all PHAs, and 85 percent of PHAs without approved plans. HUD has recently determined that it can sanction tenant-based Section 8-only PHAs that fail to submit plans. HUD could withhold a portion of the administrative fee, and requires an approved fiscal year 2000 plan for PHAs to be eligible for additional vouchers for fiscal year 2002. In addition to the individual named above, Johnnie Barnes, Sherrill Dunbar, Gloria Hernandez-Saunders, Miko Johnson, John McGrail, Luann Moy, Don Watson, and Alwynne Wilbur made key contributions to this report. The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. 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The Quality Housing and Work Responsibility Act of 1998 was designed to improve the quality of public housing and the lives of its residents. Since fiscal year 2000, housing agencies managing low-rent or tenant-based Section 8 units have been required to develop and submit five-year and annual plans. As of January 2002, 98 percent of public housing agency plans for fiscal year 2000 had been submitted and approved. The Department of Housing and Urban Development (HUD) had mixed views about the fiscal year 2000 plan process and its value. The field locations that responded to GAO's survey reported that their review of fiscal year 2000 plans was hampered by several factors, including difficulty in transmitting data between public housing agencies and HUD. Most field locations responded that public housing agencies are implementing their plans but acknowledged that there may be some problems, particularly in fulfilling requirements related to resident participation in the process. The eight public housing agencies GAO visited had differing views on the usefulness of the planning process, the level of resources required to prepare the plans, the sufficiency of HUD's guidance on completing the plans, and the difficulty of meeting the resident participation requirement.

All outpatient therapy providers are subject to Medicare part B payment and coverage rules. Payment amounts for each type of outpatient therapy service are based on the part B physician fee schedule. In 2000, Medicare paid approximately $2.1 billion for all outpatient therapy services, of which $87.1 million was paid to CORFs. To meet Medicare reimbursement requirements, outpatient therapy services must be: appropriate for the patient's condition, expected to improve the patient's condition, reasonable in amount, frequency, and duration, furnished by a skilled professional, provided with a physician available on call to furnish emergency medical part of a written treatment program that is reviewed periodically by a physician. CMS relies on its claims administration contractors to monitor provider compliance with program requirements. Contractors regularly examine claims data to identify billing patterns by specific providers or for particular services that are substantially different from the norm. Claims submitted by these groups of providers--or for specific services--are then selected for additional scrutiny. Whether such reviews occur prior to payment (prepayment reviews) or after claims have been paid (postpayment reviews), the provider is generally required to submit patient records to support the medical necessity of the services billed. This routine oversight may lead to additional claim reviews or provider education about Medicare coverage or billing issues. With 567 facilities nationwide at the end of 2002, the CORF industry is relatively small. Although CORFs operated in 41 states at the end of 2002, the industry is highly concentrated in Florida, where 191 (one-third) of all Medicare-certified CORFs are located. By contrast, the state with the second largest number of CORFs at the end of 2002 was Texas, with 53 CORFs. The number of CORF facilities in Florida grew about 30 percent during 2002 and the industry is now largely composed of relatively new, for-profit providers. The CORF industry in Florida continued to grow in 2003, reaching 220 facilities by year's end, of which 96 percent were for profit. The growth in Florida CORFs came after a period of substantial turnover among CORF owners (many closures and new entrants). From 1999 to 2002, Medicare payments to Florida CORFs rose substantially and far outpaced growth in the number of beneficiaries that used CORFs. The number of Medicare beneficiaries receiving services from CORFs grew 13 percent, increasing from 33,653 in 1999 to 38,024 in 2002. However, during the same time period, Medicare expenditures for services billed by CORFs rose significantly, with total payments increasing 61 percent, from $48.1 million to $77.4 million. Half of all Florida CORFs received an annual payment of $91,693 or more from Medicare in 1999; by 2002, the median annual payment more than doubled to $187,680. Although CORFs were added to the Medicare program to offer beneficiaries a wide range of nontherapy services at the same location where they receive therapy, most Florida CORFs do not provide these types of services. For those that do, only a small proportion of Medicare payments are accounted for by these services. In 2002, 98 percent of Medicare payments to Florida CORFs went to furnish physical and occupational therapy or speech-language pathology services. The mix of services reimbursed by Medicare was very different in 1999, when such therapy accounted for 68 percent of all payments, and the remainder paid for nontherapy services, such as pulmonary treatments and psychiatric care. In recent years, payments to Florida CORFs have increasingly shifted toward those made for patients with back and musculoskeletal conditions. Most notably, patients who presented with back disorders accounted for 16 percent of all Medicare payments to Florida CORFs in 1999 and 29 percent of payments in 2002. In addition, payments for treating patients diagnosed with soft tissue injuries increased from 8 percent of Florida CORF payments in 1999 to 24 percent in 2002. One diagnosis group for which there was a notable decrease in the proportion of Medicare payments was pulmonary disorders, which fell from 30 percent of all payments in 1999 to 2 percent in 2002. In 2002, most of the 191 CORFs in Florida were small, with the median CORF in the state treating 150 beneficiaries. CORFs accounted for 15 percent of all Florida Medicare beneficiaries who received outpatient therapy from facility-based providers that year, and 30 percent of Medicare's payments for outpatient therapy services to Florida facility- based providers. In a few areas, however, CORFs represented a substantial share of the outpatient therapy market, particularly in south Florida. For example, CORFs were the predominate providers of outpatient therapy services in Miami, with 53 percent of all facility-based outpatient therapy patients, and treated 29 percent of patients who received outpatient therapy from facility-based providers in nearby Fort Lauderdale. In 2002, Medicare's therapy payments per patient to Florida CORFs were several times higher than therapy payments made to other facility-based outpatient therapy providers in the state. This billing pattern was evident in each of the eight Florida MSAs that accounted for the majority of Medicare CORF facilities and patients. Differences in prior hospitalization diagnoses and patient demographic information did not explain the disparities in per-patient therapy payments. Our analysis of claims payment data showed that per-patient therapy payments to Florida CORFs were about twice as high as therapy payments to rehabilitation agencies and SNF outpatient departments, and more than 3 times higher than therapy payments to hospital outpatient departments. (See table 1.) Specifically, at $2,327 per patient, therapy payments for CORF patients were 3.1 times higher than the per-patient payment of $756 for those treated by outpatient hospital-based therapists. Higher therapy payments for Medicare patients treated at CORFs were largely due to the greater number of services that CORF patients received. As shown in table 1, on average, CORF patients received 108 units of therapy compared with 37 to 59 units of outpatient therapy, on average, at the other types of outpatient providers. Typically, a unit of therapy service represents about 15 minutes of treatment with a physical therapist, occupational therapist, or speech-language pathologist. The pattern of relatively high payments to CORFs was evident in all of the localities where CORFs were concentrated. In 8 of the 14 MSAs in Florida that had CORFs in 2002, CORF payments per patient were higher than payments to all other types of facility-based outpatient therapy providers. These MSAs together accounted for 86 percent of all Florida CORF beneficiaries and 90 percent of the state's CORF facilities. In these localities, per-patient payments to CORFs ranged from 1.2 to 7.4 times higher than payments to the provider type with the next highest payment amount. For example, in Fort Lauderdale, the 2002 average CORF therapy payment was $2,900--more than twice the average payment of $1,249 made for beneficiaries treated by rehabilitation agencies. (See table 2.) Some factors that could account for differences in therapy payment amounts--patient diagnosis and indicators of patient health care needs-- did not explain the higher payments that some Florida CORFs received compared with other types of facility-based outpatient therapy providers. We found that CORFs received higher per-patient therapy payments than other facility-based providers for patients in each of the four leading diagnosis categories treated at CORFs. For patients with neurologic disorders, arthritis, soft tissue injuries, and back disorders, payments to CORFs were 66 percent to 159 percent higher than payments to rehabilitation agencies and SNF OPDs and higher yet than payments to hospital OPDs. (See table 3.) Patients treated for back disorders made up the largest share of Florida CORF patients, at 25 percent. For patients with this diagnosis, average payments to CORFs--at $1,734--were twice as high as the average payment of $867 made to rehabilitation agencies--the next highest paid provider type. The higher therapy payments to CORFs were driven by the higher volume of therapy services that CORFs provided to their Medicare patients, compared with the volume of services other facility-based outpatient therapy providers furnished to patients in the same diagnosis group. As shown in table 4, for all four leading diagnosis categories, CORF Medicare patients received far more units of therapy, on average, than Medicare patients treated by other outpatient therapy providers. Differences across provider types were particularly pronounced for Medicare patients with arthritis. CORFs furnished an average of 100 units of therapy to beneficiaries treated for arthritis. In contrast, non-CORF outpatient therapy providers delivered an average of 33 to 53 units of therapy to Medicare arthritis patients. Differences in patient demographic characteristics and prior-year hospital diagnoses--factors that could indicate variation in patient health care needs--did not explain most of the wide disparities in therapy payments per patient across settings. When we considered differences in patient age, sex, disability, Medicaid enrollment, and 2001 inpatient hospital diagnoses across provider types, the data showed that patients served by CORFs could be expected to use slightly more health care services than patients treated by other facility-based therapy providers. However, we found that, after controlling for these patient differences, average payments for CORF patients remained 2 to 3 times greater than for those treated by other provider types. Consistent with this finding, therapy industry representatives we spoke with--including those representing CORFs--reported that, in the aggregate, CORF patients were not more clinically complex or in need of more extensive care than patients treated by other outpatient therapy providers. They told us that patients are referred to different types of outpatient therapy providers based on availability and convenience rather than on their relative care needs. One private consultant to CORFs and other outpatient provider groups noted that there are no criteria to identify and direct patients to a particular setting for outpatient care, and that physicians generally refer patients to therapy providers with whom they have a relationship. Despite the Florida contractor's increased scrutiny of CORF claims, our analysis of Florida CORFs' 2002 billing patterns suggests that some providers received inappropriate payments that year. In late 2001, after finding widespread billing irregularities among CORF claims, the Florida claims administration contractor implemented new strategies for reviewing claims that were maintained throughout 2002. Although these strategies were successful at ensuring appropriate claims payments for a limited number of beneficiaries, our analysis of 2002 CORF claims found that many CORFs continued to receive very high per-patient payments. In 2001, the Medicare claims administration contractor for Florida reviewed about 2,500 claims submitted by CORFs and other facility-based outpatient therapy providers for services provided from January 1999 through February 2001. Among these claims, the contractor found widespread billing for medically unnecessary therapy services. These were therapy services related to maintaining rather than improving a patient's functioning, as required by Medicare reimbursement requirements for covering outpatient therapy. Reviews also found claims for the same beneficiary, made by more than one CORF, sometimes on the same day. The unlikelihood that a patient would receive treatment from more than one CORF provider when each one was equipped to provide the patient's full range of needed services caused the contractor to investigate further. After interviewing a sample of beneficiaries treated by multiple CORFs, the contractor found that some of the facilities treating these beneficiaries had common owners. It reported that the common ownership was significant, suggesting efforts by the owners to distribute billings for a patient's services across several providers. The contractor stated that this would allow the CORFs' owners to avoid the scrutiny of the Medicare contractor, which typically screens claims aggregated by facility rather than by beneficiary. After conducting additional reviews of a sample of paid claims from these CORFs, it found that 82 percent of payments made were inappropriate, largely due to questions about medical necessity. As a result, the contractor required these CORFs to repay Medicare approximately 1 million dollars and referred some of the CORFs to CMS and the HHS OIG for further investigation. In late 2001, the Florida claims administration contractor implemented additional claim review strategies targeting CORF claims. For any new CORF, the contractor began reviewing for medical necessity, prior to payment, about 30 of the first claims submitted. The contractor also began reviewing all therapy claims submitted on behalf of about 650 beneficiaries identified as having high levels of therapy use from multiple CORFs and other facility-based outpatient therapy providers during the 2001 investigation. CORFs and other providers submitting therapy claims for these beneficiaries had to supply documentation of medical necessity before claims were paid. The contractor also conducted prepayment reviews for specific therapy services determined to be at high risk for inappropriate payments, regardless of the beneficiary receiving services. The contractor maintained these intensified claim documentation and review requirements throughout 2002. The contractor indicated that the oversight measures put in place for specific beneficiaries were effective at improving the appropriateness of claims payments for therapy services made for those beneficiaries. Specifically, the contractor reported that Florida CORFs billed Medicare $12.1 million for this group in 2000, $10.2 million in 2001, and $7.3 million during 2002. In addition, the contractor denied an increasing percentage of the amount billed each year--46 percent in 2001, and 53 percent in 2002-- based on its medical records reviews. While the contractor succeeded in ensuring that payments to CORFs for this limited group of beneficiaries met Medicare rules, our own analysis of CORF claims submitted in 2002 found several indications that billing irregularities continued. The indicators included a high rate of beneficiaries who received services from multiple CORFs, some CORFs that did not provide any therapy services, and many facilities with very high per-patient payments. Our analysis of 2002 Florida CORF claims by facility showed that the Florida claims administration contractor's efforts to ensure appropriate CORF payments were not completely effective. We found that 11 percent of the beneficiaries who received CORF services in Florida were treated by more than one CORF facility during the year. While Medicare rules do not prohibit beneficiaries from receiving services from multiple providers in a single year, this occurs much more frequently among Florida CORFs than among CORFs in other states. Specifically, in the five other states with the greatest numbers of CORFs at the end of 2001 (Alabama, California, Kentucky, Pennsylvania, and Texas), fewer than 4 percent of beneficiaries received services from more than one CORF during 2002, and in most of these states, the rate was 1 percent or less. Although many CORFs treated a few patients who received services from multiple providers during 2002, a small group of Florida CORFs had very high rates of "shared" patients that year--suggesting that some CORFs may have continued to operate in the patterns first detected by the Florida contractor during its 2001 review. Of the CORFs operating in Florida in 2002, 32 facilities shared more than half of their patients with other CORF providers. At four CORFs, more than 75 percent of the beneficiaries were treated by multiple CORF providers during the year. Staff from the Florida contractor told us that these patterns of therapy use--receiving services from multiple providers during the same time period--complicate their ability to monitor appropriate use of therapy services. Contractor staff routinely analyze claims data to evaluate appropriate levels of service use and identify trends that may suggest excessive use. However, these analyses are normally conducted on claims data aggregated by CORF provider, not aggregated per beneficiary. When beneficiaries receive outpatient therapy services from multiple providers, traditional methods of oversight are less likely to detect high levels of service use and payments. Our review of 2002 Florida claims data also showed that some CORFs were not complying with Medicare program rules about furnishing required services. Although CORFs are permitted to provide nontherapy services, they must be delivered as part of a beneficiary's overall therapy plan of care. However, three Florida CORFs received payments exclusively for nontherapy services--such as pulmonary treatment and oxygen saturation tests--in 2002. Four additional providers billed Medicare primarily for nontherapy services, with therapy care accounting for less than 10 percent of their annual Medicare payments. In addition, we found that a number of the CORFs identified during the Florida contractor's 2001 investigation continued to have very high average payments for all services provided in 2002. As shown in table 5, several of these facilities were among 21 CORFs with per-patient payments that exceeded the statewide CORF average by more than 50 percent. Among this group of high-cost facilities, the per-patient payment in 2002 ranged from $3,099 to $6,080, substantially above the average payment of $2,036 across all Florida CORFs. These relatively high 2002 payments suggested that Florida CORFs responded to the contractor's targeted medical reviews selectively by reducing the services provided to the small number of patients whose claims were under scrutiny. Other patients, outside the scope of the contractor's criteria for medical review, continued to receive high levels of services. The contractor continues to rely on the medical review criteria originally established in late 2001. However, contractor staff reported ongoing concerns about the extent to which CORFs bill for services that may not meet the program's requirements for payment. In particular, they cited the practice of delivering therapy services over relatively long periods of time that only maintain, rather than improve, a patient's functional status. Sizeable disparities between Medicare therapy payments per patient to Florida CORFs and other facility-based outpatient therapy providers in 2002--with no clear indication of differences in patient needs--raise questions about the appropriateness of CORF billing practices. After finding high rates of medically unnecessary therapy services to CORFs, CMS's claims administration contractor for Florida took steps to ensure appropriate claim payments for a small, targeted group of CORF patients. Despite its limited success, billing irregularities continued among some CORFS and many CORFs continued to receive relatively high payments the following year. This suggests that the contractor's efforts were too limited in scope to be effective with all CORF providers. To ensure that Medicare only pays for medically necessary care as outlined in program rules, CMS should direct the Florida claims administration contractor to medically review a larger number of CORF claims. CMS officials reviewed a draft of this report and agreed with its findings. Specifically, the agency noted that "disproportionately high payments made to CORFs indicate a need for medical review of these providers." The agency also pointed out that, given the high volume of claims submitted by providers, contractors must allocate their limited resources for medical review in such a way as to maximize returns. Furthermore, CMS stated that the Florida claims administration contractor is already taking appropriate steps to address concerns about CORF billing and is prepared to take additional steps if necessary. We recognize that contractors can achieve efficiencies by targeting their medical review activities at providers or services that place the Medicare trust funds at the greatest risk. However, the impact of medical review comes, in part, from the sentinel effect of consistently applying medical review to providers' claims. Thus, while we support the contractor's focus on new CORF providers, we continue to believe that enlarging the number of CORF claims reviewed would promote compliance with medical necessity requirements. Given that Florida CORFs continued to bill significantly more per beneficiary than other outpatient therapy providers even after the contractor took steps to examine some claims, compliance could be enhanced by aggressively addressing this vulnerability. CMS's comments appear in appendix II. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from its issue date. At that time, we will send copies of this report to the Administrator of CMS and to other interested parties. In addition, this report will be available at no charge on GAO's Web site at http://www.gao.gov. We will also make copies available to others upon request. If you or your staff have any questions about this report, please call me at (312) 220-7600. Another contact and key contributors are listed in appendix III. In this report we (1) compared Medicare's outpatient therapy payments to CORFs in 2002 with its payments that year to other facility-based outpatient therapy providers and (2) assessed the program's effectiveness in ensuring that payments to CORFs complied with Medicare rules. As agreed with the requester's staff, we limited the scope of our review to facility-based outpatient therapy providers and beneficiaries in Florida. Florida accounted for one-third of all CORF facilities at the end of 2002. Our primary data source was CMS's National Claims History (NCH) 100% Nearline File. The NCH file contains all institutional and noninstitutional claims from the Common Working File (CWF)--the system that CMS uses to process and pay Medicare claims through its contractors across the country. We also reviewed data from CMS's Medicare Provider of Service Files, which contain descriptive information on CORF facility characteristics, such as location, type of ownership, and the date of each provider's initial program certification. Finally, we interviewed representatives of CMS's central and regional offices, the Florida claims administration contractor, federal law enforcement agencies, and the therapy industry. To describe the Florida CORF industry and operations, we gathered Medicare claims data from CMS's NCH File for the years 1999 through 2002. In addition to reviewing trends in total Medicare payments to CORFs, we examined changes in the patient case mix by identifying the primary diagnoses listed on claims for beneficiaries treated by CORFs. We also obtained descriptive information on CORFs' characteristics from the Provider of Service Files for 1999 through 2003. This work was performed from May 2003 through July 2004 in accordance with generally accepted government auditing standards. In this analysis, we compared Medicare therapy payments to four types of facility-based outpatient therapy providers: CORFs, rehabilitation agencies, hospital OPDs, and SNF OPDs. Although CORFs are authorized to offer a wide range of services, we limited our comparison to a common set of therapy services: physical therapy services, occupational therapy services, and speech-language pathology services. To compare Medicare's therapy payments to Florida CORFs with therapy payments to other types of facility-based outpatient rehabilitation therapy providers, we examined 2002 Medicare beneficiary claims data from the NCH File. We used the NCH file to identify all beneficiaries who resided in Florida and received outpatient therapy services from in-state providers during 2002. By limiting our review to beneficiaries who were enrolled in part B for all 12 months of the year, we excluded those in managed care and those with less than a full year of fee-for-service coverage. Using beneficiary identification numbers, we aggregated each beneficiary's total outpatient therapy claims from all provider types. We summed the annual number of therapy units billed for each beneficiary as well as the annual line-item payment amounts. This allowed us to assign each beneficiary to a provider comparison group. To compare Medicare expenditures for similar patients, we assigned each beneficiary to a diagnosis category based on the primary diagnoses listed in their outpatient therapy claims for the year. Our diagnosis groups included stroke, spinal cord injury, neurologic disorders, hip fractures, back disorders, amputation, cardiovascular disorders--circulatory, cardiovascular disorders--pulmonary, rehabilitation for unspecified conditions, arthritis, soft tissue/musculoskeletal injuries, ortho-surgical, multiple diagnoses and other. To consider differences in payment by provider type at the substate level, we compared annual per-patient payments for CORFs and other outpatient facility providers in each of Florida's 20 metropolitan statistical areas. Variation in treatment patterns and payments (for the same diagnosis category) across provider types may suggest that one type of provider treats a patient population with greater needs for service. To consider patient differences, we applied CMS's Principal Inpatient Diagnostic Cost Group (PIP-DCG) model. By comparing patients' use of hospital services and inpatient diagnoses (in the calendar year prior to the year they received therapy) and demographic information such as age, sex, disability, and Medicaid enrollment, the PIP-DCG model allowed a comparison of anticipated patient care needs across provider types. We used the PIP-DCG score developed for each beneficiary in combination with the 2002 therapy payment data to conduct an analysis of covariance. To review strategies used by the Florida claims administration contractor to ensure proper CORF payments, we interviewed representatives of CMS's central and regional offices and representatives from the contractor. The contractor provided us with the results of its 2001 investigation of Florida CORFs and its subsequent reports on CORF billing patterns. In addition, we interviewed federal law enforcement agencies involved in investigations of Florida CORF facilities. To assess the effectiveness of the contractor's oversight strategies, we reviewed information developed by the contractor on changes in CORF billing practices. We also analyzed 2002 claims data for CORF services to identify any CORFs with disproportionately high Medicare payments. This analysis included payment data for all claims--for both therapy and nontherapy services. In contrast to our comparison of per-patient payments by provider type, in this analysis we included all beneficiaries, regardless of their total annual therapy payments and duration of Medicare fee-for-service enrollment. We did not independently verify the reliability of CMS's Medicare claims data. However, we determined that CMS's Medicare claims data were sufficiently reliable for the purposes of this engagement. CMS operates a Quality Assurance System designed to ensure the accuracy of its Medicare NCH and CWF data files. Specifically, the agency has procedures in place to (1) ensure that files have been transmitted properly and completely, (2) check the functioning of contractor claims edits, and (3) sample claims from the files that exhibit unusual or inconsistent coding practices (indicating that data elements may be unreliable). In addition, we consulted with CMS's technical staff as necessary to ensure the accuracy and relevance of the data elements used in our analysis. We also screened the files and excluded claims that were denied, claims superseded by an adjustment claim, and claims for services in other years. In addition to the contact named above, Jennifer Grover, Rich Lipinski, and Hannah Fein 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."

Comprehensive Outpatient Rehabilitation Facilities (CORF) are highly concentrated in Florida. These facilities, which provide physical therapy, occupational therapy, speech-language pathology services, and other related services, have been promoted as lucrative business opportunities for investors. Aware of such promotions, the Chairman, Senate Committee on Finance, raised concerns about whether Medicare could be vulnerable to overbilling for CORF services. In this report, focusing our review on Florida, we (1) compared Medicare's outpatient therapy payments to CORFs in 2002 with its payments that year to other facility-based outpatient therapy providers and (2) assessed the program's effectiveness in ensuring that payments to CORFs complied with Medicare rules. In Florida, CORFs were by far the most expensive type of outpatient therapy provider in the Medicare program in 2002. Per-patient payments to CORFs for therapy services were 2 to 3 times higher than payments to other types of facility-based therapy providers. Higher therapy payments were largely due to the higher volume of services--more visits or more intensive therapy per visit--delivered to CORF patients. This pattern of relatively high CORF payments was evident in each of the eight metropolitan statistical areas (MSA) of the state where nearly all Florida CORFs operated and the vast majority of CORF patients were treated. A consistent pattern of high payments and service levels was also evident for patients in each of the diagnosis categories most commonly treated by CORFs. Differences in patient characteristics--age, sex, disability, and prior inpatient hospitalization--did not explain the higher payments that Florida CORFs received compared to other types of outpatient therapy providers. Steps taken by Medicare's claims administration contractor for Florida have not been sufficient to mitigate the risk of improper billing by CORFs. After examining state and national trends in payments to CORFs in 1999, the contractor increased its scrutiny of CORF claims to ensure that Medicare payments made to CORFs were appropriate. It found widespread billing irregularities in Florida CORF claims, including high rates of medically unnecessary therapy services. Since late 2001, the contractor has intensified its review of claims from new CORF providers and required medical documentation to support certain CORF services considered at high risk for billing errors. It has also required that supporting medical records documentation be submitted with all CORF claims for about 650 beneficiaries who had previously been identified as receiving medically unnecessary services. The contractor's analysis of 2002 claims data for this limited group of beneficiaries suggests that, as a result of these oversight efforts, Florida CORFs billed Medicare for substantially fewer therapy services than in previous years. However, our analysis of all CORF therapy claims for that year indicates that the contractor's program safeguards were not completely effective in controlling per-patient payments to CORFs statewide. With oversight focused on a small fraction of CORF patients, CORF facilities continued to provide high levels of services to beneficiaries whose claims were not targeted by the contractor's intensified reviews.

In May 1985, the Secretary of Agriculture established EEP to address, in part, continuing declines in U.S. agricultural exports and to pressure foreign nations to reduce trade barriers and eliminate trade-distorting practices. Subsequently, the Food Security Act of 1985 (P.L. 99-198, Dec. 23, 1985) specifically authorized EEP as an export subsidy program. The program was reauthorized by the Food, Agriculture, Conservation, and Trade Act of 1990, which extended EEP through 1995. From May 1985 to May 1994, FAS awarded bonuses valued at $7.1 billion (in constant 1993 dollars) to EEP exporters to sell mainly bulk commodities, such as wheat or rice. To qualify for EEP funding, proposed commodities and countries must be approved under an interagency process. FAS receives oral and written recommendations for countries and commodities to target under EEP; most of the recommendations come from trade associations and from within FAS. Recommendations are also submitted by importing countries, exporters, U.S. and foreign government officials, and other members of the U.S. agricultural community. EEP regulations outline four criteria to be used, among other things, by FAS in determining if commodities and countries proposed for EEP participation meet the program's objectives. How will the proposal contribute to furthering trade policy negotiations with foreign competitor nations that use unfair trade practices? How will the proposal contribute toward developing, expanding, or maintaining U.S. agricultural export markets? What will be the impact on countries that do not subsidize their agricultural exports? What is the cost of the proposal compared to the expected benefits? FAS recently changed the emphasis in its review of EEP proposals from furthering trade policy negotiations to market development. According to FAS, the implementing legislation for the GATT Uruguay Round agreement made furthering trade policy negotiations with competitor nations less significant. If FAS recommends approving the proposal, the proposal must then be approved by the Department of Agriculture's Under Secretary for Farm and International Trade Services and by the interagency Trade Policy Review Group. The Group includes representatives from agencies with an interest in foreign trade issues. Once a proposal is approved, FAS issues invitations for bids specifying the targeted country or countries, the commodity, the maximum quantity of the commodity eligible for a bonus, the eligible buyers, and the other terms and conditions of the sale. Exporters can then bid for an EEP bonus award. First, exporters must negotiate a sales price with an eligible buyer in the target country. After determining what bonus amount is needed to close the gap between the going price for the commodity in the targeted country (world price) and the U.S. price, the competing exporters then submit this information to FAS as bids. Next, FAS reviews the bids to determine if the price and bonus amounts are within FAS' acceptable ranges. FAS calculates the prevailing price for the commodity in the target market using various information sources. FAS rejects bids proposing prices that undercut the world price it calculated for the commodity as well as those proposing bonus amounts that exceed the difference between the world price and the U.S. market price. FAS then awards bonuses starting with the lowest bonus amount requested per unit of the commodity and proceeds to the next highest bonus amount until the quantity of the commodity eligible for EEP bonuses is exhausted. To assess whether providing EEP bonuses to foreign-owned exporters is consistent with program goals and objectives, we researched the legislative and regulatory history of the program to identify (1) the objectives of the program and (2) the intended role of exporters in the program. We also interviewed FAS headquarters officials to discuss those issues and whether changes to EEP contained in legislation recently passed by Congress would alter the role of exporters in the program. To assess whether restricting foreign-owned exporters from participation would adversely affect EEP, we obtained and analyzed fiscal year 1992 FAS data on EEP bids and awards for eight commodities. Fiscal year 1992 data were used because they were the most current and complete fiscal year data available at the start of our review. We also obtained and analyzed data from FAS on exporters participating in the program from May 1985 to May 1994. We did not verify the accuracy of data obtained from FAS. Because there is no standard definition of what constitutes a foreign- or domestic-owned firm, we used the location of company headquarters and parent company headquarters to categorize exporters as foreign- or domestic-owned. If the company was headquartered outside the United States or if it was the U.S. subsidiary of a company headquartered outside the United States, we classified the exporter as foreign-owned. We then used these data to determine (1) the extent to which foreign-owned exporters bid for and received EEP bonuses and (2) the quantity of EEP commodities exported by these foreign-owned companies on a commodity- and country-specific basis. We also reviewed economic literature regarding the relationship between the number of bidders and the extent of competition. To identify FAS' internal controls for detecting unauthorized diversions of EEP shipments, we reviewed EEP regulations and FAS written guidelines and procedures on controls over EEP shipments. We also interviewed officials from FAS headquarters in Washington, D.C., and the Agricultural Stabilization and Conservation Service in Kansas City, Missouri, about features of the control system. To assess the adequacy of the controls, we initially tested the controls by reviewing 25 judgmentally selected EEP shipments. The shipments reviewed were selected to cover the various commodities exported under EEP and to provide a mix of foreign- and domestic-owned exporters. On the basis of our preliminary results, we expanded our testing by randomly selecting 100 shipments from the 3,356 shipments that occurred under EEP during fiscal year 1992. During our testing, we compared data provided by exporters on EEP shipments with data maintained by Lloyd's Maritime Information Services, Inc., on the movement of marine vessels. We did our review from July 1993 to September 1994 in accordance with generally accepted government auditing standards. We received written comments on a draft of this report from the FAS Administrator. They are summarized on page 13 and presented in full in appendix II. FAS' award of EEP bonuses to foreign-owned corporations is consistent with program objectives set forth in the Food, Agriculture, Conservation, and Trade Act of 1990. These objectives are to "discourage unfair trade practices by making U.S. agricultural commodities competitive." The nationality of an exporter's ownership is not germane to the pursuit of these objectives, since both foreign- and domestic-owned EEP exporters act as intermediaries in the program's sales of U.S. agricultural commodities in overseas markets. Exporters help ensure that U.S. agricultural commodities compete on the world market by negotiating sales and prices with potential foreign buyers and by arranging for commodity deliveries to foreign buyers. The 1990 statute does not preclude foreign-owned exporters from receiving cash payments or commodities under the program as long as such payments serve the stated purpose of discouraging unfair foreign trade practices by making the prices of U.S. agricultural commodities competitive. In addition, the statute does not make a distinction regarding the treatment of domestic- and foreign-owned exporters under the program. Pending changes to EEP resulting from the implementation of the GATT Uruguay Round agreement are unlikely to alter the role of exporters in the program, according to FAS officials. In April 1994, U.S. officials joined delegates from more than 100 other countries in signing the GATT Uruguay Round agreement. The agreement, among other things, requires participating developed countries to reduce their subsidies for agricultural exports by 36 percent in budgetary outlays and reduce the quantities of subsidized exports by 21 percent. The agreement also prohibits member nations from introducing or reintroducing subsidies for agricultural products that were not subsidized during the 1986 to 1990 base year period. In December 1994, Congress enacted implementing legislation for the Uruguay Round agreement (P.L. 103-465, Dec. 8, 1994). The legislation extended EEP through 2001 and refocused EEP so that it would not be limited to countries where the United States faces unfair foreign trade practices. While the Uruguay Round agreement established annual ceilings on the use of subsidies, it did not prohibit the use of agricultural export subsidies. Therefore, the Clinton administration recommended, and Congress agreed, that it was necessary to maintain EEP and other U.S. agricultural subsidy programs as a means of inducing other nations to negotiate further reductions on the use of agricultural export subsidies. According to FAS officials, the implementing legislation allows EEP to be used to export U.S. agricultural commodities to a greater number of countries. FAS officials we spoke with did not yet know how the change in EEP's objectives would affect the program's operation. However, they did not anticipate changes being made to the role of exporters in the program. Eliminating foreign-owned exporters from EEP participation could impair competition for EEP bonuses, which could ultimately lead to higher subsidies being paid for each unit of commodity exported under the program. In addition, our analysis of EEP award data suggested that restricting foreign-owned exporters from EEP participation could significantly lower the amount of barley malt, barley, and wheat exported under EEP unless the extent of foreign-owned exporter participation could be replaced by domestic-owned exporters. However, we could not determine whether domestic-owned exporters could easily replace foreign-owned exporters in the program. Currently, foreign-owned exporters receive a substantial portion of EEP bonuses--over 39 percent--as shown in table 1. It is important to note that of the 38 exporters we classified as foreign owned, 36 are the U.S. subsidiaries of parent companies located outside of the United States. Many of these U.S. subsidiaries have a substantial presence in the United States. For example, the Pillsbury Company, which is the subsidiary of a British firm, is headquartered in Minnesota and employs 8,000 workers throughout the United States. (See app. I for a complete listing of EEP exporters participating in the program from May 1985 to May 1994 and their ownership classification.) Eliminating foreign-owned exporters from the program would reduce the number of bidders for EEP bonuses. The economic studies we reviewed suggested that eliminating potential bidders from participating in EEP would reduce competition for EEP bonuses. Reduced competition among a smaller pool of bidders for EEP bonuses could lead to payment of larger EEP bonuses per unit of commodity subsidized under the program. FAS officials hold a similar view. They explained that strong competition for bonuses should result in smaller bonus awards as exporters vie for a fixed amount of EEP bonuses. These smaller awards per unit of export should allow FAS to subsidize a greater quantity of EEP commodities since lower bonus payments per unit of export enable FAS to subsidize more exports with available EEP funds. Our analysis of bidding activity by exporters during fiscal year 1992 for eight commodities showed that foreign-owned exporters submitted over one-third of the bids for bonus awards. Foreign-owned exporters were particularly active bidders for wheat and barley malt bonuses, submitting 44 and 72 percent, respectively, of the bids for those commodities during fiscal year 1992. Foreign-owned exporters received a significant share of the winning bids, with foreign-owned exporters being more important for some commodities than others. As shown in figure 1, foreign-owned exporters accounted for about 79 percent of the quantity of barley malt sold under EEP during fiscal year 1992. As with barley malt and barley, a major portion (50 percent) of the quantity of wheat sold under EEP during fiscal year 1992 was exported by foreign-owned exporters. This is significant because wheat exports have overshadowed all other commodities in the EEP program. During fiscal year 1992, bonuses for wheat shipments accounted for about 84 percent of all EEP funds. Given the number of variables that affect whether an exporter participates in and receives bonuses under EEP, we could not determine if domestic-owned exporters could easily replace foreign-owned exporters in the program. For example, FAS does not know whether the domestic-owned exporters currently participating in the program would bid for the volume of EEP commodities currently exported by foreign-owned exporters. Domestic-owned exporters would still need to meet FAS' price and bonus thresholds for EEP bonuses. FAS also does not know to what extent domestic-owned exporters not currently participating in EEP would enter into the program and compete successfully for EEP bonuses. Currently, exporters must provide FAS with documentation showing their experience in selling at least a minimal amount of the targeted commodity during the previous 3 calendar years to qualify for EEP participation. FAS issued a proposed rule on January 18, 1995, that would eliminate this requirement. According to FAS officials, some exporters have complained that the experience requirement prevented them from otherwise qualifying for program participation. FAS officials told us that eliminating the experience requirement should increase the number of exporters eligible to participate in the program. However, they stated that the number of additional exporters that would actually receive bonuses under the program and the extent of their participation are not known. FAS has only a limited ability to detect unauthorized diversions of EEP shipments. Unauthorized diversions occur when commodities do not arrive at the destination country and, instead, are sent to another country. Unauthorized diversions of EEP shipments are both illegal and counter to the current targeting aspects of the program. Internal FAS controls to detect unauthorized diversions primarily consisted of examining exporter-provided documentation to determine if EEP commodities arrived at the destination country. However, information the exporters provided was not reliable or accurate in some cases. While FAS is attempting to improve its monitoring of EEP shipments, key limitations hinder its ability to verify that shipments were not diverted. The possibility of unauthorized diversions of EEP shipments has long concerned Congress. The Food, Agriculture, Conservation, and Trade Act of 1990, which prohibits such diversions, requires exporters to maintain proof that EEP commodities arrived at the intended destination. The act also requires FAS to ensure that the agricultural commodities arrived at the intended destination country as provided for in the EEP agreement. FAS relied primarily on information supplied by exporters to monitor for possible unauthorized diversions. FAS required EEP exporters to provide bills of lading to document the export of EEP commodities. FAS also required exporters to provide documentation showing the receipt of EEP commodities in the intended destination countries. FAS officials told us that their staff then compared the certificates of entry to the bills of lading to monitor for possible diversions of EEP shipments and to ensure that EEP bonuses were paid only for commodities that actually had arrived at the intended destination. Our review of individual EEP shipments showed that exporters did not always provide reliable and accurate information regarding the arrival of EEP commodities in destination countries. To assess the reliability of documents submitted by exporters, we first reviewed the documentation provided by exporters in support of 25 EEP shipments made in fiscal year 1992. During our review of the 25 shipments, we found discrepancies that led us to question the accuracy and validity of the documentation provided by the exporters. For example, we compared the information on the bills of lading to the certificates of entry and found that one exporter had provided certificates of entry showing the arrival of the ship in the destination country before the cargo loading date shown on the bills of lading. We then expanded our analysis to include a review of 100 randomly selected fiscal year 1992 shipments. Although we did not find any discrepancies between the bills of lading and the certificates of entry upon our review of the 100 shipments, we did find 6 shipments for which the exporters had submitted questionable or inaccurate information. We used an on-line data service, known as SeaData, subscribed to by FAS, to verify the accuracy of the certificates of entry. FAS had been testing and using the SeaData system, which is maintained by Lloyd's Maritime Information Services, Inc., since January 1992 to obtain information on the movement of commercial trading vessels worldwide. We found six cases in which SeaData had reported that the vessels shown on the certificates of entry had been in different areas of the world and had not visited the ports or countries shown on the certificates of entry. At our request, FAS contacted the exporters for the six shipments and verified that five of the shipments had been taken off the vessel shown on the bill of lading and loaded onto another vessel for delivery to the target country. It also verified that the certificates of entry did not list the vessel from which the EEP commodity had actually been unloaded in the destination country. Instead, the certificates of entry showed the name of the vessel that the EEP commodity had been transferred from. The remaining case was not resolved because the exporter was unable to supply additional documentation to support the arrival of the EEP commodity in the destination country. FAS subsequently notified exporters of the need to provide further documentation whenever EEP commodities are transferred from one vessel onto another for delivery to the target country. Given that five of the six discrepancies identified in our random sample were resolved, we would not expect many of the 3,356 shipments to have unresolvable discrepancies. Any unauthorized diversion of EEP shipments undermines the targeting aspect of the program. According to FAS, EEP's targeting aspect was intended to (1) demonstrate a direct response to subsidized competition; (2) minimize the impact on foreign competitor nations that do not subsidize their agricultural exports; and (3) provide a more focused and, therefore, effective use of EEP funds. By targeting markets where foreign nations are providing subsidized exports, EEP is intended to pressure subsidizing foreign nations to eliminate the use of subsidies and other trade-distorting practices. Although the United States has made progress in obtaining foreign competitor nations' commitment to reduce the use of agricultural export subsidies, FAS officials told us that EEP is still necessary to induce foreign competitor nations to negotiate further reductions. As a result, any unauthorized diversions of EEP shipments reduce the program's effectiveness as a trade policy tool. FAS plans to use SeaData to strengthen its ability to ensure that unauthorized diversions of EEP shipments do not occur. FAS officials told us that they will randomly select EEP shipments and use SeaData to verify the accuracy of the data provided by the exporters. However, SeaData has some significant limitations. The SeaData system provides information on ship movement but not on whether commodities were unloaded from the ship in the ports it visited. In addition, the SeaData system does not provide data on ship movement in certain parts of the world. For example, the SeaData system cannot be used to verify whether ships bound for some ports in the former Soviet Union arrived as shown on the exporter's certificate of entry. FAS officials told us they were exploring other methods of verifying the arrival of EEP commodities in the destination countries. They said that random on-site inspections of EEP shipment arrivals were not feasible because of resource constraints and because some foreign countries would not allow U.S. government officials physical access to their ports. However, they said they were considering more cost-effective alternatives to on-site inspections. For example, FAS staff may be able to perform on-site reviews of documents maintained by some large EEP buyers in foreign countries. The Foreign Agricultural Service provided written comments on a draft of this report. It said that FAS had recently shifted the emphasis of its review of EEP proposals from the impact on furthering trade policy negotiations to market development. FAS said that the shift in emphasis was in accordance with the implementing legislation for the GATT Uruguay Round agreement. FAS pointed out that the draft report did not acknowledge that it had been testing and using the SeaData system for over a year before making it available to GAO. FAS provided some additional information on its efforts to obtain reliable third-party sources of information that could be used to verify the quantity of commodity discharged at the destination port. Lastly, FAS said that one of the EEP exporters shown in the draft report as being foreign-owned was currently owned by a U.S. company. Where appropriate, FAS' comments have been incorporated into the text of the report. The complete text of FAS' comments, along with our specific responses, is included in appendix II. We are sending copies of this report to the Secretary of Agriculture and other interested parties. Copies will be made available to others on request. The major contributors to this report are listed in appendix III. Please contact me at (202) 512-4812 if you have any questions concerning this report. N.P. N.P. AG Processing, Inc. AG Processing, Inc. N.P. N.P. ConAgra, Inc. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. Ferruzzi Finanziaria, S.p.A. N.P. N.P. N.P. N.P. Boro Hall International, Ltd. N.P. N.P. Brown Swiss Cattle Breeders Association of the U.S.A. CAM S.A. ConAgra, Inc. N.P. N.P. N.P. N.P. Cargill, Inc. N.P. N.P. N.P. N.P. N.P. N.P. Erly Industries, Inc. N.P. N.P. ConAgra, Inc. (continued) ConAgra, Inc. ConAgra, Inc. ConAgra, Inc. Connell Company, Inc. N.P. N.P. Dreamstreet Holsteins, Inc. N.P. N.P. N.P. N.P. Dolphin Reefer Lines Co., Ltd. Foster's Brewing Group Limited N.P. N.P. Euro-Maghrib, Inc. N.P. N.P. N.P. N.P. N.P. N.P. Norfoods, Inc. N.P. N.P. N.P. N.P. N.P. N.P. Great West Holdings, Inc. Canada Malting Company, Ltd. N.P. N.P. (continued) N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. C. Itoh & Company Limited N.P. N.P. N.P. N.P. Italgraini S.p.A. Goldman Sachs Group Limited Partnership Cargill, Inc. L & M Food Group Limited N.P. N.P. Louis Dreyfus et Cie, S.A. N.P. N.P. North Star Universal, Inc. Marshall Durbin Food Corp. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. (continued) Oleo Trading, S.A. N.P. N.P. ConAgra, Inc. Salomon, Inc. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. Rosscape, Inc. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. Toshoku, Ltd. Farmlands Industries, Inc. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. Mars, Inc. Mitsui and Company, Ltd. N.P. N.P. N.P. N.P. (continued) N.P. N.P. Place Vendome Nominees, Ltd. Place Vendome Nominees, Ltd. N.P. N.P. N.P. = No parent company indicated in the source data. The following are GAO's comments on FAS' letter dated March 20, 1995. 1.The report was amended to show that FAS now emphasizes market development in its review of EEP proposals. 2.We changed the report to recognize FAS' earlier use of the SeaData system. 3.We acknowledged in our draft report that FAS routinely examined the bills of lading and other documents it receives to monitor for possible diversions. However, we believe that additional information is needed to show what was actually received at the export destination. We encourage FAS to continue its efforts to identify additional sources of information that will allow it to monitor for possible diversions of EEP shipments. 4.Appendix I and the corresponding statistics used in this report were modified to reflect the change in the ultimate parent company for Tradigrain. Kane A. Wong, Assistant Director Harry Medina, Evaluator-in-Charge Gerhard C. Brostrom, Reports Analyst The first copy of each GAO report and testimony is free. 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Pursuant to a congressional request, GAO reviewed the participation of foreign-owned companies in the Foreign Agricultural Service's (FAS) Export Enhancement Program (EEP). GAO found that: (1) foreign exporters' participation in EEP is consistent with the program's basic objectives of discouraging other countries' unfair trade practices and increasing the competitiveness of U.S. agricultural commodities; (2) exporters help achieve these objectives by facilitating U.S. agricultural product sales in targeted countries; (3) restricting foreign exporters' EEP participation could reduce the effectiveness of the program; (4) eliminating foreign-owned exporters would reduce the number of bidders for EEP bonuses, which would reduce competition and result in higher program costs; (5) it is unclear whether domestic-owned exporters could easily replace foreign-owned exporters; and (6) FAS ability to detect unauthorized diversions of EEP shipments, consisting mainly of checking exporters' documents which may be unreliable or inaccurate, will be affected by limitations in the database.

In 1980, the Comprehensive Environmental Response, Compensation, and Liability Act created the Superfund program to clean up highly contaminated hazardous waste sites. Under the act, EPA is authorized to compel the parties responsible for the contamination to perform the cleanup. EPA may also pay for the cleanup and attempt to recover the cleanup costs from the responsible parties. When EPA pays for the cleanup, the work is conducted by a private contractor who is directly hired by EPA, another federal entity, or a state. Superfund contractors study and design cleanups, as well as manage and implement cleanup actions at sites on the National Priorities List (EPA's list of the nation's worst hazardous waste sites) or at sites where there are immediate threats from hazardous wastes. In our 1998 report on contractor cleanup spending, we reported that for remedial action cleanups managed by EPA, about 71 percent of the costs charged by cleanup contractors was for the subcontractors who physically performed the cleanups--such as earthmoving and constructing treatment facilities. The remaining 29 percent went to the prime contractors for professional work, such as construction management and engineering services, and associated travel, overhead, and administrative costs and fees. For the purpose of this report, contractor cleanup work includes all Superfund spending for the study, design, and implementation of cleanups. The remaining Superfund spending is classified as cleanup support, which includes both site-specific and non-site-specific support. Site-specific support consists of Superfund activities linked to a specific hazardous waste site, such as supervising cleanup contractors and conducting site analyses. Non-site-specific support consists of activities related to the overall Superfund program, rather than a specific site, and includes activities such as financial management and policy development. The share of total Superfund expenditures for contractor cleanup work declined from about 48 percent in fiscal year 1996 to about 42 percent in fiscal year 1998. Over the same period, spending for site-specific support increased from about 16 percent of total Superfund expenditures to about 18 percent. Finally, the non-site-specific expenditures also increased from about 36 percent to over 39 percent. (See fig. 1.) As the figure shows, the share of Superfund expenditures used for contractor cleanup work decreased between fiscal year 1996 and fiscal year 1997, and again in fiscal year 1998. EPA officials could not explain these changes in detail because they had not analyzed Superfund costs in this manner and were unaware of this decline until we presented the results of our analysis. Similarly, EPA officials were unaware of, and therefore did not have an explanation for, the changes in the other cost categories shown in figure 1 above. The actual expenditures for contractor cleanup work, site-specific support, and non-site-specific support for fiscal years 1996 through 1998 are shown in table 1. Over the 3-year period of our analysis, the mix of spending for contractor cleanup work, site-specific support, and non-site-specific support varied substantially among EPA's regions and headquarters units. (See fig. 2.) As shown in figure 2, the mix among contractor cleanup work, site-specific support, and non-site-specific support is substantially different between headquarters and the regions. This difference can be expected because headquarters functions are more related to administration and management, while the regions have primary responsibility for overseeing the implementation of cleanups. However, our analysis also identified substantial variation among the regions in the mix of their expenditures. Specifically, expenditures for contractor cleanup work ranged from a low of 42 percent in EPA's Kansas City region to a high of 72 percent in EPA's Boston and New York regions. Site-specific support spending ranged from a low of 12 percent in EPA's New York region to a high of 29 percent in EPA's Kansas City region. Non-site-specific support ranged from a low of 14 percent to a high of 30 percent among EPA's regions. These differences in the relative shares of expenditures among these categories--more than double in some instances--raise questions about the factors underlying them. We discussed these variations with EPA headquarters officials. However, because EPA does not analyze Superfund expenditures in this manner, they did not have an explanation for the specific factors underlying these regional differences and whether they warrant action. We also examined EPA's Superfund personnel costs because they account for a significant share of all Superfund support costs. In total, over the last 3 years, about 21 percent of EPA's Superfund personnel expenses have been for site-specific functions and 79 percent for non-site-specific functions. As shown in figure 3, this breakdown varies substantially between regional personnel spending and headquarters personnel spending. Over the 3-year period of our analysis, Superfund personnel spending totaled about $722 million. Of this, about $547 million was for regional personnel spending, and the remaining $175 million was for headquarters personnel spending. Over this period, the breakdown between site-specific and non-site-specific personnel spending within the individual units (headquarters and each of the regions) remained relatively constant from year to year. However, we found that there was variation among the regions. For example, site-specific personnel spending for the 3-year period ranged from a low of 22 percent in one region to a high of about 33 percent in another region--a 50-percent difference between the lowest and highest regions. Because EPA headquarters does not analyze Superfund personnel costs in terms of the amount of site-specific and non-site-specific spending, the meaning of these differences is unclear. In 1996, EPA implemented improvements to its Superfund accounting system to better track Superfund expenditures. EPA expected that these improvements would help it compile more detailed cost information to support the agency's efforts to recover costs from responsible parties and to improve internal tracking of Superfund financial data for management purposes. These improvements introduced over 100 categories to account for the activities that are paid for with Superfund money. Some of the categories capture activities that are site-specific, such as monitoring and supervising cleanups conducted by private parties, while other categories capture activities that are more administrative, such as maintaining automated data processing systems. We found that Superfund spending is not evenly distributed among all the activity categories. Three of the more than 100 categories accounted for over 60 percent of all Superfund support costs (both site-specific and non-site-specific). These three categories are defined by EPA as follows: General support and management--includes all activities associated with managing and evaluating costs for site characterization. Also includes the general support activities required to operate and maintain the Superfund program. Activities include, but are not limited to, the following contractual services: establishing, maintaining, and revising automated data processing systems, and conducting special studies to help determine programmatic direction in future years. General enforcement support--includes all activities associated with managing and evaluating the enforcement program. Activities include, but are not limited to, the following contractual services: establishing, maintaining, and revising automated data processing systems, and conducting special studies to help determine programmatic direction in future years. Remedial support and management--includes all activities associated with managing and evaluating the remedial program. Figure 4 shows EPA's spending for non-site-specific and site-specific support. EPA's non-site-specific spending was more concentrated in these three administrative categories than its site-specific spending. Specifically, about 78 percent of EPA's non-site-specific spending was in the three administrative categories, compared to only 25 percent of the site-specific spending. Given the concentration of non-site-specific spending under these three categories, we conducted a detailed analysis of 1 year's (fiscal 1997) non-site-specific spending under these three administrative categories for three EPA regions and the three headquarters offices that had the highest amount of Superfund spending--the Office of Administration and Resources Management, the Office of Enforcement and Compliance Assurance, and the Office of Solid Waste and Emergency Response. For the three regions, most of the non-site-specific spending was on personnel items--such as management, administrative, and secretarial support--and general support activities, such as financial management, facility management, public affairs, and contract management. We found that some of this spending represented cost allocations to the Superfund program, while other spending was more directly related to specific program activities. For example, in all three regions we found that some of the non-site-specific costs had been allocated to the Superfund program for its share of expenses, such as the regional administrator's management, clerical, and administrative costs, regional motor pool expenses, and computer equipment and service costs. We also identified a few instances in which non-site-specific expenditures were more directly related to implementing cleanups, such as expenditures on annual physical examinations for staff who conduct field work at hazardous waste sites. Among the headquarters units, the Office of Administration and Resources Management had non-site-specific Superfund expenditures for items such as rent, information management, and facilities operations and maintenance. The Office of Enforcement and Compliance Assurance had non-site-specific expenditures for items such as overall program direction; policy development; and budgetary, financial and administrative support. This Office also incurred expenses for criminal investigations and for activities such as field sampling and laboratory and forensic analyses in support of criminal cases. These expenses were recorded as non-site-specific to protect the confidentiality of ongoing criminal investigations. The Office of Solid Waste and Emergency Response had non-site-specific expenditures for personnel functions, such as developing national strategy programs, technical policies, regulations and guidelines, and for providing program leadership for such activities as community involvement, program planning and analysis, contract management, information management, and human and organizational services. This Office also incurred non-site-specific expenditures for contracted functions such as worker training, analytic support for EPA's contract laboratory program, and information management support. We also analyzed EPA's spending for site-specific support activities for fiscal years 1996 through 1998. We found that about $184 million of the site-specific spending was in the three administrative categories. About $542 million was in the other more than 100 categories, for activities such as developing information for enforcement cases, overseeing cleanups at federal facilities, conducting site analyses and studies, overseeing private party cleanups, conducting laboratory analysis, and supervising cleanup contractors. EPA regularly monitors and performs analyses of Superfund spending. These analyses, however, do not examine the breakdown of Superfund expenditures in terms of contractor cleanup work, site-specific support, and non-site-specific support. The Director of the Superfund office responsible for resources and information management provided a summary of the activities EPA undertakes to manage Superfund spending, including: monitoring whether regions and units obligate funds at the expected rate and in accordance with the agency's operating plan; conducting midyear reviews that focus on program accomplishments, contracts and grants, and resources management; reviewing contract management issues in all regions on a 3-year cycle; and monitoring inactive contracts to identify and deobligate funds that are no longer needed. EPA's 1996 memorandum announcing improvements to its Superfund accounting system stated that one of the main benefits of the improvements would be to enable managers to more precisely account for site-specific and non-site-specific costs. The memo also stated that Superfund financial and programmatic managers would be able to track financial trends more accurately due to the increased level of financial detail now available in the accounting system. However, when we discussed our analyses with EPA officials, they told us that they do not perform the types of analyses we conducted. During the course of our work, we noted that another federal agency that deals with the cleanup of hazardous wastes--the Department of Energy--has been analyzing its costs using a functional cost reporting system since 1994. This system breaks costs down into functional categories--mission-direct and several categories of support costs, including site-specific support and general support. While not identical to the categories we used in our analyses, Energy's functional cost categories are similar. In essence, Energy's system compares the share of costs in the different categories among the agency's operating units. If a unit's costs in any given category vary significantly from the other operating units', those costs are further analyzed to determine whether the differences are appropriate or whether they indicate areas for improvement. Department of Energy financial officials stated that the functional cost reporting system has resulted in support costs receiving increased attention by management and has been a helpful tool that has contributed to support costs declining faster than other costs--from 45 to 43 percent of total costs between fiscal years 1994 and 1997. Detailed analyses of expenditure trends over time and among regions and headquarters units can be a valuable tool in identifying potential cost savings. While EPA's Superfund accounting system contains the data necessary to perform such analyses, EPA has not done so, even though tracking site-specific and non-site-specific costs more accurately was one of the major benefits anticipated when the 1996 system improvements were made. Given the variation in spending shares for contractor cleanup work, site-specific support, and non-site-specific support among EPA's regional and headquarters units, we believe that conducting such analyses would be a valuable tool in helping the agency to ensure that its Superfund resources are being used as wisely as possible. In order to better identify opportunities for potential cost savings, we recommend that the Administrator, EPA, require the Assistant Administrator for Solid Waste and Emergency Response to expand the monitoring of Superfund expenditures to regularly analyze the breakdown of expenditures in terms of contractor cleanup work, site-specific spending, and non-site-specific spending. These analyses should compare such spending shares among EPA's regional and headquarters units, and significant differences should be further analyzed to identify the underlying causes and to determine whether cost-saving corrective actions are warranted. We provided EPA with copies of a draft of this report for its review and comment. In a letter from EPA's Acting Assistant Administrator for Solid Waste and Emergency Response, EPA disagreed with our characterization that EPA's activities fall into three groups--contractor cleanup costs, site-specific support, and non-site-specific support--and stated that this division gives the erroneous impression that site-specific and non-site-specific support do not contribute substantially to the achievement of cleanups. We do not believe that our categorization of Superfund costs leads to this impression. In fact, the first paragraph of the report explicitly states that EPA undertakes a number of activities, both site-specific and non-site-specific, that support cleanups, including supervising cleanup contractors, compelling private parties to perform cleanups, and performing management and administrative activities. Furthermore, the body of the report provides numerous examples of the purposes served by both site-specific and non-site-specific spending. We believe that these examples demonstrate that many of the site-specific and non-site-specific support activities contribute to the achievement of cleanups. The purpose of our analyses was to disaggregate Superfund expenditures to provide more detailed information on the specific functions served by this spending. This analytic method can be used (and is being used by the Department of Energy) to identify cost category differences among operating units that can lead to potential cost savings. Our report does not attempt to define or determine which expenditures are "cleanup activities," but rather to describe the purposes for which Superfund money has been expended. According to EPA, cleanup response spending includes "lab analysis, engineering and technical analyses, project manager salaries, State/Tribal activities, community involvement activities, and oversight of responsible parties and many other activities necessary to achieve cleanups." We agree that these activities support the cleanup of sites, as stated in this report. However, when these support costs are aggregated into the larger category of cleanup response, it is unclear what share of these costs are for work related to specific sites, as opposed to general program expenditures. EPA also stated that our analyses failed to recognize Superfund appropriations used by other federal agencies. In fact, our analyses included Superfund expenditures by other federal agencies, and these expenditures were included under our site-specific and non-site-specific spending categories, as appropriate. The only substantial expenditures excluded from our review were made by the Agency for Toxic Substances and Disease Registry, because these expenditures are made directly by that agency and are not reported in EPA's Superfund accounting system. EPA further stated that our analyses did not account for the expenditures private parties make to clean up Superfund sites that are the result of EPA's enforcement expenditures. We did not analyze private parties' expenditures to clean up hazardous waste sites because our focus was on federal Superfund expenditures. However, as part of our work for this assignment, we found that more than half of EPA's fiscal year 1997 enforcement expenditures was for management and administrative activities. Notwithstanding EPA's concerns as discussed above, the agency agreed to consider analyzing Superfund spending in terms of site-specific and non-site-specific obligations and expenditures, as we recommended. The full text of EPA's comments is included as appendix II. We conducted our review from September 1998 through April 1999 in accordance with generally accepted government auditing standards. See appendix I for our scope and methodology. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to other congressional committees with jurisdiction over the Superfund program, and to the Honorable Carol M. Browner, Administrator, Environmental Protection Agency. We will also make copies available to others upon request. If you have any further questions about this report, please call me at (202) 512-6111. Major contributors to this report are listed in appendix III. To determine the share of annual Superfund spending for contractor cleanup work, site-specific support, and non-site-specific support for fiscal years 1996 through 1998, we obtained information from the Environmental Protection Agency's (EPA's) Integrated Financial Management System (IFMS). Using the IFMS information, we classified the cleanup support activities into spending for site-specific support and non-site-specific support for these fiscal years. We confirmed this classification with Office of Comptroller officials. In order to give a complete representation of cleanup support activities, we made one adjustment to the analyses included in our prior reports. Specifically, we included the costs for EPA personnel who supervise the cleanup contractors into the category for site-specific support. In our two prior reports, we had included these personnel in the contractor cleanup work category as EPA's accounting system does. This change has the effect of reducing the percentage of contractor cleanup work by about 1 percent from the level we had previously reported. To determine what activities were carried out with EPA's cleanup support spending, particularly its non-site-specific spending, we used the IFMS information. We categorized the spending by EPA's budget action codes, which provided general activity descriptions for Superfund spending under the more than 100 action codes. To obtain more specific information for EPA's non-site-specific spending, we selected three regional offices--Philadelphia, Chicago, and Kansas City--for sampling. Among EPA's regions, the first two had the highest non-site-specific spending and the third had the lowest, based on fiscal year 1997 data, which was the most recent information for which we had a breakdown of total support spending at the time we made our selection. We also selected the three EPA headquarters units--the Office of Solid Waste and Emergency Response, the Office of Administration and Resources Management, and the Office of Enforcement and Compliance Assurance--with the highest levels of Superfund spending. We interviewed cognizant officials from the three regional offices and three headquarters units about the particular activities conducted under the various budget action codes for the non-site-specific spending, and obtained greater detail on the uses of this spending. In a 1995 report on the IFMS, we found instances of inaccurate and incomplete data in the system. While we did not consider these instances to be representative of the overall integrity of the IFMS data, we recommended that EPA conduct statistical testing of the data, which EPA has done. During the course of our current review, officials of EPA's Office of Inspector General told us that in their opinion the IFMS has not led to any material misstatements in EPA's 1996 and 1997 annual financial statements and that they believed that the IFMS information was reliable for the purposes of our review. Finally, in discussing spending activities with officials from EPA's regional offices and headquarters units, we did not identify any material variations between the IFMS information and the underlying detailed records. To ascertain how EPA monitors and analyzes its regions' and headquarters units' spending of Superfund resources, particularly for contractor cleanup work, site-specific support, and non-site-specific support, we met with EPA headquarters officials. These officials included representatives from EPA's Office of Solid Waste and Emergency Response--which is responsible for the Superfund program--and the Office of the Chief Financial Officer. We also obtained copies of pertinent documents describing EPA's monitoring and analysis procedures and related reports. In addition, we met with Department of Energy officials and obtained documentation on their Functional Cost Reporting System. Richard P. Johnson, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. 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Pursuant to a congressional request, GAO provided information on the Environmental Protection Agency's (EPA) Superfund Program expenditures, focusing on: (1) the relative shares of Superfund expenditures for contractor cleanup work, site-specific support, and non-site-specific support; (2) the activities carried out with the EPA's cleanup support spending, particularly its non-site-specific spending; and (3) EPA's efforts to monitor and analyze how its regions and headquarters units spend Superfund resources, particularly the distribution of expenditures among contractor cleanup work, site-specific support, and non-site-specific support. GAO noted that: (1) over the last 3 years, the share of total Superfund expenditures for contractor cleanup work was about 45 percent in fiscal year 1998; (2) over this period, expenditures for non-site-specific support were about 38 percent, whereas those for site-specific support were about 17 percent; (3) however, GAO found substantial variation among EPA's regions in the shares of their expenditures devoted to each of these cost categories; (4) for example, spending for non-site-specific support ranged from a low of 14 percent in EPA's Boston region to 30 percent in EPA's San Francisco region; (5) EPA spends its support funds predominately on administrative activities; (6) although EPA classifies its Superfund expenditures into over 100 separate activity categories, GAO found that over 60 percent of all Superfund support expenditures (both site-specific and non-site-specific) were accounted for by three activities--general support and management, general enforcement support, and remedial support and management; (7) moreover, almost 80 percent of EPA's non-site-specific spending was concentrated on these three administrative activities; (8) for the three regions that GAO reviewed in detail, these non-site-specific expenditures were primarily personnel expenses for activities such as management, administrative and secretarial support, financial management, public affairs, and contract management; (9) for the three headquarters units that GAO reviewed in detail, this spending was on items such as rent, information management, facilities operations and maintenance, program and policy development, and budgetary, financial, and administrative support; (10) EPA monitors the Superfund spending of its regions and headquarters units in several ways, including tracking whether funds are obligated at the expected rate and in compliance with the approved operating plan, and monitoring program accomplishments; (11) however, EPA does not monitor or analyze the expenditures of its regions and units in terms of the relative shares of contractor cleanup costs, site-specific support costs, and non-site-specific support costs; and (12) conducting such analyses would provide EPA with an additional tool to identify potential cost savings in Superfund spending.

The Navy can maintain a 12-carrier force for less cost than that projected in the Bottom-Up Review (BUR) and the Navy's Recapitalization Plan by using one of several options that consider cost and employment levels. The least expensive investment option that also maintains employment levels at or above minimum levels authorizes building the CVN-76 in fiscal year 1995 and then transitions to a conventional carrier construction program. This option costs approximately 25 percent less than the BUR and the Navy's Recapitalization Plan options. Building CVN-76 in fiscal year 1995, as proposed by the BUR, the Navy's Recapitalization Plan, and other options in our report (see table 1.1), stops the downward trend in Newport News Shipbuilding employment at about the minimum sustaining level of 10,000 employees. Options to delay building the carrier result in a continuing decline to about 7,500 employees. However, in the long term the employment levels in the BUR and the Navy's Recapitalization Plan also fall below 10,000 employees. In addition, options that include building CVN-76 in fiscal year 1995 require building carriers sooner than they are needed for force structure purposes and therefore incur expenses sooner than necessary. Moreover, the option to build nuclear carriers at the historical rate of one every 3 years maintains stable employment levels but costs about 40 percent more than options in the BUR and the Navy's Recapitalization Plan. Options for using carriers for their full service lives (options 1A and 1B) are less expensive than those in the BUR and the Navy's Recapitalization Plan, especially if the force transitions to a conventional carrier construction program. However, in the near term, the employment levels fall below the Navy's estimated critical minimum sustaining level of 10,000 employees. Since affordability of the future force is an important concern, a transition to constructing conventionally powered carriers would save the largest amount of investment resources (see table 1.1). A conventional carrier force structure would require less budget authority funding and fewer outlays than any force structure that continues to require building nuclear aircraft carriers. Costs are lower because all major cost elements--procurement, midlife modernization, and inactivation costs--are lower for a conventional carrier than for a nuclear carrier. Throughout the 1960s and most of the 1970s, the Navy pursued a goal of creating a fleet of nuclear carrier task forces. The centerpiece of these task forces, the nuclear-powered aircraft carrier, would be escorted by nuclear-powered surface combatants and nuclear-powered submarines. In deciding to build nuclear-powered surface combatants, the Navy believed that the greatest benefit would be achieved when all the combatant ships in the task force were nuclear powered. Nonetheless, the Navy procured the last nuclear-powered surface combatant in 1975 because this vessel was so expensive. More recently, relatively new and highly capable nuclear-powered surface combatants have been decommissioned because of the affordability problems facing the Navy. Affordability is an important, but not the only, criterion when comparing nuclear and conventional carriers. Important factors also include operational effectiveness, potential utilization, and other intangibles. Flexibility of operations, such as the ability to steam at high speeds for unlimited distances without refueling; increased capacity for aviation fuel; increased capacity for other consumables, such as munitions; and the higher speeds of the advanced nuclear carrier over conventional carriers are some of the factors that need to be considered when evaluating nuclear- and conventionally powered carriers. Other considerations include the availability and location of homeports and nuclear-capable shipyards for maintenance and repairs and other supporting infrastructure, such as for training; the effect of out-of-homeport maintenance on the amount of time personnel are away from their homeport; and the disposal of nuclear materials and radioactively contaminated materials. These issues and others will be addressed in our upcoming review on the cost-effectiveness of conventional versus nuclear carriers and submarines as mandated by the congressional conferees on the Defense Appropriations Act for 1994. Department of Defense (DOD) officials partially concurred with the results of our report. DOD agreed that affordability is an important, but not the only, criterion when comparing nuclear and conventional carriers. DOD stated that other factors, including operational effectiveness and potential utilization, need to be considered when comparing nuclear and conventional carriers. We agree, and these issues will be examined as part of our upcoming review of the cost-effectiveness of conventional versus nuclear carriers and submarines. DOD noted that we did not examine the impact of alternative investment strategies on the Newport News Shipbuilding nuclear carrier industrial base, nuclear construction skills and vendors, or the need to preserve the base. We noted those limitations to the report's scope in our draft. Our report does reflect the employment levels resulting from the investment options, and the Navy's comments on the likely effects of those employment curves are in our report. DOD also noted that our report compares only the investment-related cost of a nuclear-powered carrier with that of a conventionally powered carrier and not the operating and support component of total life-cycle costs, including the fuel cost. DOD stated that the potential requirement to build additional logistics support ships must be considered in the decision to build and operate a conventionally powered carrier force. As we noted in the draft report, our analysis focused on the investment-related costs of alternative procurement profile strategies. Although outside the scope of this review, we have estimated the operating and support costs of a nuclear carrier and a conventional carrier of the general type used in our investment analysis (see table 1.2). The annualized life-cycle cost of a modern fleet oiler is about $19.6 million. A recent Center for Naval Analyses study suggests that the conventional carrier's incremental support requirements would be less than one fleet oiler per carrier. We have not verified this data. Our upcoming review will examine in greater detail the life-cycle costs of nuclear and conventional carriers, considering the incremental fuel-driven demand of conventional carriers for additional logistics support ships. The objective of the BUR strategy is to maintain a 12-carrier force, maintain the industrial base at NNS, avoid cost increases associated with a delay in construction, and preserve carrier force size flexibility. Under the BUR, the Navy would purchase CVN-76 in fiscal year 1995 consistent with a sustaining rate strategy but would shift to a replacement rate strategy beginning with CVN-77. The Navy's Recapitalization Plan transfers resources from the Navy's infrastructure and savings from a smaller fleet to fund the Navy's protected major procurement accounts, including the carrier program, in order to maintain the BUR force structure and/or critical industrial capabilities. Under the Navy's recapitalization strategy, the Navy would buy CVN-76 in fiscal year 1995 but would defer CVN-77 until fiscal year 2002 and then shift to a sustaining rate strategy of one carrier every 4 years. The BUR and the Navy's Recapitalization Plan were analyzed to determine the effects of their strategies on the carrier force structure, financial investment requirements, and the Newport News Shipbuilding total employment level. In addition, we analyzed eight alternatives for structuring a 12-carrier force to achieve one of the following objectives: 1. Maximize budgetary savings through a carrier replacement rate strategy. This approach maximizes the carriers' useful service lives and builds new carriers when actually needed to sustain force levels. (See the analysis and discussion of alternatives 1A and 1B.) 2. Maximize the stability of Newport News Shipbuilding (NNS) employment through a sustained rate construction and refueling/complex overhaul program. This approach requires forgoing useful service life by accelerating inactivations to maintain a sustained rate production program. (See the analysis and discussion of alternatives 2A and 2B.) 3. Optimize budgetary savings and employment level stability. This approach optimizes the service lives of nuclear carriers and provides a stable employment base. (See the analysis and discussion of alternative 3.) 4. Delay building the new carrier to defer near-term outlays and reduce overall carrier program costs. The new starts for a nuclear carrier force were planned for fiscal years 1998 and 2000 and fiscal year 2002 for a conventional carrier force. (See the analysis and discussion of alternatives 4A, 4B, and 4C.) The following discusses our analyses of DOD's and the Navy's baseline force structure plans and the options we developed based on the four planning objectives and force structure investment strategies. We analyzed each option's impact on force structure and the trade-offs between budgetary requirements and overall employment levels at NNS. Under the BUR's baseline force structure option to support a 12-carrier force (i.e., 11 active carriers and 1 operational reserve/training carrier), CVN-76 is funded in fiscal year 1995, necessitating the early retirement of the U.S.S. Kitty Hawk (CV-63). After CVN-76 the Navy plans to procure new carriers when needed to maintain force levels. This approach results in fluctuating intervals of 2 to 7 years for the construction of new carriers, but maximizes the notional 50-year service life of current and planned nuclear-powered carriers. To sustain their full 50-year service life, nuclear carriers will be refueled after approximately 23 years of service. (See fig 2.1.) Figure 2.2 shows that this option halts the rapid decline in employment at NNS at just above the 10,000-employee level-- the minimum level needed to sustain the shipyard's viability, according to the Navy. If scheduled CVN construction is delayed, the Navy stated it would, at a minimum, have to expand the number of regular overhauls at NNS and take action to preserve the nuclear component and shipbuilding industrial base. The BUR option provides a near-term solution to the employment level decline, although it may be difficult for the shipyard to economically administer the drastic shifts in the employment levels at the yard between fiscal years 1998 and 2033. Substantial declines in employment at NNS are projected to bottom out in fiscal years 1998, 2004, 2014, 2024, and 2033. The drastic decline beginning in fiscal year 2010 reduces the workforce by about 13,000, dropping total employment below the minimum level. Although DOD believes that this option is cost-effective, it totals over $4.2 billion in the short term (fiscal years 1995-99), and its cost over the long term (fiscal years 1995-2035) totals more than $56 billion. Only one option, which reduces the service life of nuclear carriers to 37 years, has larger outlays than the BUR baseline force model (see discussion of alternative 2A). The Navy's Recapitalization Plan was developed to fulfill the requirements of the BUR. This plan calls for funding CVN-76 in fiscal year 1995 and building new nuclear carriers in 4-year intervals beginning in fiscal year 2002, as shown in figure 2.3. The plan requires that some assets be retired early to buy newer equipment. The U.S.S. Kitty Hawk (CV-63) will be retired 3 years before the end of its projected service life to maintain the 12-carrier force level when CVN-76 enters the fleet. To sustain the 4-year build interval, five other carriers will be retired early: the U.S.S. Enterprise (CVN-65) will be inactivated 2 years early, the U.S.S. Dwight D. Eisenhower (CVN-69) and the U.S.S. Carl Vinson (CVN-70) will be retired 3 years before the end of their projected service lives, and the U.S.S. Nimitz (CVN-68) and the U.S.S. Theodore Roosevelt (CVN-71) will be decommissioned 4 years early. The Navy will prematurely incur large inactivation costs, currently estimated at almost $1 billion each, for the early inactivations of these Nimitz-class carriers. The plan maintains approximately the same employment level at NNS as the BUR baseline force structure option through fiscal year 2001 (see fig. 2.4). Between fiscal years 2010 and 2034, the plan maintains an average total employment level above the projected level for the BUR option. Except for declines in total employment in fiscal years 2003-5, 2017-18, and 2029-31, this option maintains shipyard employment between 15,000 and 23,000 after fiscal year 2001 due to the consistent 4-year construction interval. Although the outlays are slightly lower than those in the BUR option in the near term (1995-99) due to a 1-year delay in CVN-77, the outlays for the mid-term (fiscal years 1995-2015) and long term (fiscal years 1995-2035) are higher than those in the BUR option due to the consistent 4-year new construction interval and the additional premature inactivations of Nimitz-class carriers. Total outlays for fiscal years 1995-2035 total almost $59 billion, about $2.5 billion higher than the cost in the BUR option. Using this force structure option, the Navy builds a new carrier only to replace a carrier that has to be inactivated at the end of its service life (see fig. 2.5). The U.S.S. Independence (CV-62) is the last carrier to be decommissioned before the end of its service life to maintain a 12-carrier force level when the U.S.S. United States (CVN-75) enters the force. All Nimitz-class carriers will use their entire projected 50-year service lives, which will require that each receive a nuclear refueling complex overhaul at 23 years. This option's construction schedule leads to a variable build interval; construction starts may be anywhere from 3 to 10 years apart. Construction for CVN-76 begins in fiscal year 1999, and the ship will replace the U.S.S. Kitty Hawk (CV-63) in fiscal year 2006. Figures 2.5 and 2.6 show that although the Navy receives the full value of its carrier force investment, workforce management is complicated by several short-term surges in total employment and then large drop-offs because of the varying build intervals. Those changes in employment levels are similar to those in the BUR baseline force option, although the drop-off between fiscal years 1996 and 2000 under this option is much more drastic, with the employment level falling below 10,000. The workload gap could be filled by having the government direct other work to the shipyard or reschedule delivery of work under contract. Employment at the shipyard improves under this option in the mid- and long terms. Between fiscal years 2001 and 2015, the total employment level at NNS is generally at a higher level than in the BUR option. After fiscal year 2020, this option's total employee level has fewer major shifts over the remaining 15 years of the period we analyzed than the BUR option. Since new ship construction and inactivations occur only when needed under this option, money is not outlaid prematurely for procurement and major investment costs. Outlays are less than half of those incurred under the BUR option for fiscal years 1995-99 but are only $161 million less than those between fiscal years 1995 and 2035 because, in the long term, the BUR maintains a similar replacement rate new carrier construction strategy. Outlays for this option in the long term are higher then those in the options delaying CVN-76's construction start to fiscal years 1998 and 2000; however, in the near term, this option requires over $530 million less outlays than the option that builds CVN-76 in fiscal year 1998 due to the additional 1-year delay in CVN-76's construction start. The government will receive the full value of its investment in aircraft carriers under this option because both conventional and nuclear carriers will remain in the active fleet until the end of their expected service lives (see fig. 2.7). Nimitz-class nuclear carriers receive nuclear refuelings and complex overhauls after 23 years and are inactivated at the end of their 50-year service lives. Conventional carriers remain active for 45 years, entering the service life extension program after 30 years of service. After fiscal year 1994, only the U.S.S. Independence (CV-62) is inactivated before the end of its projected service life so that the U.S.S. United States (CVN-75) can be commissioned into the fleet in fiscal year 1998. This early inactivation will allow the Navy to maintain the 12-carrier force level, and carriers will only be built to replace others. The next carrier, CVA-76, is programmed to begin construction in fiscal year 2000 at NNS, and new construction start intervals would fluctuate between 3 and 10 years, similar to the BUR baseline force structure option. Figure 2.8 shows that this fluctuating new construction start rate results in a total employee level profile similar to that in the BUR option. During the near-term period of fiscal years 1995-99, the employment level under this option ranges from 7,500 to 10,000 compared with 11,000 and 15,000 under the BUR option. The decrease in the employment level could be mitigated by other shipyard work being directed by the government to NNS or by bidding for projects in the commercial shipbuilding market, such as liquified natural gas tankers or cruise ships. Since this option requires new ship construction and decommissioning only when needed, major procurement and investment costs are not incurred prematurely. Therefore, this option has the lowest value of outlays in the long term. Outlays for this option are over $2 billion less between fiscal years 1995 and 2015 and $6.5 billion less between fiscal years 1995 and 2035 than the option that transitions to conventional carrier construction with CVA-77. Also, this option's outlays are approximately one-third less than those for the BUR baseline force structure option for fiscal years 1995-2015 and approximately 37 percent less than those between fiscal years 1995 and 2035. This option emphasizes maximizing the stability of NNS' employment level through a sustained rate of new carrier construction, regardless of cost (see fig. 2.9). New nuclear carrier construction starts begin in fiscal year 1995 at a historical rate of every 3 years. All nuclear carriers receive their nuclear refuelings and complex overhauls but are retired early, after approximately 37 years. Conventional carriers in the fleet, the U.S.S. Independence (CV-62), the U.S.S. Kitty Hawk (CV-63), and the U.S.S. Constellation (CV-64), are retired before the end of their expected service lives as well. The benefit of this option is that NNS could sustain a workforce averaging over 20,000 employees with very few shifts in the overall employment level (see fig. 2.10). Employment levels remain above those under the BUR option throughout the 1995 to 2035 time frame. Constructing new nuclear carriers every 3 years is extremely expensive, and the outlays are significantly greater than those in the BUR baseline force structure option in the near term (fiscal years 1995-99), mid-term (fiscal years 1995-2015), and long term (fiscal years 1995-2035). This option requires more outlays because maintaining a 12-carrier force level at this construction rate requires the Navy to retire all of its carriers early, most with 25 percent of their service life remaining. Therefore, the Navy will need to fund costly nuclear carrier inactivations prematurely. This option procures 14 carriers between fiscal years 1995 and 2035, compared with 10 carriers under the BUR plan. This investment strategy represents the long-term investment implications of building carriers at historical rates to protect the carrier shipbuilding industrial base and employee levels. To support a sustained-rate construction program, the Navy would need to inactivate eight Nimitz-class nuclear carriers prematurely with 20 percent of their useful service life remaining. The new conventional carrier construction start is programmed for fiscal year 2000, and the follow-on conventional carriers have construction starts every 3 years. (See fig. 2.11.) No nuclear carriers are built after the completion of the U.S.S. United States (CVN-75). The nuclear capabilities at NNS would be sustained through a series of nuclear refuelings and complex overhauls of the Nimitz-class carriers through fiscal year 2024, some or all of the decommissioning work of the nuclear carrier fleet, and other nuclear repair and maintenance work. None of the remaining conventionally powered carriers would be decommissioned early except for the U.S.S. Independence (CV-62) to maintain a 12-carrier force when the U.S.S. United States (CVN-75) is brought into service in fiscal year 1998. NNS will have a severe drop-off in its workload between fiscal years 1996 and 2000 (see fig. 2.12) unless other work is directed to the shipyard. Consolidating all Atlantic Coast-based nuclear shipbuilding and overhaul work at NNS would help maintain nuclear capabilities and help mitigate the severe drop-off in the workload. Between fiscal years 2000 and 2014, the employment level at the shipyard averages about 17,500 employees, and between fiscal years 2015 and 2025 the employment level averages about 22,000 employees. In fiscal year 2026, the shipyard's workforce level drops below 15,000 employees and does not return to the 15,000-employee level until fiscal year 2027. Due to the frequent new construction starts and the earlier decommissioning of the Nimitz-class nuclear carriers, this option costs approximately $8 billion more in the long term (fiscal years 1995-2035) than the conventional replacement rate strategy. During the near-term period (fiscal years 1995-99) this option still costs less than the conventional carrier option that builds CVA-77 in fiscal year 2002 because this option delays the new construction start and cancels the construction of CVN-76. Maximizing the NNS employment levels through a high-production rate is a very costly approach to maintaining a carrier force level in the long term, and the value of the total outlays is higher during this period than in any other conventional option. However, this option is still $11.5 billion less than the BUR option over the long term. This option is consistent with DOD's plan to request funding for CVN-76 in fiscal year 1995. The next ship, however, would be a new design conventional carrier as shown in figure 2.13. The BUR report recommended the deferment of the advance procurement funding beyond fiscal year 1999 for the carrier after CVN-76 pending the completion of an evaluation of alternative aircraft carrier concepts for the next century, including the conventional carrier force option. Under this option, the construction start for CVA-77 is in fiscal year 2002. New starts for follow-on conventional ships are at 4-year intervals, which would support a sustained rate production program at NNS. The employment level under this option is projected to have fewer extreme increases and drop-offs than in the BUR plan. Nuclear carriers currently in the fleet will have 45- to 48-year service lives, requiring all of them to undergo nuclear refuelings and complex overhauls. Both the U.S.S. Independence (CV-62) and the U.S.S. Kitty Hawk (CV-63) will be inactivated 6 and 3 years, respectively, before the end of their estimated service lives. The plan requires that the U.S.S. John F. Kennedy (CV-67) remain in the active fleet 5 years longer than currently planned.This longer service life may be feasible for the ship in its new role as the reserve/training carrier because it will have a reduced tempo of operations, resulting in a reduced amount of "wear and tear." This option maintains the workforce at NNS above the 10,000-employee level throughout fiscal years 1995-2035. The shipyard maintains a very stable employment level after fiscal year 2006--the workforce fluctuates between approximately 15,000 and 20,000 employees in fiscal years 2006-7, with only one significant drop in employment in fiscal year 2015. After fiscal year 2027, the employment level ranges between 11,900 and 16,500. (See fig. 2.14.) Since this option requires building CVN-76 in fiscal year 1995, the near term outlays are similar to those in the BUR baseline option. However, in the mid-term (fiscal years 1995-2015) and long term (fiscal years 1995-2035), the outlays are approximately 25 percent less than those in the BUR option. These savings could help reduce the Navy's Recapitalization Plan projected annual funding shortfall of $3.5 billion in fiscal years 1999 and beyond. If the construction start for the next nuclear carrier--CVN-76--is delayed 3 years to fiscal year 1998, the Navy could maintain a 12-carrier force and maximize the service lives of its nuclear carriers. (See fig. 2.15.) All nuclear carriers will be refueled and overhauled, extending each carrier's service life over 23 years to its full 50-year service life. This option creates fewer drastic shifts in the overall employment level than the BUR option because it has a new carrier construction start rate of every 4 to 5 years compared with the BUR rate of 3 to 7 years. Two conventional carriers, the U.S.S. Kitty Hawk (CV-63) and the U.S.S. Constellation (CV-64), are retained in the active fleet for several years longer than projected in the BUR option and are inactivated closer to or at the end of their projected useful lives. This alternative also retains the U.S.S. John F. Kennedy (CV-67) in the fleet 7 years past the BUR option's plan. This ship, in its new role as the reserve/training carrier, will have a reduced tempo of operations and thus a reduced amount of wear and tear. Other carriers are replaced when required to meet force structure needs. Under this option, NNS' employment level drops to around 7,500 employees and remains below the critical 10,000-employee level for about 3 years. As shown in figure 2.16, overall employment is more stable during fiscal years 2005 through 2034 than under the BUR option. Increased stability in shipyard employment requires fewer adjustments to the workforce over time. Compared to the BUR option, this option's employment troughs are significantly smaller in fiscal years 2004, 2018, and 2025-26. The Navy could mitigate the employment decline in fiscal year 1998 by redirecting other shipbuilding and maintenance work to the yard, or, as the BUR suggested, by rescheduling the delivery of carriers under contract, overhauls, and other work. DOD's financial investment requirement for this option is less than in the BUR option for the near term (fiscal years 1995-99), mid-term (fiscal years 1995-2015), and long term (fiscal years 1995-2035). The difference in outlays from fiscal years 1995 to 1999 for this option are approximately $1.6 billion less than the BUR option. Under this option, the Navy generally retains each nuclear carrier to the end of its useful 50-year service life and therefore will need to refuel each nuclear carrier after 23 years (see fig. 2.17). Two conventional carriers, the U.S.S. Kitty Hawk (CV-63) and U.S.S. Constellation (CV-64), are retained in the active fleet to the end of their expected service lives. Also, the U.S.S. John F. Kennedy (CV-67) will remain in the active fleet for a total of 50 years, 7 years longer than projected in the BUR option. This should be feasible, since the carrier will have a reduced tempo of operations as the reserve/training carrier. Only two nuclear carriers are retired before the end of their useful service lives--the U.S.S. Enterprise (CVN-65) 1 year early and the U.S.S. Nimitz (CVN-68) 2 years early. In addition, this option builds new carriers to replace carriers that are at the end of their service lives, which will lead to a stable new construction start rate every 4 to 5 years. DOD considered delaying the construction of CVN-76 until fiscal year 2000. However, the BUR concluded that, as a result of the delay, existing contracts would not be completed until the mid-1990s, and a lack of subsequent orders would threaten NNS' viability by 1997. NNS will need to fill in a large gap in workload between fiscal years 1996 and 2001. The shipyard does have the capability to construct nuclear submarines and other surface ships and therefore could complete other types of shipyard work to compensate for the drop-off in workload. The shipyard will begin the nuclear refueling complex overhaul of the U.S.S. Nimitz (CVN-68) in fiscal year 1998 while it completes construction work on the U.S.S. United States (CVN-75), scheduled for commissioning in fiscal year 1998. This work will enable NNS to sustain a nuclear-capable workforce. Figure 2.18 shows that the overall employment level at NNS is at or below the critical 10,000-employee level in fiscal years 1996-2001. This option does not have as large a drop-off in the projected total workforce beginning in fiscal year 2014 than either the BUR option, in which employment level drops below 10,000, or the option to start construction of CVN-76 in fiscal year 1998. The financial outlays required for this option are less than any of the nuclear carrier force structure options for the near term (fiscal years 1995-99) and long term (1995-2035). In the near term, the outlays are less than half of those required for the BUR option because of the delay in the construction start of CVN-76. Using this option the Navy would not build a nuclear carrier before the transition to a conventional carrier construction program in fiscal year 2002, with the start of CVA-76. This option provides a 7-year design period, sustains a steady new carrier construction start interval of 3-1/2 years, and fully utilizes the service lives of almost all of the conventional carriers in the fleet. (See fig. 2.19.) The delay in the construction start enables several conventional carriers in the active force to remain in service longer than in the BUR plan. This option also provides for longer service lives for most carriers currently in the active fleet than under the Navy's Recapitalization Plan. The U.S.S. Kitty Hawk (CV-63) and U.S.S. Constellation (CV-64) remain active slightly beyond their estimated notional lives, enabling these ships to complete a last deployment within their last maintenance cycle. The U.S.S. John F. Kennedy (CV-67) is programmed for a 50-year service life because of its reduced tempo of operations as the reserve/training carrier. Nimitz-class nuclear carriers remain in the fleet for 47 to 50 years. This option requires all Nimitz-class nuclear carriers to undergo nuclear refuelings and complex overhauls. As shown in figure 2.20, deferring construction of the next carrier until fiscal year 2002 results in continuing near-term declines in employment levels at NNS. The only carrier program work expected in the shipyard during that time period is the completion of construction of the U.S.S. United States (CVN-75) and the nuclear refueling complex overhaul of the U.S.S. Nimitz (CVN-68), which begins in fiscal year 1998. NNS would need other work to bring levels above the critical 10,000-employee level between fiscal years 1996 and 2001. After this period, employment levels average from 15,000 to 20,000 persons through fiscal year 2024. This option requires fewer outlays than any other option we examined except for option 1B's (conventional carrier replacement rate) long-term estimate. The reduction in outlays is a result of delaying the construction start of the next aircraft carrier until fiscal year 2002, building conventional carriers that have a much lower procurement cost, and retaining carriers longer in the active fleet. The near-term outlays (fiscal years 1995-99) are approximately 35 percent of the BUR option's outlays for the same period. In the long term (fiscal years 1995-2035), this option will save almost $19 billion in outlays over the amount projected to be spent for the BUR option. This option costs approximately $4.5 billion less in the long term than the option that begins conventional carrier construction with CVA-77.

GAO reviewed the Navy's aircraft carrier program, focusing on: (1) the budget implications of the options for meeting the Department of Defense's Bottom-Up Review (BUR) force structure requirement for 12 carriers; and (2) each option's effect on the shipbuilding contractor's employment levels. GAO found that: (1) there are several available options for maintaining the 12-carrier force at less cost than projected in the BUR and the Navy Recapitalization Plan; (2) the least expensive option maintains employment levels at or above minimum levels, authorizes building the proposed nuclear carrier in fiscal year 1995, switches to construction of conventionally powered carriers in later years, and would cost 25 percent less than the BUR and Navy Recapitalization Plan options; (3) options to build CVN-76 in fiscal year 1995 would stop the downward trend in employment at about the minimum sustaining employment level of 10,000 employees, require building carriers sooner than they are needed for force structure purposes, and incur expenses sooner than necessary; (4) options to delay building the carrier would result in a continuing decline in employment to about 7,500 employees; (5) in the long term the employment levels in the BUR and the Navy Recapitalization Plan also fall below 10,000 employees; (6) the option to build nuclear carriers at the historical rate of one every 3 years maintains stable employment levels but costs about 40 percent more than the options in the BUR and the Navy Recapitalization Plan; (7) options for using carriers for their full service lives are less expensive than those in the BUR and Navy Recapitalization Plan, but in the near term the employment levels fall below the minimum sustaining level; (8) a transition to constructing conventionally powered carriers would save the largest amount of investment resources; and (9) criteria for comparing nuclear and conventional carriers include affordability, operational effectiveness, potential utilization, availability of homeports and shipyards for maintenance, and supporting infrastructure such as training and disposal of nuclear materials.

FDA is responsible for overseeing the safety and effectiveness of medical devices that are marketed in the United States, whether manufactured in domestic or foreign establishments. All establishments that manufacture medical devices for marketing in the United States are required to register annually with FDA. As part of its efforts to ensure the safety, effectiveness, and quality of medical devices, FDA is responsible for inspecting certain foreign and domestic establishments to ensure that, among other things, they meet manufacturing standards established in FDA's quality system regulation. Within FDA, CDRH is responsible for assuring the safety and effectiveness of medical devices. Among other things, CDRH works with ORA, which conducts inspections of foreign establishments. FDA may conduct inspections before and after medical devices are approved or otherwise cleared to be marketed in the United States. Premarket inspections are conducted before FDA approves U.S. marketing of a new medical device that is not substantially equivalent to one that is already on the market. Premarket inspections primarily assess manufacturing facilities, methods, and controls and may verify pertinent records. Postmarket inspections are conducted after a medical device has been approved or otherwise cleared to be marketed in the United States and include several types of inspections: (1) Quality system inspections are conducted to assess compliance with applicable FDA regulations, including the quality system regulation to ensure good manufacturing practices and the regulation requiring reporting of adverse events. These inspections may be comprehensive or abbreviated, which differ in the scope of inspectional activity. Comprehensive postmarket inspections assess multiple aspects of the manufacturer's quality system, including management controls, design controls, corrective and preventative actions, and production and process controls. Abbreviated postmarket inspections assess only some of these aspects, but always assess corrective and preventative actions. (2) For-cause and compliance follow- up inspections are initiated in response to specific information that raises questions or problems associated with a particular establishment. (3) Postmarket audit inspections are conducted within 8 to 12 months of a premarket application's approval to examine any changes in the design, manufacturing process, or quality assurance systems. Requirements governing foreign and domestic inspections differ. Specifically, FDA is required to inspect domestic establishments that manufacture class II or III medical devices every 2 years. There is no comparable requirement to inspect foreign establishments. FDA does not have authority to require foreign establishments to allow the agency to inspect their facilities. However, if an FDA request to inspect is denied, FDA may prevent the importation of medical devices from that foreign establishment into the United States. In addition, FDA has the authority to conduct physical examinations of products offered for import and, if there is sufficient evidence of a violation, prevent their entry at the border. Unlike food, for which FDA primarily relies on inspections at the border, physical inspection of manufacturing establishments is a critical mechanism in FDA's process to ensure that medical devices are safe and effective and that manufacturers adhere to good manufacturing practices. FDA determines which establishments to inspect using a risk-based strategy. High priority inspections include premarket approval inspections for class III devices, for-cause inspections, inspections of establishments that have had a high frequency of device recalls, and other devices and manufacturers FDA considers high risk. The establishment's inspection history may also be considered. A provision in FDAAA may assist FDA in making decisions about which establishments to inspect because this law authorizes the agency to accept voluntary submissions of audit reports addressing manufacturers' conformance with internationally established standards for the purpose of setting risk-based inspectional priorities. FDA's programs for foreign and domestic inspections by accredited third parties provide an alternative to the traditional FDA-conducted comprehensive postmarket quality system inspection for eligible manufacturers of class II and III medical devices. MDUFMA required FDA to accredit third persons--which are organizations--to conduct inspections of certain establishments. In describing this requirement, the House of Representatives Committee on Energy and Commerce noted that some manufacturers have faced an increase in the number of inspections required by foreign countries and that the number of inspections could be reduced if the manufacturers could contract with a third-party organization to conduct a single inspection that would satisfy the requirements of both FDA and foreign countries. Manufacturers that meet eligibility requirements may request a postmarket inspection by an FDA-accredited organization. The eligibility criteria for requesting an inspection of an establishment by an accredited organization include that the manufacturer markets a medical device in the United States and markets (or intends to market) a medical device in at least one other country and that the establishment to be inspected must not have received warnings for significant deviations from compliance requirements on its last inspection. MDUFMA also established minimum requirements for organizations to be accredited to conduct third-party inspections, including protections against financial conflicts of interest and assurances of the competence of the organization to conduct inspections. FDA developed a training program for inspectors from accredited organizations that involves both formal classroom training and completion of three joint training inspections with FDA. Each individual inspector from an accredited organization must complete all training requirements successfully before being cleared to conduct independent inspections. FDA relies on manufacturers to volunteer to host these joint inspections, which count as FDA postmarket quality system inspections. A manufacturer that is cleared to have an inspection by an accredited third party enters an agreement with the approved accredited organization and schedules an inspection. Once the accredited organization completes its inspection, it prepares a report and submits it to FDA, which makes the final assessment of compliance with applicable requirements. FDAAA added a requirement that accredited organizations notify FDA of any withdrawal, suspension, restriction, or expiration of certificate of conformance with quality systems standards (such as those established by the International Organization for Standardization) for establishments they inspected for FDA. In addition to the Accredited Persons Inspection Program, FDA has a second program for accredited third-party inspections of medical device establishments. On September 7, 2006, FDA and Health Canada announced the establishment of PMAP. This pilot program was designed to allow qualified third-party organizations to perform a single inspection that would meet the regulatory requirements of both the United States and Canada. The third-party organizations eligible to conduct inspections through PMAP are those that FDA accredited for its Accredited Persons Inspection Program (and that completed all required training for that program) and that are also authorized to conduct inspections of medical device establishments for Health Canada. To be eligible to have a third- party inspection through PMAP, manufacturers must meet all criteria established for the Accredited Persons Inspection Program. As with the Accredited Persons Inspection Program, manufacturers must apply to participate and be willing to pay an accredited organization to conduct the inspection. FDA relies on multiple databases to manage its program for inspecting medical device manufacturing establishments. FDA's medical device registration and listing database contains information on domestic and foreign medical device establishments that have registered with FDA. Establishments that are involved in the manufacture of medical devices intended for commercial distribution in the United States are required to register annually with FDA. These establishments provide information to FDA, such as an establishment's name and its address and the medical devices it manufactures. Prior to October 1, 2007, this information was maintained in DRLS. As of October 1, 2007, establishments are required to register electronically through FDA's Unified Registration and Listing System and certain medical device establishments pay an annual establishment registration fee, which in fiscal year 2008 is $1,706. OASIS contains information on medical devices and other FDA-regulated products imported into the United States, including information on the establishment that manufactured the medical device. The information in OASIS is automatically generated from data managed by Customs and Border Protection (CBP). These data are originally entered by customs brokers based on the information available from the importer. CBP specifies an algorithm by which customs brokers generate a manufacturer identification number from information about an establishment's name, address, and location. FACTS contains information on FDA's inspections, including those of domestic and foreign medical device establishments. FDA investigators enter information into FACTS following completion of an inspection. According to FDA data, there are more registered establishments in China and Germany reporting that they manufacture class II or III medical devices than in any other foreign countries. Canada and the United Kingdom also have a large number of registered establishments. FDA faces challenges in its program to inspect foreign establishments manufacturing medical devices. The databases that provide FDA with data about the number of foreign establishments manufacturing medical devices for the U.S. market have not provided it with an accurate count of foreign establishments for inspection. In addition, FDA conducted relatively few inspections of foreign establishments. Moreover, inspections of foreign medical device manufacturing establishments pose unique challenges to FDA--both in human resources and logistics. FDA's databases on registration and imported medical devices have not provided an accurate count of establishments subject to inspection, although recent improvements to FDA's medical device registration database may address some weaknesses. In January 2008, we testified that DRLS provided FDA with information about foreign medical device establishments and the products they manufacture for the U.S. market. According to DRLS, as of September 2007, 4,983 foreign establishments that reported manufacturing a class II or III medical device for the U.S. market had registered with FDA. However, these data contained inaccuracies because establishments may register with FDA but not actually manufacture a medical device or may manufacture a medical device that is not marketed in the United States. In addition, FDA did not routinely verify the data within this database. Recent changes to FDA's medical device establishment registration process could improve the accuracy of its database. In fiscal year 2008, FDA implemented, in addition to its annual user fee, electronic registration and an active re-registration process for medical device establishments. According to FDA, about half of previously registered establishments had reregistered using the new system as of April 11, 2008. While FDA officials expect that additional establishments will reregister, they expect that the final result will be the elimination of establishments that do not manufacture medical devices for the U.S. market and thus a smaller, more accurate database of medical device establishments. FDA officials indicated that implementation of electronic registration and the annual user fee seemed to have improved the data so FDA can more accurately identify the type of establishment registered, the devices manufactured at an establishment, and whether or not an establishment should be registered. According to FDA officials, the revenue from device registration user fees is applied to the process for the review of device applications, including premarket inspections. FDA has also proposed, but not yet implemented, the Foreign Vendor Registration Verification Program, which could also help improve the accuracy of information FDA maintains on registered foreign establishments. Through this program, FDA plans to contract with an external organization to conduct on-site verification of the registration data and product listing information of foreign establishments shipping medical devices and other FDA-regulated products to the United States. FDA has solicited proposals for this contract, but it is still developing the specifics of the program. For example, as of April 2008, the agency had not yet established the criteria it would use to determine which establishments would be visited for verification purposes or determined how many establishments it would verify annually. FDA plans to award this contract in June 2008. Given the early stages of this process, it is too soon to determine whether this program will improve the accuracy of the data FDA maintains on foreign medical device establishments. FDA also obtains information on foreign establishments from OASIS, which tracks the importation of medical devices and other FDA-regulated products. While not intended to provide a count of establishments, OASIS does contain information about the medical devices actually being imported into the United States and the establishments manufacturing them. However, inaccuracies in OASIS prevent FDA from using it to develop a list of establishments subject to inspection. OASIS contains an inaccurate count of foreign establishments manufacturing medical devices imported into the United States as a result of unreliable identification numbers generated by customs brokers when the product is offered for entry. FDA officials told us that these errors result in the creation of multiple records for a single establishment, which results in inflated counts of establishments offering medical devices for entry into the U.S. market. According to OASIS, in fiscal year 2007, there were as many as 22,008 foreign establishments that manufactured class II medical devices for the U.S. market and 3,575 foreign establishments that manufactured class III medical devices for the U.S. market. FDA has supported a proposal with the potential to address weaknesses in OASIS, but FDA does not control the implementation of this proposed change. FDA is pursuing the creation of a governmentwide unique establishment identifier, as part of the Shared Establishment Data Service (SEDS), to address these inaccuracies. Rather than relying on the creation and entry of an identifier at the time of import, SEDS would provide a unique establishment identifier and a centralized service to provide commercially verified information about establishments. The standard identifier would be submitted as part of import entry data when required by FDA or other government agencies. SEDS could thus eliminate the problems that have resulted in multiple identifiers associated with an individual establishment. The implementation of SEDS is dependent on action from multiple federal agencies, including the integration of the concept into a CBP import and export system under development and scheduled for implementation in 2010. In addition, once implemented by CBP, participating federal agencies would be responsible for bearing the cost of integrating SEDS with their own operations and systems. FDA officials are not aware of a specific time line for the implementation of SEDS. Developing an implementation plan for SEDS was recommended by the Interagency Working Group on Import Safety. Although comparing information from its registration and import databases could help FDA determine the number of foreign establishments marketing medical devices in the United States, the databases do not exchange information to be compared electronically and any comparisons are done manually. FDA is in the process of implementing additional initiatives to improve the integration of its databases, and these changes could make it easier for the agency to establish an accurate count of foreign manufacturing establishments subject to inspection. The agency's Mission Accomplishments and Regulatory Compliance Services (MARCS) is intended to help FDA electronically integrate data from multiple systems. It is specifically designed to give individual users more complete information about establishments. FDA officials estimated that MARCS, which is being implemented in stages, could be fully implemented by 2011 or 2012. However, FDA officials told us that implementation has been slow because the agency has been forced to shift resources away from MARCS and toward the maintenance of current systems that are still heavily used, such as FACTS and OASIS. Taken together, changes to FDA's databases could provide the agency with more accurate information on the number of establishments subject to inspection. However, it is too early to tell whether this will improve FDA's management of its inspection program. From fiscal year 2002 through fiscal year 2007, FDA inspected relatively few foreign medical device establishments and primarily inspected establishments located in the United States. During this period, FDA conducted an average of 247 foreign establishment inspections each year, compared to 1,494 inspections of domestic establishments. This average number of foreign inspections suggests that each year FDA inspects about 6 percent of registered foreign establishments that reported manufacturing class II or class III medical devices. FDA officials estimated the agency had inspected foreign class II manufacturers every 27 years and foreign class III manufacturers every 6 years. The inspected foreign establishments were in 44 foreign countries and more than two-thirds were in 10 countries. Most of the countries with the highest number of inspections were also among those with the largest number of registered establishments that reported manufacturing class II or III medical devices. The lowest rate of inspections in these 10 countries was in China, where 64 inspections were conducted in this 6-year period and 568 establishments were registered as of May 6, 2008. (See table 1.) FDA's inspections of foreign medical device establishments were primarily postmarket inspections. While premarket inspections were generally FDA's highest priority, relatively few have had to be performed in any given year. Therefore, FDA focused its resources on postmarket inspections. From fiscal year 2002 through fiscal year 2007, 89 percent of the 1,481 foreign establishment inspections were for postmarket purposes. Inspections of foreign establishments pose unique challenges to FDA-- both in human resources and logistics. FDA does not have a dedicated cadre of investigators that only conduct foreign medical device establishment inspections; those staff who inspect foreign establishments also inspect domestic establishments. Among those qualified to inspect foreign establishments, FDA relies on staff to volunteer to conduct inspections. FDA officials told us that it has been difficult to recruit investigators to voluntarily travel to certain countries. However, they added that if the agency could not find an individual to volunteer for a foreign inspection trip, it would mandate the travel. Logistically, foreign medical device establishment inspections are difficult to extend even if problems are identified because the trips are scheduled in advance. Foreign medical device establishment inspections are also logistically challenging because investigators do not receive independent translational support from FDA or the State Department and may rely on English- speaking employees of the inspected establishment or the establishment's U.S. agent to translate during an inspection. FDA recently announced proposals to address some of the challenges unique to conducting foreign inspections, but specific steps toward implementation and associated time frames are unclear. FDA noted in its report on revitalizing ORA that it was exploring the creation of a cadre of investigators who would be dedicated to conducting foreign inspections. However, the report did not provide any additional details or time frames about this proposal. In addition, FDA announced plans to establish a permanent presence overseas, although little information about these plans is available. FDA intends that its foreign offices will improve cooperation and information exchange with foreign regulatory bodies, improve procedures for expanded inspections, allow it to inspect facilities quickly in an emergency, and facilitate work with private and government agencies to assure standards for quality. FDA's proposed foreign offices are intended to expand the agency's capacity for overseeing, among other things, medical devices, drugs, and food that may be imported into the United States. The extent to which the activities conducted by foreign offices are relevant to FDA's foreign medical device inspection program is uncertain. Initially, FDA plans to establish a foreign office in China with three locations--Beijing, Shanghai, and Guangzhou--comprised of a total of eight FDA employees and five Chinese nationals. The Beijing office, which the agency expects will be partially staffed by the end of 2008, will be responsible for coordination between FDA and Chinese regulatory agencies. FDA staff located in Shanghai and Guangzhou, who are to be hired in 2009, will be focused on conducting inspections and working with Chinese inspectors to provide training as necessary. FDA noted that the Chinese nationals will primarily provide support to FDA staff, including translation and interpretation. The agency is also considering setting up offices in other locations, such as India, the Middle East, Latin America, and Europe, but no dates have been specified. While the establishment of both a foreign inspection cadre and offices overseas have the potential for improving FDA's oversight of foreign establishments, it is too early to tell whether these steps will be effective or will increase the number of foreign medical device establishment inspections. Few inspections of foreign medical device manufacturing establishments--a total of six--have been conducted through FDA's two accredited third-party inspection programs, the Accredited Persons Inspection Program and PMAP. FDAAA specified several changes to the requirements for inspections by accredited third parties that could result in increased participation by manufacturers. Few inspections have been conducted through FDA's Accredited Persons Inspection Program since March 11, 2004--the date when FDA first cleared an accredited organization to conduct independent inspections. Through May 7, 2008, four inspections of foreign establishments had been conducted independently by accredited organizations. As of May 7, 2008, 16 third-party organizations were accredited, and individuals from 8 of these organizations had completed FDA's training requirements and been cleared to conduct independent inspections. FDA and accredited organizations had conducted 44 joint training inspections. As we previously reported, fewer manufacturers volunteered to host training inspections than have been needed for all of the accredited organizations to complete their training, and scheduling these joint training inspections has been difficult. FDA officials told us that, when appropriate, staff are instructed to ask manufacturers to host a joint training inspection at the time they notify the manufacturers of a pending inspection. FDA schedules inspections a relatively short time prior to an actual inspection, and as we previously reported, some accredited organizations have not been able to participate because they had prior commitments. We previously reported that manufacturers' decisions to request an inspection by an accredited organization might be influenced by both potential incentives and disincentives. According to FDA officials and representatives of affected entities, potential incentives to participation include the opportunity to reduce the number of inspections conducted to meet FDA and other countries' requirements. For example, one inspection conducted by an accredited organization was a single inspection designed to meet the requirements of FDA, the European Union, and Canada. Another potential incentive mentioned by FDA officials and representatives of affected entities is the opportunity to control the scheduling of the inspection by an accredited organization by working with the accredited organization. FDA officials and representatives of affected entities also mentioned potential disincentives to having an inspection by an accredited organization. These potential disincentives include bearing the cost for the inspection, doubts about whether accredited organizations can cover multiple requirements in a single inspection, and uncertainty about the potential consequences of an inspection that otherwise may not occur in the near future--consequences that could involve regulatory action. Changes specified by FDAAA have the potential to eliminate certain obstacles to manufacturers' participation in FDA's programs for inspections by accredited third parties that were associated with manufacturers' eligibility. For example, a requirement that foreign establishments be periodically inspected by FDA before being eligible for third-party inspections was eliminated. Representatives of the two organizations that represent medical device manufacturers with whom we spoke about FDAAA told us that the changes in eligibility requirements could eliminate certain obstacles and therefore potentially increase manufacturers' participation. These representatives also noted that key incentives and disincentives to manufacturers' participation remain. FDA officials told us that they were revising their guidance to industry in light of FDAAA and expected to issue the revised guidance during fiscal year 2008. It is too soon to tell what impact these changes will have on manufacturers' participation. FDA officials have acknowledged that manufacturers' participation in the Accredited Persons Inspection Program has been limited. In December 2007, FDA established a working group to assess the successes and failures of this program and to identify ways to increase participation. Representatives of two organizations that represent medical device manufacturers told us that they believe manufacturers remain interested in the Accredited Persons Inspection Program. The representative of one large, global manufacturer of medical devices told us that it was in the process of arranging to have 20 of its domestic and foreign device manufacturing establishments inspected by accredited third parties. As of May 7, 2008, two inspections of foreign establishments had been conducted through PMAP, FDA's second program for inspections by accredited third parties. Although it is too soon to tell what the benefits of PMAP will be, the program is more limited than the Accredited Persons Inspection Program and may pose additional disincentives to participation by both manufacturers and accredited organizations. Specifically, inspections through PMAP would be designed to meet the requirements of the United States and Canada, whereas inspections conducted through the Accredited Persons Inspection Program could be designed to meet the requirements of other countries. In addition, two of the five representatives of affected entities whom we spoke to for our January 2008 statement noted that in contrast to inspections conducted through the Accredited Persons Inspection Program, inspections conducted through PMAP could undergo additional review by Health Canada. Health Canada will review inspection reports submitted through this pilot program to ensure the inspections meet its standards. This extra review poses a greater risk of unexpected outcomes for the manufacturer and the accredited organization, which could be a disincentive to participation in PMAP that is not present with the Accredited Persons Inspection Program. Americans depend on FDA to ensure the safety and effectiveness of medical devices manufactured throughout the world. A variety of medical devices are manufactured in other countries, including high-risk devices designed to be implanted or used in invasive procedures. However, FDA faces challenges in inspecting foreign establishments. Weaknesses in its database prevent it from accurately identifying foreign establishments manufacturing medical devices for the United States and prioritizing those establishments for inspection. In addition, staffing and logistical difficulties associated with foreign inspections complicate FDA's ability to conduct such inspections. The agency has recently taken some positive steps to improve its foreign inspection program, such as initiating changes to improve the accuracy of the data it uses to manage this program and announcing plans to increase its presence overseas. However, it is too early to tell whether these steps will ultimately enhance the agency's ability to select establishments to inspect and increase the number of foreign establishments inspected. To date, FDA's programs for inspections by accredited third parties have not assisted FDA in meeting its regulatory responsibilities nor have these programs provided a rapid or substantial increase in the number of inspections performed by these organizations, as originally intended. Recent statutory changes to the requirements for inspections by accredited third parties may encourage greater participation in these programs. However, the lack of meaningful progress in conducting inspections to this point raises questions about the practicality and effectiveness of these programs to help FDA conduct additional foreign inspections. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or the other Members of the subcommittee may have at this time. For further information about this statement, please contact Marcia Crosse at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may found on the last page of this statement. Geraldine Redican-Bigott, Assistant Director; Kristen Joan Anderson; Katherine Clark; William Hadley; Cathleen Hamann; Julian Klazkin; and Lisa Motley 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. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

As part of the Food and Drug Administration's (FDA) oversight of the safety and effectiveness of medical devices marketed in the United States, it inspects certain foreign and domestic establishments where these devices are manufactured. To help FDA address shortcomings in its inspection program, the Medical Device User Fee and Modernization Act of 2002 required FDA to accredit third parties to inspect certain establishments. In response, FDA has implemented two voluntary programs for that purpose. This statement is based primarily on GAO testimonies from January 2008 (GAO-08-428T) and April 2008 (GAO-08-701T). In this statement, GAO assesses (1) FDA's program for inspecting foreign establishments that manufacture medical devices for the U.S. market and (2) FDA's programs for third-party inspections of those establishments. For GAO's January and April 2008 testimonies, GAO interviewed FDA officials, analyzed information from FDA, and updated GAO's previous work on FDA's programs for inspections by accredited third parties. GAO updated selected information for this statement in early May 2008. FDA faces challenges managing its program to inspect foreign establishments that manufacture medical devices. GAO testified in January 2008 that two databases that provide FDA with information about foreign medical device establishments and the products they manufacture for the U.S. market contained inaccurate information about establishments subject to FDA inspection. In addition, comparisons between these databases--which could help produce a more accurate count--had to be done manually. Recent changes FDA made to its registration database could improve the accuracy of the count of establishments, but it is too soon to tell whether these and other changes will improve FDA's management of its foreign inspection program. Another challenge is that FDA conducts relatively few inspections of foreign establishments; officials estimated that the agency inspects foreign manufacturers of high-risk devices (such as pacemakers) every 6 years and foreign manufacturers of medium-risk devices (such as hearing aids) every 27 years. Finally, inspections of foreign manufacturers pose unique challenges to FDA, such as difficulties in recruiting investigators to travel to certain countries and in extending trips if the inspections uncovered problems. FDA is pursuing initiatives that could address some of these unique challenges, but it is unclear whether FDA's proposals will increase the frequency with which the agency inspects foreign establishments. Few inspections of foreign medical device manufacturing establishments have been conducted through FDA's two accredited third-party inspection programs--the Accredited Persons Inspection Program and the Pilot Multi-purpose Audit Program (PMAP). Under FDA's Accredited Persons Inspection Program, from March 11, 2004--the date when FDA first cleared an accredited organization to conduct independent inspections--through May 7, 2008, four inspections of foreign establishments had been conducted by accredited organizations. An incentive to participation in the program is the opportunity to reduce the number of inspections conducted to meet FDA's and other countries' requirements. Disincentives include bearing the cost for the inspection, particularly when the consequences of an inspection that otherwise might not occur in the near future could involve regulatory action. The Food and Drug Administration Amendments Act of 2007 made several changes to program eligibility requirements that could result in increased participation by manufacturers. PMAP was established on September 7, 2006, as a partnership between FDA and Canada's medical device regulatory agency and allows accredited organizations to conduct a single inspection to meet the regulatory requirements of both countries. As of May 7, 2008, two inspections of foreign establishments had been conducted by accredited organizations through this program. The small number of inspections completed to date by accredited third-party organizations raises questions about the practicality and effectiveness of these programs to quickly help FDA increase the number of foreign establishments inspected.

History is a good teacher, and to solve the problems of today, it is instructive to look to the past. The problems with the department's financial management operations date back decades, and previous attempts at reform have largely proven to be unsuccessful. These problems adversely affect DOD's ability to control costs, ensure basic accountability, anticipate future costs and claims on the budget, such as for health care, weapon systems, and environmental liabilities, measure performance, maintain funds control, prevent fraud, and address pressing management issues. Problems with the department's financial management operations go far beyond its accounting and finance systems and processes. The department continues to rely on a far-flung, complex network of finance, logistics, personnel, acquisition, and other management information systems-- 80 percent of which are not under the control of the DOD Comptroller-- to gather the financial data needed to support day-to-day management decision-making. This network was not designed, but rather has evolved into the overly complex and error-prone operation that exists today, including (1) little standardization across DOD components, (2) multiple systems performing the same tasks, (3) the same data stored in multiple systems, (4) manual data entry into multiple systems, and (5) a large number of data translations and interfaces which combine to exacerbate problems with data integrity. DOD determined, for example, that efforts to reconcile a single contract involving 162 payments resulted in an estimated 15,000 adjustments. Many of the department's business processes in operation today are mired in old, inefficient processes and legacy systems, some of which go back to the 1950s and 1960s. For example, the department relies on the Mechanization of Contract Administration Services (MOCAS) system to process a substantial portion of DOD contract payment transactions for all DOD organizations, which totaled about $78 billion in fiscal year 2001. When MOCAS was first implemented in 1968, "mechanization" was a high tech word. Past efforts to replace MOCAS have failed. Most recently, in 1994, DOD began acquiring the Standard Procurement System (SPS) to replace the contract administration functions currently performed by MOCAS. However, our July 2001 and February 2002 reporting on DOD's $3.7 billion investment in SPS showed that this substantial investment was not economically justified and raised questions as to whether further investment in SPS was justified. For the foreseeable future, DOD will continue to be saddled with MOCAS. Moving to the 1970s, we, the Defense Inspector General, and the military service audit organizations, issued numerous reports detailing serious problems with the department's financial management operations. For example, between 1975 and 1981, we issued more than 75 reports documenting serious problems with DOD's existing cost, property, fund control, and payroll accounting systems. In the 1980s, we found that despite the billions of dollars invested in individual systems, these efforts too fell far short of the mark, with extensive schedule delays and cost overruns. For example, in 1989, our report on eight major DOD system development efforts--including two major accounting systems--under way at that time, showed that system development cost estimates doubled, two of the eight efforts were abandoned, and the remaining six efforts experienced delays of from 3 to 7 years. Beginning in the 1990s, following passage of the Chief Financial Officers (CFO) Act of 1990, there was a recognition in DOD that broad-based financial management reform was needed. Over the past 12 years, the department has initiated several departmentwide reform initiatives intended to fundamentally reform its financial operations as well as other key business support processes, including the Corporate Information Management initiative, the Defense Business Operations Fund, and the Defense Reform Initiative. These efforts, which I will highlight today, have proven to be unsuccessful despite good intentions and significant effort. The conditions that led to these previous attempts at reform remain largely unchanged today. Corporate Information Management. The Corporate Information Management (CIM), initiative, begun in 1989, was expected to save billions of dollars by streamlining operations and implementing standard information systems. CIM was expected to reform all DOD's functional areas, including finance, procurement, material management, and human resources through consolidating, standardizing, and integrating information systems. DOD also expected CIM to replace approximately 2,000 duplicative systems. Over the years, we made numerous recommendations to improve CIM's management, but these recommendations were largely not addressed. Instead, DOD spent billions of dollars with little sound analytical justification. We reported in 1997,that 8 years after beginning CIM, and spending about $20 billion on the initiative, expected savings had yet to materialize. The initiative was eventually abandoned. Defense Business Operations Fund. In October 1991, DOD established a new entity, the Defense Business Operations Fund by consolidating nine existing industrial and stock funds and five other activities operated throughout DOD. Through this consolidation, the fund was intended to bring greater visibility and management to the overall cost of carrying out certain critical DOD business operations. However, from its inception, the fund was plagued by management problems. In 1996, DOD announced the fund's elimination. In its place, DOD established four working capital funds. These new working capital funds inherited their predecessor's operational and financial reporting problems. Defense Reform Initiative (DRI). In announcing the DRI program in November 1997, the then Secretary of Defense stated that his goal was "to ignite a revolution in business affairs." DRI represented a set of proposed actions aimed at improving the effectiveness and efficiency of DOD's business operations, particularly in areas that have been long-standing problems--including financial management. In July 2000, we reportedthat while DRI got off to a good start and made progress in implementing many of the component initiatives, DRI did not meet expected timeframes and goals, and the extent to which savings from these initiatives will be realized is yet to be determined. GAO is currently examining the extent to which DRI efforts begun under the previous administration are continuing. The past has clearly taught us that addressing the department's serious financial management problems will not be easy. Early in his tenure, Secretary Rumsfeld commissioned a new study of the department's financial management operations. The report on the results of the study, Transforming Department of Defense Financial Management: A Strategy for Change, was issued on April 13, 2001. The report recognized that the department will have to undergo "a radical financial management transformation" and that it would take more than a decade to achieve. The report concluded that many studies and interviews with current and former leaders in DOD point to the same problems and frustrations, and that repetitive audit reports verify systemic problems illustrating the need for radical transformation in order to achieve success. Secretary Rumsfeld further confirmed the need for a fundamental transformation of DOD in his "top-down" Quadrennial Defense Review. Specifically, his September 30, 2001, Quadrennial Defense Review Report concluded that the department must transform its outdated support structure, including decades old financial systems that are not well interconnected. The report summed up the challenge well in stating: "While America's business have streamlined and adopted new business models to react to fast-moving changes in markets and technologies, the Defense Department has lagged behind without an overarching strategy to improve its business practices." As part of our constructive engagement approach with DOD, I met with Secretary Rumsfeld last summer to provide our perspectives on the underlying causes of the problems that have impeded past reform efforts at the department and to discuss options for addressing these challenges. There are four underlying causes a lack of sustained top-level leadership and management accountability for deeply embedded cultural resistance to change, including military service parochialism and stovepiped operations; a lack of results-oriented goals and performance measures and monitoring; and inadequate incentives for seeking change. Historically, DOD has not routinely assigned accountability for performance to specific organizations or individuals that have sufficient authority to accomplish desired goals. For example, under the CFO Act, it is the responsibility of agency CFOs to establish the mission and vision for the agency's future financial management. However, at DOD, the Comptroller--who is by statute the department's CFO--has direct responsibility for only an estimated 20 percent of the data relied on to carry out the department's financial management operations. The department has learned through its efforts to meet the Year 2000 computing challenge that to be successful, major improvement initiatives must have the direct, active support and involvement of the Secretary and Deputy Secretary of Defense. In the Year 2000 case, the then Deputy Secretary of Defense was personally and substantially involved and played a major role in the department's success. Such top-level support and attention helps ensure that daily activities throughout the department remain focused on achieving shared, agency-wide outcomes. A central finding from our report on our survey of best practices of world-class financial management organizations--Boeing, Chase Manhattan Bank, General Electric, Pfizer, Hewlett-Packard, Owens Corning, and the states of Massachusetts, Texas and Virginia--was that clear, strong executive leadership was essential to (1) making financial management and entitywide priority, (2) redefining the role of finance, (3) providing meaningful information to decision-makers, and (4) building a team of people that deliver results. DOD past experience has suggested that top management has not had a proactive, consistent, and continuing role in building capacity, integrating daily operations for achieving performance goals, and creating incentives. Sustaining top management commitment to performance goals is a particular challenge for DOD. In the past, the average 1.7 year tenure of the department's top political appointees has served to hinder long-term planning and follow-through. Cultural resistance to change and military service parochialism have also played a significant role in impeding previous attempts to implement broad-based management reforms at DOD. The department has acknowledged that it confronts decades-old problems deeply grounded in the bureaucratic history and operating practices of a complex, multifaceted organization, and that many of these practices were developed piecemeal and evolved to accommodate different organizations, each with its own policies and procedures. For example, as discussed in our July 2000 report,the department encountered resistance to developing departmentwide solutions under the then Secretary's broad-based DRI. In 1997, the department established a Defense Management Council--including high-level representatives from each of the military services and other senior executives in the Office of the Secretary of Defense--which was intended to serve as the "board of directors" to help break down organizational stovepipes and overcome cultural resistance to changes called for under DRI. However, we found that the council's effectiveness was impaired because members were not able to put their individual military services' or DOD agencies' interests aside to focus on department-wide approaches to long-standing problems. We have also seen an inability to put aside parochial views. Cultural resistance to change has impeded reforms in not only financial management, but also in other business areas, such as weapon system acquisition and inventory management. For example, as we reported last year, while the individual military services conduct considerable analyses justifying major acquisitions, these analyses can be narrowly focused and do not consider joint acquisitions with the other services. In the inventory management area, DOD's culture has supported buying and storing multiple layers of inventory rather than managing with just the amount of stock needed. Further, DOD's past reform efforts have been handicapped by the lack of clear, linked goals and performance measures. As a result, DOD managers lack straightforward road maps showing how their work contributes to attaining the department's strategic goals, and they risk operating autonomously rather than collectively. In some cases, DOD had not yet developed appropriate strategic goals, and in other cases, its strategic goals and objectives were not linked to those of the military services and defense agencies. As part of our assessment of DOD's Fiscal Year 2000 Financial Management Improvement Plan, we reported that, for the most part, the plan represented the military services' and Defense components' stovepiped approaches to reforming financial management, and did not clearly articulate how these various efforts will collectively result in an integrated DOD-wide approach to financial management improvement. In addition, we reported the department's plan did not have performance measures that could be used to assess DOD's progress in resolving its financial management problems. DOD officials have informed us that they are now working to revise the department's approach to this plan so that it in future years' updates it will reflect a more strategic, department-wide vision and tool for financial management reform. The department faces a formidable challenge in responding to technological advances that are changing traditional approaches to business management as it moves to modernize its systems. For fiscal year 2001, DOD's reported total information technology investments of almost $23 billion, supporting a wide range of military operations as well as its business functions. As we have reported,while DOD plans to invest billions of dollars in modernizing its financial management and other business support systems, it does not yet have an overall blueprint--or enterprise architecture--in place to guide and direct these investments. As we recently testified, our review of practices at leading organizations showed they were able to make sure their business systems addressed corporate--rather than individual business unit--objectives by using enterprise architectures to guide and constrain investments. Consistent with our recommendation, DOD is now working to develop a financial management enterprise architecture, which is a very positive development. The final underlying cause of the department's long-standing inability to carry out needed fundamental reform has been the lack of incentives for making more than incremental change to existing "business as usual" processes, systems, and structures. Traditionally, DOD has focused on justifying its need for more funding rather than on the outcomes its programs have produced. DOD generally measures its performance by the amount of money spent, people employed, or number of tasks completed. Incentives for DOD decisionmakers to implement changed behavior have been minimal or nonexistent. Secretary Rumsfeld perhaps said it best in announcing his planned transformation at DOD, "...there will be real consequences from, and real resistance to, fundamental change." This underlying problem has perhaps been most evident in the department's acquisition area. In DOD's culture, the success of a manager's career has depended more on moving programs and operations through the DOD process rather than on achieving better program outcomes. The fact that a given program may have cost more than estimated, took longer to complete, and did not generate results or perform as promised was secondary to fielding a new program. To effect real change, actions are needed to (1) break down parochialism and reward behaviors that meet DOD-wide and congressional goals, (2) develop incentives that motivate decisionmakers to initiate and implement efforts that are consistent with better program outcomes, including saying "no" or "pulling the plug" on a system or program that is failing, and (3) facilitate a congressional focus on results-oriented management, particularly with respect to resource allocation decisions. As we testified in May 2001, our experience has shown there are several key elements that, collectively will enable the department to effectively address the underlying causes of DOD's inability to resolve its long- standing financial management problems. These elements, which will be key to any successful approach to financial management reform include addressing the department's financial management challenges as part of a comprehensive, integrated, DOD-wide business process reform; providing for sustained leadership by the Secretary of Defense and resource control to implement needed financial management reforms; establishing clear lines of responsibility, authority, and accountability for such reform tied to the Secretary; incorporating results-oriented performance measures and monitoring tied to financial management reforms; providing appropriate incentives or consequences for action or inaction; establishing an enterprisewide system architecture to guide and direct financial management modernization investments; and ensuring effective oversight and monitoring. Actions on many of the key areas central to successfully achieving desired financial management and related business process transformation goals --particularly those that rely on longer term systems improvements--will take a number of years to fully implement. Secretary Rumsfeld has estimated that his envisioned transformation may take 8 or more years to complete. Consequently, both long-term actions focused on the Secretary's envisioned business transformation, as well as short-term actions, focused on improvements within existing systems and processes, will be critical going forward. Short-term actions in particular will be critical if the department is to achieve the greatest possible accountability over existing resources and more reliable data for day-to-day decision-making while longer term systems and business process reengineering efforts are under way. Beginning with the Secretary's recognition of a need for a fundamental transformation of the department's business processes, and building on some of the work begun under past administrations, DOD has taken a number of positive steps in many of these key areas. At the same time, the challenges remaining in each of these key areas are somewhat daunting. As we have reported in the past,establishing the right goal is essential for success. Central to effectively addressing DOD's financial management problems will be the recognition that they cannot be addressed in an isolated, stovepiped, or piecemeal fashion separate from the other high- risk areas facing the department.Successfully reengineering the department's processes supporting its financial management and other business support operations will be critical if DOD is to effectively address deep-rooted organizational emphasis on maintaining "business as usual" across the department. Financial management is a crosscutting issue that affects virtually all of DOD's business areas. For example, improving its financial management operations so that they can produce timely, reliable, and useful cost information will be essential if the department is to effectively measure its progress toward achieving many key outcomes and goals across virtually the entire spectrum of DOD's business operations. At the same time, the department's financial management problems--and, most importantly, the keys to their resolution--are deeply rooted in and dependent upon developing solutions to a wide variety of management problems across DOD's various organizations and business areas. For example, we have reported that many of DOD's financial management shortcomings were attributable in part to human capital issues. The department does not yet have a strategy in place for improving its financial management human capital. This is especially critical in connection with DOD's civilian workforce, since DOD has generally done a much better job in conjunction with human capital planning for its military personnel. In addition, DOD's civilian personnel face a variety of size, shape, skills, and succession planning challenges that need to be addressed. As I mentioned earlier, and it bears repetition, the department has reported that an estimated 80 percent of the data needed for sound financial management comes from its other business operations, such as its acquisition and logistics communities. DOD's vast array of costly, nonintegrated, duplicative, and inefficient financial management systems is reflective of the lack of an enterprisewide, integrated approach to addressing its management challenges. DOD has acknowledged that one of the reasons for the lack of clarity in its reporting under the Government Performance and Results Act has been that most of the program outcomes the department is striving to achieve are interrelated, while its management systems are not integrated. As I mentioned earlier, the Secretary of Defense has made the fundamental transformation of business practices throughout the department a top priority. In this context, the Secretary established a number of top-level committees, councils and boards, including the Senior Executive Committee, Business Initiative Council, and the Defense Business Practices Implementation Board. The Senior Executive Committee was established to help guide efforts across the department to improve its business practices. This committee, chaired by the Secretary of Defense, and with membership to include the Deputy Secretary, the military service secretaries and the Under Secretary of Defense for Acquisition, Logistics and Technology, was established to function as the board of directors for the department. The Business Initiative Council, comprised of the military service secretaries and headed by the Under Secretary of Defense for Acquisition, Technology and Logistics, was established to encourage the military services to explore new money saving business practices to help offset funding requirements for transformation and other initiatives. The Secretary also established the Defense Business Practices Implementation Board, composed of business leaders from the private sector. The board is intended to tap outside expertise to advise the department on its efforts to improve business practices. The department's successful Year 2000 effort illustrated and our survey of leading financial management organizations captured the importance of strong leadership from top management. As we have stated many times before, strong, sustained executive leadership is critical to changing a deeply rooted corporate culture--such as the existing "business as usual" culture at DOD--and successfully implementing financial management reform. As I mentioned earlier, the personal, active involvement of the Deputy Secretary of Defense played a key role in building entitywide support and focus for the department's Year 2000 initiatives. Given the long-standing and deeply entrenched nature of the department's financial management problems combined with the numerous competing DOD organizations, each operating with varying and often parochial views and incentives, such visible, sustained top-level leadership will be critical. In discussing their April 2001 report to the Secretary of Defense on transforming financial management, the authors stated that, "unlike previous failed attempts to improve DOD's financial practices, there is a new push by DOD leadership to make this issue a priority." With respect to the key area of investment control, the Secretary took action to set aside $100 million for financial modernization. Strong, sustained executive leadership--over a number of years and administrations--will be key to changing a deeply rooted culture. In addition, given that significant investments in information systems and related processes have historically occurred in a largely decentralized manner throughout the department, additional actions will likely be required to implement a centralized IT investment control strategy. For example, in our May 2001 report, we recommended DOD take action to establish centralized control over transformation investments to ensure that funding is provided for only those proposed investments in systems and business processes that are consistent with the department's overall business process transformation strategy. Last summer, when I met with Secretary Rumsfeld, I stressed the importance of establishing clear lines of responsibility, decision-making authority, and resource control for actions across the department tied to the Secretary as a key to reform. As we previously reported, such an accountability structure should emanate from the highest levels and include the secretaries of each of the military services as well as heads of the department's various major business areas. The Secretary of Defense has taken action to vest responsibility and accountability for financial management modernization with the DOD Comptroller. In October 2001, the DOD Comptroller established the Financial Management Modernization Executive and Steering Committees as the governing bodies to oversee the activities related to this modernization effort and also established a supporting working group to provide day-to-day guidance and direction on these efforts. DOD reports that the executive and steering committees met for the first time in January 2002. It is clear to us that the Comptroller has the full support of the Secretary and that the Secretary is committed to making meaningful change. To make this work, it will be important that the Comptroller has sufficient authority to bring about the full, effective participation of the military services and business process owners across the department. The Comptroller has direct control of 20 percent of the data needed for sound financial management and has historically had limited ability to control information technology investments across the department. Addressing issues such as centralization of authority for information systems investments and continuity of leadership will be critical to successful business process transformation. In addition to DOD, a number of other federal departments and agencies are facing an array of interrelated business system management challenges for which resolution is likely to require a number of years and could span administrations. One option that may have merit would be the establishment of chief operating officers, who could be appointed for a set term of 5 to 7 years, with the potential for reappointment. These individuals should have a proven track record as a business process change agent for a large, diverse organization and would spearhead business process transformation across the department or agency. As discussed in our January 2001 report on DOD's major performance and accountability challenges, establishing a results orientation will be another key element of any approach to reform. Such an orientation should draw upon results that could be achieved through commercial best practices, including outsourcing and shared servicing concepts. Personnel throughout the department must share the common goal of establishing financial management operations that not only produce financial statements that can withstand the test of an audit but, more importantly, routinely generate useful, reliable, and timely financial information for day-to-day management purposes. In addition, we have previously testified that DOD's financial management improvement efforts should be measured against an overall goal of effectively supporting DOD's basic business processes, including appropriately considering related business process system interrelationships, rather than determining system-by-system compliance. Such a results-oriented focus is also consistent with an important lesson learned from the department's Year 2000 experience. DOD's initial Year 2000 focus was geared toward ensuring compliance on a system-by-system basis and did not appropriately consider the interrelationship of systems and business areas across the department. It was not until the department, under the direction of the then Deputy Secretary, shifted to a core mission and function review approach that it was able to achieve the desired result of greatly reducing its Year 2000 risk. Since the Secretary has established an overall business process transformation goal that will require a number of years to achieve, going forward, it will be especially critical for managers throughout the department to focus on specific measurable metrics that, over time, collectively will translate to achieving this overall goal. It will be important for the department to refocus its annual accountability reporting on this overall goal of fundamentally transforming the department's financial management systems and related business processes to include appropriate interim annual measures to track progress toward this goal. In the short term, it will be important to focus on actions that can be taken using existing systems and processes. Establishing interim measures to both track performance against the department's overall transformation goals and facilitate near term successes using existing systems and processes will be critical. The department has established an initial set of metrics intended to evaluate financial performance, and reports that it has seen improvements. For example, with respect to closed appropriation accounts, DOD reported during the first 4 months of fiscal year 2002, a reduction in the dollar value of adjustments to closed appropriation accounts of about 51 percent from the same 4-month period in fiscal year 2001. Other existing metrics concern cash and funds management, contract and vendor payments, and disbursement accounting. DOD also reported that it is working to develop these metrics into higher level measures more appropriate for senior management. We agree with the department's efforts to expand the use of appropriate metrics to guide its financial management reform efforts. Another key to breaking down parochial interests and stovepiped approaches that have plagued previous reform efforts will be establishing mechanisms to reward organizations and individuals for behaviors that comply with DOD-wide and congressional goals. Such mechanisms should be geared to providing appropriate incentives and penalties to motivate decisionmakers to initiate and implement efforts that result in fundamentally reformed financial management and other business support operations. In addition, such incentives and consequences will be essential if DOD is to break down the parochial interests that have plagued previous reform efforts. Incentives driving traditional ways of doing business, for example, must be changed, and cultural resistance to new approaches must be overcome. Simply put, DOD must convince people throughout the department that they must change from "business as usual" systems and practices or they are likely to face serious consequences, organizationally and personally. Establishing and implementing an enterprisewide financial management architecture will be essential for the department to effectively manage its large, complex system modernization effort now underway. The Clinger- Cohen Act requires agencies to develop, implement, and maintain an integrated system architecture. As we previously reported, such an architecture can help ensure that the department invests only in integrated, enterprisewide business system solutions and, conversely, will help move resources away from non-value added legacy business systems and nonintegrated business system development efforts. In addition, without an architecture, DOD runs the serious risk that its system efforts will result in perpetuating the existing system environment that suffers from systems duplication, limited interoperability, and unnecessarily costly operations and maintenance. In our May 2001 report, we pointed out that DOD lacks a financial management enterprise architecture to guide and constrain the billions of dollars it plans to spend to modernize its financial management operations and systems. DOD has reported that it is in the process of contracting for the development of a DOD-wide financial management enterprise architecture to "achieve the Secretary's vision of relevant, reliable and timely financial information needed to support informed decision-making." Consistent with our previous recommendations in this area, DOD has begun an extensive effort to document the department's current "as-is" financial management architecture by inventorying systems now relied on to carryout financial management operations throughout the department. DOD has identified 674 top-level systems and at least 997 associated interfaces thus far and estimates that this inventory could include up to 1,000 systems when completed. While DOD's beginning efforts at developing a financial management enterprise architecture are off to a good start, the challenges yet confronting the department in its efforts to fully develop, implement, and maintain a DOD-wide financial management enterprise architecture are unprecedented. Our May 2001 reportdetails a series of recommended actions directed at ensuring DOD employs recognized best practices for enterprise architecture management. This effort will be further complicated as the department strives to develop multiple enterprise architectures across its various business areas. For example, in June 2001, we recommendedthat DOD develop an enterprise architecture for its logistics operations. As I discussed previously, an integrated reform strategy will be critical. In this context, it is essential that DOD closely coordinate and integrate the development and implementation of these, as well as other, architectures. By following this integrated approach and our previous recommendations, DOD will be in the best position to avoid the serious risk that after spending billions of dollars on systems modernization, it will continue to perpetuate the existing systems environment that suffers from duplication of systems, limited interoperability, and unnecessarily costly operations and maintenance. Ensuring effective monitoring and oversight of progress will also be a key to bringing about effective implementation of the department's financial management and related business process reform. We have previously testifiedthat periodic reporting of status information to department top management, the Office of Management and Budget (OMB), the Congress, and the audit community was another key lesson learned from the department's successful effort to address its Year 2000 challenge. Previous Financial Management Improvement Plans DOD submitted to the Congress have simply been compilations of data call information on the stovepiped approaches to financial management improvements received from the various DOD components. It is our understanding that DOD plans to change its approach and anchor its plans in an enterprise system architecture. If the department's future plans are upgraded to provide a department-wide strategic view of the financial management challenges facing the DOD along with planned corrective actions, these plans can serve as an effective tool not only to help guide and direct the department's financial management reform efforts, but a tool for oversight. Going forward, this Subcommittee's annual oversight hearings, as well the active interest and involvement of other cognizant defense and oversight committees in the Congress, will continue to be key to effectively achieving and sustaining DOD's financial management and related business process reform milestones and goals. Given the size, complexity, and deeply engrained nature of the financial management problems facing DOD, heroic end-of-the year efforts relied on by some agencies to develop auditable financial statement balances are not feasible at DOD. Instead, a sustained focus on the underlying problems impeding the development of reliable financial data throughout the department will be necessary and is the best course of action. I applaud the proposals spearheaded by the Senate Armed Services Committee, and subsequently enacted as part of the fiscal year 2002 National Defense Authorization Act, to provide a framework for redirecting the department's resources from the preparation and audit of financial statements that are acknowledged by DOD leadership to be unauditable to the improvement of DOD's financial management systems and financial management policies, procedures and internal controls. Under this new legislation, the department will also be required to report to the Congress on how resources have been redirected and the progress that has been achieved. This reporting will provide an important vehicle for the Congress to use in assessing whether DOD is using its available resources to best bring about the development of timely and reliable financial information for daily decisionmaking and transform its financial management as envisioned by the Secretary of Defense.

Financial management problems at the Department of Defense (DOD) are complex, long-standing, and deeply rooted throughout its business operations. DOD's financial management deficiencies represent the single largest obstacle to achieving an unqualified opinion on the U.S. government's consolidated financial statements. So far, none of the military services or major DOD components have passed the test of an independent financial audit because of pervasive weaknesses in financial management systems, operations, and controls. These problems go back decades, and earlier attempts at reform have been unsuccessful. DOD continues to rely on a far-flung, complex network of finance, logistics, personnel, acquisition, and other management information systems for financial data to support day-to-day management and decision-making. This network has evolved into an overly complex and error-prone operation with (1) little standardization across DOD components, (2) multiple systems performing the same tasks, (3) the same data stored in multiple systems, (4) manual data entry into multiple systems, and (5) a large number of data translations and interfaces, which combine to exacerbate problems with data integrity. Many of the elements that are crucial to financial management reform and business process transformation--particularly those that rely on long-term systems improvements--will take years to fully implement.

Iraq possesses the third largest oil reserve in the world, estimated at a total of 115 billion barrels. As shown in figure 1, only Saudi Arabia and Iran have larger proved world oil reserves. Iraq's ability to extract these reserves has varied widely over time and Iraq's oil infrastructure has deteriorated over several decades due to war damage, inadequate maintenance, and the limited availability of spare parts, equipment, new technology, and financing. In addition, Iraq's crude oil production and export capacities were further affected by considerable looting after Operation Iraqi Freedom and continued attacks on crude oil and refined product pipelines. Nonetheless, crude oil production and exports have recovered since 2003. As of June 2008, Iraq's crude oil export averaged 2.01 million barrels per day (mbpd), according to Iraqi oil export receipt data (see fig. 2). Iraq generally receives a discounted export price for its crude oil, in part due to its relatively lower quality compared with crude oil sales of the U.S. West Texas Intermediate (WTI) and Brent--benchmarks for world oil prices. Figure 3 shows Iraqi crude oil export prices in comparison to world benchmark prices. According to data on Iraqi crude oil export receipts reported by the Central Bank of Iraq (CBI) for January through June 2008, Iraqi crude oil was priced at an average of $96.88 per barrel. During this same period, WTI and Brent prices averaged $110.95 and $109.17 per barrel, respectively. On average, the CBI price was 12.9 percent and 12.7 percent less than the WTI and Brent, respectively, from January 2007 through June 2008. The following section provides information on Iraq's revenues from 2005 through 2007 and estimated revenues for 2008. From 2005 through 2007, the Iraqi government generated an estimated $96 billion in cumulative revenues. This estimate is based on actual crude oil export sales of $90.2 billion as reported by the Central Bank of Iraq and Iraqi taxes, interest, and other revenues, of $5.7 billion as estimated by IMF. Ninety-four percent of the total estimated revenues came from the export sale of crude oil. The Central Bank of Iraq export oil revenue data provided by Treasury are based on actual export oil receipts. These data are generally consistent with estimates of Iraq's crude oil export sales reported by the International Advisory and Monitoring Board (IAMB), the IMF, and the EIA. (See app. II for data on Iraqi crude oil export revenue from these different sources.) Crude oil export revenues increased an average of about 30 percent each year from 2005 to 2007 due to increases in oil exports and price. For 2008, we estimate that Iraq could generate between $73.5 billion to $86.2 billion in total revenues. Table 1 displays the projected total revenues, based on six scenarios projecting oil export revenues by varying price and volume of exports. These scenarios assume that tax and other revenues (a small portion of total revenues) will be $6.9 billion for 2008 but that export oil revenues will vary based on the price Iraq receives for its oil and the volume it exports. As a result, we project that Iraq could generate between $66.5 billion and $79.2 billion in oil revenues in 2008, more than twice the average annual amount Iraq generated from 2005 through 2007. These scenarios use the actual prices Iraq received for its oil exports over the first 6 months of 2008, as reported by the Central Bank of Iraq. For the last 6 months of 2008, we varied the volume exported from 1.89 to 2.01 mbpd and price received from $96.88 to $125.29 per barrel. For a detailed discussion of these scenarios, see appendix III. The following section provides information on the Government of Iraq's estimated expenditures from 2005 through 2007, expenditure ratios from 2005 through 2007, and estimated expenditures for 2008. From 2005 through 2007, the Iraqi government spent an estimated $67 billion on a variety of operating and investment activities, as reported by the Ministry of Finance. As displayed in table 2, Iraq's expenditures can be divided between operating and investment expenditures. Operating expenses include salaries and pensions, operating goods and services, interest payments, subsidies to public and private enterprises, social benefits, and other transfers. Investment expenses include capital goods and capital projects such as structures, machinery, and vehicles. Our analysis of Ministry of Finance data on Iraqi expenditures from 2005 through 2007 found the following: Iraq spent 90 percent of the $67 billion on operating expenses and a smaller portion of these funds--about 10 percent--on investment expenses. Iraq's dollar expenditures grew by about 23 percent per year, from $17.6 billion to $26.6 billion, largely due to increased spending on Iraqi security personnel. (See app. V for details on expenditures by the security ministries and other selected ministries.) However, annual average growth rates computed in Iraqi dinars were 13 percent per year. Growth rates in dinar may be more informative since Iraq spends its budget in dinars. Using dollar-denominated expenditures inflates the growth rates because the dinar appreciated 19 percent against the dollar in 2007. The Iraqi government spent about $947 million, or 1 percent of its total expenditures for the maintenance of Iraqi- and U.S.-funded investments. These expenses include maintenance of roads, bridges, vehicles, buildings, water and electricity installations, and weapons. Investment expenditures increased at an annual rate of 42 percent in Iraqi dinars. However, most of this increase occurred in 2007 and was due primarily to the increase in investment by the Kurdistan Regional Government (KRG), not by the central ministries responsible for providing critical services to the Iraqi people, including oil, water, electricity, and security. For example, of the $1.8 billion increase in investment expenditures in 2007, $1.3 billion, or more than 70 percent was due to a reported increase in KRG investment. Investment by the central ministries declined in 2007. Although Iraq's total expenditures grew from 2005 through 2007, Ministry of Finance data show that the Iraqi government was unable to spend all of the funds it budgeted. Expenditure ratios are defined as actual expenditures for a ministry or activity divided by the budgeted amount for this ministry or activity. This ratio is a preliminary measure as to how well the government is able to implement its intentions and priorities. Figure 4 displays our analysis of Iraqi expenditure ratios for the 2005 through 2007 budgets. Specifically, we found: While Iraq's total expenditures increased from 2005 through 2007, Iraq spent a declining share of its budget allocations--73 to 65 percent from 2005 to 2007. In each year, Iraq spent a greater percentage of its operating budget, including salaries, than its investment budget. For example, in 2007, the Iraqi government spent 80 percent of its $28.9 billion operating budget and 28 percent of its $12.2 billion investment budget. The central ministries, responsible for providing essential services to the Iraqi people, spent a smaller share of their investment budgets than the Iraqi government as a whole. Further, their investment expenditure ratios declined from 14 percent in 2005 to 11 percent in 2007. Specifically, while the central ministries budgeted $5.7 billion and $8.1 billion for investments in 2005 and 2007, they spent $825 million and $896 million, respectively. In 2008, we estimate that the Iraqi government could spend between $35.3 billion and $35.9 billion of its $49.9 billion 2008 budget. This estimate is based on the assumption that the expenditure ratio in 2008 will be the same as the average expenditure ratios from 2005 to 2007 except expenditures for war reparations (5 percent of estimated oil export revenues), which will vary with differing scenarios for oil exports. This estimate implies a more than 21-percent increase in dinar expenditures in 2008, compared with the annual average of 13 percent over the past 3 years. However, the Iraqi government is considering a supplemental budget for 2008. According to Treasury, Iraq's Ministry of Finance introduced a $22 billion supplemental budget, including about $8 billion dedicated to capital spending, which would bring the total 2008 budget allocation to more than $70 billion. This supplemental was submitted to the Council of Representatives in July, according to Treasury. However, based on past expenditure performance, it is unclear whether Iraq will be able to spend this sizable budget. Iraq also has outstanding foreign liabilities. In July 2008, Treasury officials estimated that Iraq will owe between $50 billion to $80 billion in bilateral foreign debt. In addition, Iraq owes $29 billion in war reparations to Kuwait. Oil revenues in Iraq are currently immune from garnishment, liens, and other legal judgments, but this immunity will expire in December 2008 absent further UN Security Council action. As of December 31, 2007, the Iraqi government had financial deposits of $29.4 billion held in the Development Fund for Iraq (DFI) at the New York Federal Reserve Bank, central government deposits at the Central Bank of Iraq (CBI), and central government deposits in Iraq's commercial banks, which includes state-owned banks such as Rafidain and Rasheed (see table 3). The data for the DFI financial deposits are based on a July 2008 audited statement by IAMB. The financial deposits in the Central Bank of Iraq and Iraq's commercial banks come from the IMF's International Financial Statistics, as of July 2008. The financial deposits at the end of 2007 result from an estimated budget surplus of about $29 billion from 2005 to 2007 and unverified balances prior to 2005. As displayed in table 4, we estimate that Iraq's budget surplus for 2008 could range from $38.2 billion to $50.3 billion, based on the six scenarios we used to project export oil revenues by varying price and volume of export. (See app. III for the six scenarios projecting export oil revenues.) This estimate is based on the assumption that the expenditure ratio in 2008 will be the same as the average expenditure ratios from 2005 to 2007 except expenditures for war reparations (5 percent of estimated oil export revenues), which will vary with differing scenarios for oil exports. However, as previously noted, Iraq is considering a supplemental budget of $22 billion for 2008. If approved and then spent, the proposed budget supplemental would reduce the projected surplus. In addition, the IMF estimates that the Central Bank of Iraq had, as of December 31, 2007, about $31.4 billion in gross foreign exchange reserves. Gross foreign exchange reserves help support Iraq's monetary policy and back the domestic currency to maintain confidence in the Iraqi dinar and control inflation. It is important to note that adding the $31.4 billion in gross foreign exchange reserves to the Iraqi government's $29.4 billion in financial deposits may result in double counting. For example, if the Iraqi government uses $1 billion to pay for imported food, both its cash balances and gross foreign exchange reserves would decrease by $1 billion. While the amount the central bank may hold in reserve is not fixed, the IMF stand-by agreement with Iraq specifies a floor of $21.1 billion. CBI's gross foreign exchange reserves have, on average, increased by more than $7 billion per year from 2005 through 2007. Since fiscal year 2003, Congress has appropriated about $48 billion to U.S. agencies to finance stabilization and reconstruction efforts in Iraq, including developing Iraq's security forces, enhancing Iraq's capacity to govern, and rebuilding Iraq's oil, electricity, and water sectors, among others. As of June 2008, of the $48 billion in appropriated U.S. funds from fiscal years 2003 through 2008, about $42 billion (88 percent) had been obligated and about $32 billion (68 percent) had been spent. Over two-thirds of the $32 billion spent, or $23.2 billion, have supported reconstruction and stabilization activities in the security, oil, water, and electricity sectors. Table 5 compares the allocations and spending of comparable activities by the United States and Iraq in these sectors. The Iraqi government developed its first annual budget in 2005. From May 2003 through June 2004, the Coalition Provisional Authority (CPA) was responsible for spending Iraqi oil revenues for the benefit of the Iraqi people. We previously reported that the CPA allocated approximately $7 billion in Iraqi funds for relief and reconstruction projects, primarily for the import of refined fuel products, security, regional programs, and oil and power projects. Iraq allocated $28 billion between 2005 and 2008 for the four sectors, and U.S. agencies allocated $33.4 billion from fiscal years 2003 to June 2008. Allocations in the security sector account for $22.5 billion of the U.S. amount. As of June 2008, the United States spent 70 percent, or $23.2 billion, of the amount it allocated for these four sectors. In contrast, as of April 2008, Iraq spent 14 percent, or $3.9 billion, of the amount it allocated for similar activities in these sectors. The security sector received the largest share of funds from the United States and Iraq. U.S. government, coalition, and international agencies have identified a number of factors affecting the Iraqi government's ability to spend more of its revenues on capital investments intended to rebuild its infrastructure. These factors include Iraq's shortage of trained staff, weak procurement and budgeting systems, and violence and sectarian strife. First, these officials have observed the relative shortage of trained budgetary, procurement, and other staff with the necessary technical skills as a factor limiting the Iraqi government's ability to plan and execute its capital spending. Officials report a shortage of trained staff with budgetary experience to prepare and execute budgets and a shortage of staff with procurement expertise to solicit, award, and oversee capital projects. Second, weak procurement, budgetary, and accounting systems are of particular concern in Iraq because these systems must balance efficient execution of capital projects while protecting against reported widespread corruption. Third, these officials have noted that violence and sectarian strife remain major obstacles to developing Iraqi government capacity, including its ability to execute budgets for capital projects. The high level of violence contributes to a decrease in the number of workers available, can increase the amount of time needed to plan and complete capital projects, and hinders U.S. advisors' ability to provide the ministries with assistance and monitor capital project performance. Since 2005, U.S. agencies have been working with the Iraqis to assist the government in addressing challenges in executing its capital budgets. As we have previously reported, the United States has funded efforts since 2005 to build the capacity of key civilian ministries and security ministries to improve the Iraqi government's ability to effectively execute its budget for capital projects. In 2005 and 2006, the United States provided funding for programs to help build the capacity of key civilian ministries and the Ministries of Defense and Interior. Ministry capacity development refers to efforts and programs to advise and help Iraqi government employees develop the skills to plan programs, execute their budgets, and effectively deliver government services such as electricity, water, and security. We found multiple U.S. agencies leading individual efforts and recommended that Congress consider conditioning future appropriations on the completion of an integrated strategy for U.S. capacity development efforts. In commenting on a draft of this report, Treasury stated that Treasury and Embassy Baghdad are working to improve the pace of Iraqi budget execution and ability to evaluate whether Iraqi capital spending achieves its intended impact. To improve budget reporting, transparency, and accountability, the U.S. and Iraqi governments restarted the Iraq Financial Management Information System (IFMIS) on July 5, 2008, with the expectation that the IFMIS will be operational in all 250 Iraqi spending units by early 2009. In January 2008, we reported that the U.S. Agency for International Development began the IFMIS system in 2003, experienced significant delays, and suspended the IFMIS system in June 2007. Iraq, with the third largest oil reserve in the world, has benefited from the recent rise in oil prices and generated billions of dollars in revenues. In 2008, Iraq will likely earn between $67 billion and $79 billion in oil sales-- at least twice the average annual amount Iraq generated from 2005 through 2007. This substantial increase in revenues offers the Iraqi government the potential to better finance its own security and economic needs. We provided a draft of this report to the Departments of State, the Treasury, and Defense for review. We received written comments from Treasury, which we have reprinted in appendix VI. Treasury agreed with the findings of this report. Treasury stated that the report accurately highlights that Iraq's revenues have grown substantially in recent years and presents a credible picture of Iraq's cumulative budget surpluses and expected 2008 budget surplus. In addition, Treasury stated that the increase in Iraqi revenues places the Government of Iraq in a stronger position to ultimately shoulder the full burden of its development, reconstruction, and security programs. Treasury noted that Iraq has adequate funds to make and maintain capital investments that deliver services and create conditions that foster economic growth. Although Iraq's budget surplus is likely to grow significantly over the course of 2008, Treasury stated that the Government of Iraq still needs to improve the effectiveness of its budget execution and accountability for Iraqi funds. Treasury commented that the pace of spending has been held back by various factors, including deficiencies in capacity and security. Treasury also provided technical comments, which we incorporated as appropriate. State provided technical comments, which we incorporated as appropriate. DOD did not provide comments. We are sending copies of this report to interested congressional committees. We will also make copies available to others on request. In addition, this report is available on GAO's Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact Joseph A. Christoff, Director, International Affairs and Trade, at (202) 512-8979 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VII. In this report, we discuss (1) Iraq's estimated revenues from 2005 through 2008, (2) Iraq's estimated expenditures from 2005 through 2008, (3) Iraq's financial deposits through 2007 and budget surpluses, (4) U.S. cumulative expenditures on stabilization and reconstruction activities in Iraq since 2003, and (5) factors affecting Iraq's efforts to accelerate spending. This report builds on GAO's extensive body of work on Iraq, including our May 2007 assessment of reconstruction efforts in rebuilding Iraq's oil and electricity sector, our January 2008 assessment of Iraq's budget execution, and our June 2008 assessment on the progress made in meeting key goals in The New Way Forward. To complete this work, we analyzed relevant data, reviewed U.S. agency and International Monetary Fund (IMF) documents, and interviewed officials from the Departments of State, Defense, and the Treasury; Department of Energy's Energy Information Administration (EIA); and the IMF. We also reviewed translated copies of Iraqi documents, including budget, capital spending, and Central Bank of Iraq export oil receipts data. We provided drafts of the report to the Departments of the Treasury, State, and Defense. We received formal comments from the Department of the Treasury, which are included in appendix VI. We conducted this performance audit from May to August 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. To estimate Iraq's budget revenues from 2005 through 2007, we used data on export oil revenues and added estimates for other revenues. Crude oil export revenues are based on export oil receipts data from the Central Bank of Iraq (CBI) provided by the Department of the Treasury. The data account for all export transactions including amount paid, exported volume, price charged, date of shipment, payment date, and destination. The transactions are recorded on a daily basis. Monthly prices are calculated by dividing the total revenue by the total output from that month; export volume is calculated by aggregating the output from all the transactions from each month. We found that data were sufficiently reliable to present Iraqi oil export revenue as part of estimates of Iraqi revenues from 2005 through 2007. We determined that the 2004 budget revenue and expenditure data were not reliable and did not include this data in our review. To determine Iraq's tax and other revenues, we added preliminary estimates of net domestic revenues from oil-related public enterprises, taxes, and other revenues as reported in IMF's stand-by arrangement with Iraq. We interviewed IMF officials and made comparisons to other available sources to determine the reliability of those estimates. We found that the data were sufficiently reliable for the purpose of our analysis. We also projected total revenues for 2008 by forecasting export oil revenues and added those to IMF's forecast of net revenues from oil-related public enterprises and taxes and other revenues. We developed six alternative scenarios for export oil revenues. See appendix III for the underlying assumptions about prices and export volumes for each scenario. To provide detailed information on the Iraqi government's estimated expenditures, we reviewed Iraqi official Ministry of Finance monthly and annual budget and expenditure data for fiscal years 2005 through 2008, which were provided by Treasury. We used Iraq dinar-dollar exchange rates to convert dinar budget and expenditure figures to dollars. To provide a preliminary view of spending trends for the 3-year period 2005- 2007, we calculated annual average growth rates using an ordinary least squares regression technique. Although we computed these growth rates for both dollar and dinar denominated spending, we believe that growth rates in dinars are more informative because actual expenditures are made in dinars. Using dollar-denominated expenditures inflates the growth rates due to the 19-percent appreciation of the dinar against the dollar during this period. We did not use special reports developed by the Ministry of Finance because they include Iraqi commitments to spend as well as actual expenditures. We did not use the special reports for our analyses for two reasons: (1) Treasury Department officials stated in our meeting with them that the special reports contain unreliable data, and (2) the special reports do not define commitments, measure them, or describe how or when these commitments would result in actual expenditures. In addition, our review of these special reports show inconsistent use of poorly defined budget terms, as well as columns and rows that do not add up. Beginning in 2007, the government of Iraq adopted a new budget classification to comply with an IMF requirement. To compare the same expenditure categories over time, we re-grouped some sub-categories, as explained in appendix IV. Detailed breakdowns of the goods and services category are not available for individual ministries beginning in 2007. For the three sub-categories goods, services, and maintenance, the percentage shares were calculated for the years 2005 and 2006. Although we included the latest available 2008 expenditure figures in our tables, we did not use 2008 to calculate growth rates or shares of total expenditures for the 2005 through 2007 period. To provide some insight into how well the Iraqi government was able to implement its intentions and priorities, we constructed an expenditure ratio: actual expenditures divided by the budgeted amount for that activity or ministry. This does not capture the quality or effectiveness of expenditures, but only whether the government was able to spend the money it had budgeted. Treasury officials informed us that their analysis indicated that official Ministry of Finance data were sufficiently reliable. In addition to our interviews of cognizant officials, we examined and reviewed ministry data and compared monthly and annual data for internal consistency. Although we did not independently verify the precision of Iraqi expenditure data for 2005 through 2008, we believe that they are sufficiently reliable for the purposes of our report. However, we found that the data for 2004 were not sufficiently reliable and did not use them in our report. To identify Iraqi financial deposits as of the end of 2007, we reviewed IMF documents and interviewed IMF and Treasury officials. The data for the DFI balances are based on a July 2008 audited statement by the International Advisory and Monitoring Board (IAMB). The data on central government deposits at the CBI and Iraq's commercial banks come from the International Financial Statistics, as of July 2008. We determined that these reported data were sufficiently reliable for our analysis. To estimate Iraqi government's cumulative budget surplus from 2005 to 2007 and projected surplus for 2008, we subtracted estimated total expenditures from estimated total revenues. The data source for Iraqi spending is Iraq's Ministry of Finance. The projected expenditures for 2008 are based on the assumption that the 2005 through 2007 average budget execution rate of 68 percent will remain the same in 2008. We selected this approach because it provided the highest estimate of 2008 expenditures based on recent historic data and trends for 2005 through 2007 and the approved 2008 budget. We varied total expenditures since the amount of war reparations varied. These reparation payments are calculated at 5 percent of the estimated oil export revenues projected in our six scenarios. In addressing the amount of U.S. funds that have been appropriated, obligated, and disbursed, we collected funding information from the Departments of Defense and State and relied on prior GAO reporting and data from the Departments of Defense, State, the Treasury, U.S. Agency for International Development, and the Coalition Provisional Authority to update the information where necessary. Although we have not audited the funding data, we discussed the sources and limitations of the data with the appropriate officials and checked them, when possible, with other information sources. We found the data were sufficiently reliable for broad comparisons in the aggregate and the category descriptions we have made in this report. To update information on factors affecting the Iraqi government's ability to spend its revenues, we reviewed DOD, State, and IMF reports and met with officials from State, Treasury, DOD, and IMF. We are providing estimates of Iraq's crude oil export revenues from three sources to show how they compare with actual oil export receipt data reported by the Central Bank of Iraq (CBI). Estimates of Iraq's crude oil export revenues from different entities--the International Advisory and Monitoring Board (IAMB), Energy Information Administration (EIA), and International Monetary Fund (IMF)--ranged from about $80.2 to about $93.1 billion for the period 2005 through 2007. As shown by figure 5, these sources are consistent with Iraq's export oil revenues as reported by the CBI and show a consistent upward trend for that period. For example, CBI crude oil export receipt data for 2007 reported revenues of $37.4 billion compared to estimates that ranged from $33.3 billion to $37.5 billion. IAMB data are based on its audit of Iraqi oil receipts and do not include the 5 percent of Iraq's export oil revenues set aside into a United Nations compensation fund to process and pay claims for losses resulting from Iraq's invasion and occupation of Kuwait. The IMF data are estimates based on its own analysis and Iraqi authorities' estimates, and EIA data are estimates based on its own analysis of a variety of sources. This appendix presents our methodology for projecting Iraq's crude oil export revenues for 2008 and discusses the underlying price and export volume assumptions. First, we calculated the average monthly prices and volumes for Iraqi crude oil exports from January through June 2008, the most recent months for which data were available. For those months, we used data on the volume and price of crude oil exports as reported by the Central Bank of Iraq (CBI). Second, we made assumptions about the price and export volumes of Iraqi crude oil based on historical prices and export volumes. We used these assumptions to project monthly prices and export volumes for the period July through December 2008. Third, we used the actual price and export volume data for the first half of the year and the projected price and export volume data for the second half of the year to project a range of crude oil revenues for Iraq, using six alternative scenarios. We calculated the average monthly prices of Iraqi oil and the corresponding export volumes for January through June 2008 using actual transaction prices and volume, as reported by CBI. These monthly averages are based on the daily prices per barrel and export volumes for each month. Monthly prices are calculated by dividing the total revenue by the total output from that month; export volume is calculated by aggregating the output from all the transactions from each month. We developed six scenarios of export oil revenues by varying price and export volume. Table 6 summarizes alternative assumptions for export prices and alternative assumptions for export volumes. For the forecast period, we assume two constant levels of export volume for each month from July through December 2008: the January through June 2008 average export volume and the June 2008 export volume. This assumption is based on the reasoning that the forecast time frame is short and export volume is constrained by Iraq's oil production capacity and capability, as well as the level needed for Iraq's domestic consumption. For each of the two export volumes, we developed a base case, an optimistic scenario, and a pessimistic scenario for the behavior of prices. For the base case, we set prices equal to the June 2008 level. This implies no growth in prices for the rest of the year. For the optimistic case, we determined prices by applying a 12.9 percent discount from the average monthly prices of the West Texas Intermediate (WTI), a key benchmark for world crude oil prices forecast by EIA. This implies 1.12 percent growth in Iraqi crude oil export prices from June to December 2008. Finally, for the pessimistic case, we set prices equal to the January through June 2008 average value. This implies a price drop in July 2008 with no change afterwards; thus, the average monthly growth rate in prices from June to December 2008 is -1.93 percent. As shown in table 7, using a combination of our price and export volume assumptions, we projected six scenarios for Iraqi oil exports for July through December 2008. Figure 6 depicts the total export oil revenues for each of the two levels of assumed export volume, 1.89 and 2.01 mbpd. Total actual export oil revenues from January to June 2008 were $32.88 billion. This appendix provides information on Iraq's budget to clarify our classification of expenditures as reported by the Ministry of Finance. Iraq's budget is divided into current operating expenditures and investment. In 2007, the Iraqi government adopted a new chart of accounts as recommended by the International Monetary Fund. To compare the budget expenditures over time, we combined various expenditure categories into four groups. Column 1 in table 8 shows the nine categories of expenditures reported in 2005 and 2006 and their combination into four groups presented in the table; column 2 shows the eight categories used in the 2007 and the 2008 chart of accounts. Operating expenditures consist of (A) employee compensation, (B) goods and services, and (C) other operating expenditures. This appendix provides additional information on the expenditures of five central ministries--defense, interior, oil, water, and electricity-- responsible for providing critical services to the Iraq people. Table 9 provides information on the operating and investment expenditures for the security ministries--Ministry of Interior, responsible for internal police and security forces, and Ministry of Defense, responsible for the Iraqi military forces. Our analysis of Iraq's Ministry of Finance expenditure data from 2005 through 2007 for the security ministries--defense and interior--found the following: From 2005 through 2007, the Iraqi security ministries primarily spent their funds on operating expenses. According to data from Iraq's Ministry of Finance, Iraq's security ministries spent 94 percent ($9.1 billion) of their total expenditures on operating expenses and 6 percent ($609 million) on investment expenses. From 2005 through 2007, total expenditures by Iraq's security ministries grew at an annual rate of 36 percent, in Iraqi dinars, compared to the 13 percent annual growth rate of expenditures by the Iraqi government. This growth in expenditures is largely due to a 39 percent increase in expenditures on salaries and wages, reflecting the increase in military and police personnel. Expenditures on items other than employee compensation, such as weapons, ammunition, trucks and special vehicles, uniforms, food, structures, and other equipment account for 25 percent of total expenditures. These expenditures have grown, in Iraqi dinars, at an annual rate of 25 percent less than the growth rate of compensation. With the adoption of the new chart of accounts in 2007, it is unclear whether some purchases that were recorded as capital goods were now being recorded under goods and services or investment expenditures. We have chosen to combine and report these categories for the security ministries as total expenditures excluding employee compensation. Table 10 provides information on the operating and investment expenditures for ministries providing key essential services--Ministries of Oil, Water Resources, and Electricity. Our analysis of Iraq's Ministry of Finance expenditure data from 2005 through 2007 for the three ministries, oil, electricity, and water-- responsible for providing critical services to the Iraqi people--found the following: Investment expenditures comprise two-thirds of the total expenditures for these three critical ministries--oil, water, and electricity-- as compared with only 10 percent for the government as a whole. Spending of their investment budgets has declined significantly from 2005 through 2007. According to Ministry of Finance data, investment spending by the Ministry of Oil and Ministry of Electricity declined at an annual rate of 92 percent and 93 percent, respectively, during this period. Investment spending by the Ministry of Water declined at an annual rate of 13 percent. Further, from 2005 through 2007 the Government of Iraq allocated almost $12 billion dollars toward investment activities of these ministries. However, as table 11 shows, the ministries of oil and electricity spent only a small percentage of the investment funds made available to them. The Ministry of Water Resources spent about 50 percent of its investment budget, while the Ministry of Oil spent 3 percent and Ministry of Electricity spent 14 percent. Key contributors to this report include Godwin Agbara, Assistant Director; Pedro Almoguera; Monica Brym; Lynn Cothern; Gergana Danailova- Trainor; Bruce Kutnick; and Justin Monroe. Technical assistance was provided by Ashley Alley, Jeffrey Baldwin-Bott, Benjamin Bolitzer, Daniel Chen, Aniruddha Dasgupta, Walker Fullerton, Elizabeth Repko, Jena Sinkfield, and Eve Weisberg.

Iraq has an estimated 115 billion barrels of crude oil reserves, the third largest in the world. Oil export revenues are critical to Iraq's reconstruction, accounting for over 90 percent of the Iraqi government's revenues. In June 2008, GAO reported low 2007 spending rates by the Iraqi government for some critical sectors in the face of declining U.S. investments in these sectors. This report examines (1) Iraq's estimated revenues from 2005 through 2008, (2) Iraq's estimated expenditures from 2005 through 2008, (3) Iraq's financial deposits through 2007 and budget surpluses, (4) U.S. cumulative expenditures on stabilization and reconstruction activities in Iraq since 2003, and (5) factors affecting Iraq's efforts to accelerate spending. GAO analyzed relevant data and reviewed documents, including Central Bank of Iraq oil receipts data, International Monetary Fund's (IMF) reports, translated copies of Iraqi budget and expenditures, and U.S. agency funding data and reports. GAO also interviewed officials from the Departments of Defense (DOD), Energy, State, Treasury, and the IMF. This report contains no recommendations. Treasury agreed with the report's findings and stated that Iraq has adequate funds to make and maintain capital investments that deliver services and foster economic growth. State provided technical comments. DOD had no comments. From 2005 through 2007, the Iraqi government generated an estimated $96 billion in cumulative revenues, of which crude oil export sales accounted for about $90.2 billion, or 94 percent. For 2008, GAO estimates that Iraq could generate between $73.5 billion and $86.2 billion in total revenues, with oil exports accounting for between $66.5 billion to $79.2 billion. Projected 2008 oil revenues could be more than twice the average annual amount Iraq generated from 2005 through 2007. These projections are based on actual sales through June 2008 and projections for July to December that assume an average export price from $96.88 to $125.29 per barrel and oil export volumes of 1.89 to 2.01 million barrels per day. From 2005 through 2007, the Iraqi government spent an estimated $67 billion on operating and investment activities. Ninety percent was spent on operating expenses, such as salaries and goods and services, and the remaining 10 percent on investments, such as structures and vehicles. The Iraqi government spent only 1 percent of total expenditures to maintain Iraq- and U.S.-funded investments such as buildings, water and electricity installations, and weapons. While total expenditures grew from 2005 through 2007, Iraq was unable to spend all its budgeted funds. In 2007, Iraq spent 80 percent of its $29 billion operating budget and 28 percent of its $12 billion investment budget. For 2008, GAO estimates that Iraq could spend between $35.3 billion and $35.9 billion of its $49.9 billion budget. As of December 31, 2007, the Iraqi government had accumulated financial deposits of $29.4 billion, held in the Development Fund for Iraq and central government deposits at the Central Bank of Iraq and Iraq's commercial banks. This balance is the result, in part, of an estimated cumulative budget surplus of about $29 billion from 2005 to 2007. For 2008, GAO estimates a budget surplus of between $38.2 billion to $50.3 billion. If spent, a proposed Iraqi budget supplemental of $22 billion could reduce this projected surplus. Since fiscal year 2003, the United States appropriated about $48 billion for stabilization and reconstruction efforts in Iraq; it had obligated about $42 billion of that amount as of June 2008. U.S. agencies spent about $23.2 billion on the critical security, oil, electricity, and water sectors. From 2005 through April 2008, Iraq spent about $3.9 billion on these sectors. U.S. government, coalition, and international officials have identified a number of factors that have affected the Iraqi government's ability to spend more of its revenues on capital investments. These factors included the shortage of trained staff; weak procurement and budgeting systems; and violence and sectarian strife. The United States has funded activities to help build the capacity of key civilian and security ministries to improve Iraq's ability to execute its capital project budget.

The tax gap is an estimate of the difference between the taxes--including individual income, corporate income, employment, estate, and excise taxes--that should have been paid voluntarily and on time and what was actually paid for a specific year. The estimate is an aggregate of estimates for the three primary types of noncompliance: (1) underreporting of tax liabilities on tax returns; (2) underpayment of taxes due from filed returns; and (3) nonfiling, which refers to the failure to file a required tax return altogether or on time. IRS's tax gap estimates for each type of noncompliance include estimates for some or all of the five types of taxes that IRS administers. As shown in table 1, underreporting of tax liabilities accounted for most of the tax gap estimate for tax year 2001. IRS has estimated the tax gap on multiple occasions, beginning in 1979, relying on its Taxpayer Compliance Measurement Program (TCMP). IRS did not implement any TCMP studies after 1988 because of concerns about costs and burdens on taxpayers. Recognizing the need for current compliance data, in 2002 IRS implemented a new compliance study called the National Research Program (NRP) to produce such data for tax year 2001 while minimizing taxpayer burden. IRS has concerns with the certainty of the tax gap estimate for tax year 2001 in part because some areas of the estimate rely on old data, IRS has no estimates for other areas of the tax gap, and it is inherently difficult to measure some types of noncompliance. IRS used data from NRP to estimate individual income tax underreporting and the portion of employment tax underreporting attributed to self-employed individuals. The underpayment segment of the tax gap is not an estimate, but rather represents the tax amounts that taxpayers reported on time but did not pay on time. Other areas of the estimate, such as corporate income tax and employer-withheld employment tax underreporting, rely on decades-old data. Also, IRS has no estimates for corporate income, employment, and excise tax nonfiling or for excise tax underreporting. In addition, it is inherently difficult for IRS to observe and measure some types of underreporting or nonfiling, such as tracking cash payments that businesses make to their employees, as businesses and employees may not report these payments to IRS in order to avoid paying employment and income taxes, respectively. IRS's overall approach to reducing the tax gap consists of improving service to taxpayers and enhancing enforcement of the tax laws. IRS seeks to improve voluntary compliance through efforts such as education and outreach programs and tax form simplification. IRS uses its enforcement authority to ensure that taxpayers are reporting and paying the proper amounts of taxes through efforts such as examining tax returns and matching the amount of income taxpayers report on their tax returns to the income amounts reported on information returns it receives from third parties. IRS reports that it collected over $48 billion in fiscal year 2006 from noncompliant taxpayers it identified through its various enforcement programs. In spite of IRS's efforts to improve taxpayer compliance, the rate at which taxpayers pay their taxes voluntarily and on time has tended to range from around 81 percent to around 84 percent over the past three decades. Any significant reduction of the tax gap would likely depend on an improvement in the level of taxpayer compliance. No single approach is likely to fully and cost-effectively address noncompliance and therefore multiple approaches are likely to be needed. The tax gap has multiple causes; spans five types of taxes; and is spread over several types of taxpayers including individuals, corporations, and partnerships. Thus, for example, while simplifying laws should help when noncompliance is due to taxpayers' confusion, enforcement may be needed for taxpayers who understand their obligations but decline to fulfill them. Similarly, while devoting more resources to enforcement should increase taxes assessed and collected, too great an enforcement presence likely would not be tolerated. Simplifying or reforming the tax code, providing IRS more enforcement tools, and devoting additional resources to enforcement are three major tax gap reduction approaches discussed in more detail below, but providing quality services to taxpayers plays an important role in improving compliance and reducing the tax gap. IRS taxpayer services include education and outreach programs, simplifying the tax process, and revising forms and publications to make them electronically accessible and more easily understood by diverse taxpayer communities. For example, if tax forms and instructions are unclear, taxpayers may be confused and make unintentional errors. Quality taxpayer services would also be a key consideration in implementing any of the approaches for tax gap reduction. For example, expanding enforcement efforts would increase interactions with taxpayers, requiring processes to efficiently communicate with taxpayers. Also, changing tax laws and regulations would require educating taxpayers of the new requirements in a clear, timely, and accessible manner. In 2006, we reported that IRS improved its two most commonly used services--telephone and Web site assistance-- for the 2006 filing season. Increased funding financed some of the improvements, but a significant portion has been financed internally by efficiencies gained from increased electronic filing of tax returns and other operational improvements. Although quality service helps taxpayers comply, showing a direct relationship between quality service and compliance levels is very challenging. As required by Congress, IRS is in the midst of a study that is to result in a 5-year plan for taxpayer service activities, which is to include long-term quantitative goals and to balance service and enforcement. Part of the study focuses on the effect of taxpayer service on compliance. A Phase I report was issued in April 2006 and a Phase II report is due in early 2007, which is to include, among other things, a multiyear plan for taxpayer service activities and improvement initiatives. However, in deciding on the appropriate mix of approaches to use in reducing the tax gap, many factors or issues could affect strategic decisions. Among the broad factors to consider are the likely effectiveness of any approach, fairness, enforceability, and sustainability. Beyond these, our work points to the importance of the following: Measuring compliance levels periodically and setting long-term goals. A data-based plan is one key to closing the tax gap. To the extent that IRS can develop better compliance data, it can develop more effective approaches for reducing the gap. Regularly measuring the magnitude of, and the reasons for, noncompliance provides insights on how to reduce the gap through potential changes to tax laws and IRS programs. In July 2005, we recommended that IRS periodically measure tax compliance, identify reasons for noncompliance, and establish voluntary compliance goals. IRS agreed with the recommendations and established a voluntary tax compliance goal of 85 percent by 2009. Furthermore, we have identified alternative ways to measure compliance, including conducting examinations of small samples of tax returns over multiple years, instead of conducting examinations for a larger sample of returns for one tax year, to allow IRS to track compliance trends annually. Considering the costs and burdens. Any action to reduce the tax gap will create costs and burdens for IRS; taxpayers; and third parties, such as those who file information returns. For example, withholding and information reporting requirements impose some costs and burdens on those who track and report information. These costs and burdens need to be reasonable in relation to the improvements expected to arise from new compliance strategies. Evaluating the results. Evaluating the actions taken by IRS to reduce the tax gap would help maximize IRS's effectiveness. Evaluations can be challenging because it is difficult to isolate the effects of IRS's actions from other influences on taxpayers' compliance. Our work has discussed how to address these challenges, for example by using research to link actions with the outputs and desired effects. Optimizing resource allocation. Developing reliable measures of the return on investment for strategies to reduce the tax gap would help inform IRS resource allocation decisions. IRS has rough measures of return on investment based on the additional taxes it assesses. Developing such measures is difficult because of incomplete data on the costs of enforcement and collected revenues. Beyond direct revenues, IRS's enforcement actions have indirect revenue effects, which are difficult to measure. However, indirect effects could far exceed direct revenue effects and would be important to consider in connection with continued development of return on investment measures. In general though, the impacts of tax gap reduction by improving voluntary tax compliance can be quite large. For example, if the estimated 83.7 percent voluntary compliance rate that produced a gross tax gap of $345 billion in tax year 2001 had been 85 percent, this tax gap would have been about $28 billion less; if it had been 90 percent, the gap would have been about $133 billion less. Leveraging technology. Better use of technology could help IRS be more efficient in reducing the tax gap. IRS is modernizing its technology, which has paid off in terms of telephone service, resource allocation, electronic filing, and data analysis capability. However, this ongoing modernization will need strong management and prudent investments to maximize potential efficiencies. Congress has been encouraging IRS to develop an overall tax gap reduction plan or strategy that could include a mix of approaches like simplifying code provisions, increased enforcement, and reconsidering the level of resources devoted to enforcement. Some progress has been made towards laying out the broad elements of a plan or strategy for reducing the tax gap. On September 26, 2006, the U.S. Department of the Treasury (Treasury), Office of Tax Policy released "A Comprehensive Strategy for Reducing the Tax Gap." However, the document generally does not identify specific approaches that Treasury and IRS will undertake to reduce the tax gap, the related time frames for such steps, or explanations of how much the tax gap would be reduced. The document said that such additional details the would be part of the fiscal year 2008 IRS budget request that will be deliberated during early 2007 because of the resource implications associated with tax gap reduction. Tax law simplification and reform both have the potential to reduce the tax gap by billions of dollars. The extent to which the tax gap would be reduced depends on which parts of the tax system would be simplified and in what manner as well as how any reform of the tax system is designed and implemented. Neither approach, however, will eliminate the gap. Further, changes in the tax laws and system to improve tax compliance could have unintended effects on other tax system objectives, such as those involving economic behavior or equity. Simplification has the potential to reduce the tax gap for at least three broad reasons. First, it could help taxpayers to comply voluntarily with more certainty, reducing inadvertent errors by those who want to comply but are confused because of complexity. Second, it may limit opportunities for tax evasion, reducing intentional noncompliance by taxpayers who can misuse the complex code provisions to hide their noncompliance or to achieve ends through tax shelters. Third, tax code complexity may erode taxpayers' willingness to comply voluntarily if they cannot understand its provisions or they see others taking advantage of complexity to intentionally underreport their taxes. Simplification could take multiple forms. One form would be to retain existing laws but make them simpler. For example, in our July 2005 report on postsecondary tax preferences, we noted that the definition of a qualifying postsecondary education expense differed somewhat among some tax code provisions, for instance with some including the cost to purchase books and others not. Making definitions consistent across code provisions may reduce taxpayer errors. Although we cannot say the errors were due to these differences in definitions, in a limited study of paid preparer services to taxpayers, we found some preparers claiming unallowable expenses for books. Further, the Joint Committee on Taxation suggested that such dissimilar definitions may increase the likelihood of taxpayer errors and increase taxpayer frustration. Another tax code provision in which complexity may have contributed to the individual tax gap involves the earned income tax credit, for which IRS estimated a tax loss of up to about $10 billion for tax year 1999. Although some of this noncompliance may be intentional, we and the National Taxpayer Advocate have previously reported that confusion over the complex rules governing eligibility for claiming the credit could cause taxpayers to fail to comply inadvertently. Although retaining but simplifying tax code provisions may help reduce the tax gap, doing so may not be easy, may conflict with other policy decisions, and may have unintended consequences. The simplification of the definition of a qualifying child across various code sections is an example. We suggested in the early 1990s that standardizing the definition of a qualifying child could reduce taxpayer errors and reduce their burden. A change was not made until 2004. However, some have suggested that the change has created some unintended consequences, such as increasing some taxpayers' ability to reduce their taxes in ways Congress may not have intended. Another form of simplification could be to broaden the tax base while reducing tax rates, which could minimize incentives for not complying. This base- broadening could include a review of whether existing tax expenditures are achieving intended results at a reasonable cost in lost revenue and added burden and eliminating or consolidating those that are not. Among the many causes of tax code complexity is the growing number of preferential provisions in the code, defined in statute as tax expenditures, such as tax exemptions, exclusions, deductions, credits, and deferrals. The number of these tax expenditures has more than doubled from 1974 through 2005. Tax expenditures can contribute to the tax gap if taxpayers claim them improperly. For example, IRS's recent tax gap estimate includes a $32 billion loss in individual income taxes for tax year 2001 because of noncompliance with these provisions. Simplifying these provisions of the tax code would not likely yield $32 billion in revenue because even simplified provisions likely would have some associated noncompliance. Nevertheless, the estimate suggests that simplification could have important tax gap consequences, particularly if simplification also accounted for any noncompliance that arises because of complexity on the income side of the tax gap for individuals. Despite the potential benefits that simplification may yield, these credits and deductions serve purposes that Congress has judged to be important to advance federal goals. Eliminating them or consolidating them likely would be complicated, and would likely create winners and losers. Elimination also could conflict with other objectives such as encouraging certain economic activity or improving equity. Similar trade-offs exist with possible fundamental tax reforms that would move away from an income tax system to some other system, such as a consumption tax, national sales tax, or value added tax. Fundamental tax reform would most likely result in a smaller tax gap if the new system has few tax preferences or complex tax code provisions and if taxable transactions are transparent. However, these characteristics are difficult to achieve in any system and experience suggests that simply adopting a fundamentally different tax system may not by itself eliminate any tax gap. Any tax system could be subject to noncompliance, and its design and operation, including the types of tools made available to tax administrators, will affect the size of any corresponding tax gap. Further, the motivating forces behind tax reform likely include factors beyond tax compliance, such as economic effectiveness, equity, and burden, which could in some cases carry greater weight in designing an alternative tax system than ensuring the highest levels of compliance. Changing the tax laws to provide IRS with additional enforcement tools, such as expanded tax withholding and information reporting, could also reduce the tax gap by many billions of dollars, particularly with regard to underreporting--the largest segment of the tax gap. Tax withholding promotes compliance because employers or other parties subtract taxes owed from a taxpayer's income and remit them to IRS. Information reporting tends to lead to high levels of compliance because income taxpayers earn is transparent to them and IRS. In both cases, high levels of compliance tend to be maintained over time. Also, withholding and information reporting help IRS to better identify noncompliant taxpayers and prioritize contacting them, which enables IRS to better allocate its resources. However, designing new withholding or information reporting requirements to address underreporting can be challenging given that many types of income are already subject to at least some form of withholding or information reporting, underreporting exists in varied forms, and the requirements could impose costs and burdens on third parties. Taxpayers tend to report income subject to tax withholding or information reporting with high levels of compliance, as shown in figure 1, because the income is transparent to the taxpayers as well as to IRS. Additionally, once withholding or information reporting requirements are in place for particular types of income, compliance tends to remain high over time. For example, for wages and salaries, which are subject to tax withholding and substantial information reporting, the percentage of income that taxpayers misreport has consistently been measured at around 1 percent over time. In the past, we have identified a few specific areas where additional withholding or information reporting requirements could serve to improve compliance: Require more data on information returns dealing with capital gains income from securities sales. Recently, we reported that an estimated 36 percent of taxpayers misreported their capital gains or losses from the sale of securities, such as corporate stocks and mutual funds. Further, around half of the taxpayers who misreported did so because they failed to report the securities' cost, or basis, sometimes because they did not know the securities' basis or failed to take certain events into account that required them to adjust the basis of their securities. When taxpayers sell securities like stock and mutual funds through brokers, the brokers are required to report information on the sale, including the amount of gross proceeds the taxpayer received; however, brokers are not required to report basis information for the sale of these securities. We found that requiring brokers to report basis information for securities sales could improve taxpayers' compliance in reporting their securities gains and losses and help IRS identify noncompliant taxpayers. However, we were unable to estimate the extent to which a basis reporting requirement would reduce the capital gains tax gap because of limitations with the compliance data on capital gains and because neither IRS nor we know the portion of the capital gains tax gap attributed to securities sales. Requiring tax withholding and more or better information return reporting on payments made to independent contractors. Past IRS data have shown that independent contractors report 97 percent of the income that appears on information returns, while contractors that do not receive these returns report only 83 percent of income. We have also identified other options for improving information reporting for independent contractors, including increasing penalties for failing to file required information returns, lowering the $600 threshold for requiring such returns, and requiring businesses to report separately on their tax returns the total amount of payments to independent contractors. Requiring information return reporting on payments made to corporations. Unlike payments made to sole proprietors, payments made to corporations for services are generally not required to be reported on information returns. IRS and GAO have contended that the lack of such a requirement leads to lower levels of compliance for small corporations. Although Congress has required federal agencies to provide information returns on payments made to contractors since 1997, payments made by others to corporations are generally not covered by information returns. Information reporting helps IRS to better allocate its resources to the extent that it helps IRS better identify noncompliant taxpayers and the potential for additional revenue that could be obtained by contacting these taxpayers. For example, IRS officials told us that receiving information on basis for taxpayers' securities sales would allow IRS to determine more precisely taxpayers' income for securities sales through its document matching programs and would allow it to identify which taxpayers who misreported securities income have the greatest potential for additional tax assessments. Similarly, IRS could use basis information to improve both aspects of its examination program--examinations of tax returns through correspondence and examinations of tax returns face to face with the taxpayer. Currently, capital gains issues are too complex and time consuming for IRS to examine through correspondence. However, IRS officials told us that receiving cost basis information might enable IRS to examine noncompliant taxpayers through correspondence because it could productively select tax returns to examine. Also, having cost basis information could help IRS identify the best cases to examine face to face, making the examinations more productive while simultaneously reducing the burden imposed on compliant taxpayers who otherwise would be selected for examination. Although withholding and information reporting lead to high levels of compliance, designing new requirements to address underreporting could be challenging given that many types of income, including wages and salaries, dividend and interest income, and income from pensions and Social Security are already subject to withholding or substantial information reporting. Also, challenges arise in establishing new withholding or information reporting requirements for certain other types of income that are extensively underreported. Such underreporting may be difficult to determine because of complex tax laws or transactions or the lack of a practical and reliable third-party source to provide information on the taxable income. For example, while withholding or information reporting mechanisms on nonfarm sole proprietor and informal supplier income would likely improve their compliance, comprehensive mechanisms that are practical and effective are difficult to identify. As shown in figure 1, this income is not subject to information reporting, and these taxpayers misreported about half of the income they earned for tax year 2001. Informal suppliers by definition receive income in an informal manner through services they provide to a variety of individual citizens or small businesses. Whereas businesses may have the capacity to perform withholding and information reporting functions for their employees, it may be challenging to extend withholding or information reporting responsibilities to the individual citizens that receive services, who may not have the resources or knowledge to comply with such requirements. Finally, implementing tax withholding and information reporting requirements generally imposes costs and burdens on the businesses that must implement them, and, in some cases, on taxpayers. For example, expanding information reporting on securities sales to include basis information will impose costs on the brokers who would track and report the information. Further, trying to close the entire tax gap with these enforcement tools could entail more intrusive recordkeeping or reporting than the public is willing to accept. Devoting more resources to enforcement has the potential to help reduce the tax gap by billions of dollars, as IRS would be able to expand its enforcement efforts to reach a greater number of potentially noncompliant taxpayers. However, determining the appropriate level of enforcement resources to provide IRS requires taking into account many factors, such as how effectively and efficiently IRS is currently using its resources, how to strike the proper balance between IRS's taxpayer service and enforcement activities, and competing federal funding priorities. If Congress were to provide IRS more enforcement resources, the amount of the tax gap that could be reduced depends in part on the size of any increase in IRS's budget, how IRS would manage any additional resources, and the indirect increase in taxpayers' voluntary compliance that would likely result from expanded IRS enforcement. Given resource constraints, IRS is unable to contact millions of additional taxpayers for whom it has evidence of potential noncompliance. With additional resources, IRS would be able to assess and collect additional taxes and further reduce the tax gap. In 2002, IRS estimated that a $2.2 billion funding increase would allow it to take enforcement actions against potentially noncompliant taxpayers it identifies but cannot contact and would yield an estimated $30 billion in revenue. For example, IRS estimated that it contacted about 3 million of the over 13 million taxpayers it identified as potentially noncompliant through its matching of tax returns to information returns. IRS estimated that contacting the additional 10 million potentially noncompliant taxpayers it identified, at a cost of about $230 million, could yield nearly $7 billion in potentially collectible revenue. We did not evaluate the accuracy of the estimate, and as will be discussed below, many factors suggest that it is difficult to estimate reliably net revenue increases that might come from additional enforcement efforts. Although additional enforcement funding has the potential to reduce the tax gap, the extent to which it would help depends on several factors. First, and perhaps most obviously, the amount of tax gap reduction would depend in part on the size of any budget increase. Generally, larger budget increases should result in larger reductions in the tax gap. The degree to which revenues would increase from expanded enforcement depends on many variables, such as how quickly IRS can ramp up efforts, how well IRS selects the best cases to be worked, and how taxpayers react to enforcement efforts. Estimating those revenue increases would require assumptions about these and other variables. Because actual experience is likely to diverge from those assumptions, the actual revenue increases are likely to differ from the estimates. The lack of reliable key data compounds the difficulty of estimating the likely revenues. To the extent possible, obtaining better data on key variables would provide a better understanding of the likely results with any increased enforcement resources. With additional resources for enforcement, IRS would be able to assess and collect additional taxes, but the related tax gap reductions may not be immediate. If IRS uses the resources to hire more enforcement staff, the reductions may occur gradually as IRS is able to hire and train the staff. Also, several years can elapse after IRS assesses taxes before it actually collects these taxes. Similarly, the amounts of taxes actually collected can vary substantially from the related tax amounts assessed through enforcement actions by the type of tax or taxpayer involved. In a 1998 report, we found that 5 years after taxes were assessed against individual taxpayers with business income, 48 percent of the assessed taxes had been collected, whereas for the largest corporate taxpayers, 97 percent of assessed taxes had been collected. Over the last 2 years, IRS has requested and received additional funding targeted for enforcement activities that it estimated will result in additional revenue. In its fiscal year 2007 budget request, IRS requested an approximate 2 percent increase in funding from fiscal year 2006 to expand its enforcement efforts, including tax return examination and tax collection activities, with the goal of increasing individual taxpayer compliance and addressing concerns that we and others have raised regarding the erosion of IRS's enforcement presence. In estimating the revenue that it would obtain from the increased funding, IRS accounted for several factors, including opportunity costs because of training, which draws experienced enforcement personnel away from the field; differences in average enforcement revenue obtained per full-time employee by enforcement activity; and differences in the types and complexity of cases worked by new hires and experienced hires. IRS forecasted that in the first year after expanding enforcement activities, the additional revenue to be collected is less than half the amount to be collected in later years. This example underscores the logic that if IRS is to receive a relatively large funding increase, it likely would be better to provide it in small but steady amounts. The amount of tax gap reduction likely to be achieved from any budget increase also depends on how well IRS can use information about noncompliance to manage the additional resources. Because IRS does not have compliance data for some segments of the tax gap and others are based on old data, IRS cannot easily track the extent to which compliance is improving or declining. IRS also has concerns with its information on whether taxpayers unintentionally or intentionally fail to comply with the tax laws. Knowing the reasons for taxpayer noncompliance can help IRS decide whether its efforts to address specific areas of noncompliance should focus on nonenforcement activities, such as improved forms or publications, or enforcement activities to pursue intentional noncompliance. To the extent that compliance data are outdated and IRS does not know the reason for taxpayer noncompliance, IRS may be less able to target resources efficiently to achieve the greatest tax gap reduction at the least taxpayer burden. IRS has taken important steps to better ensure efficient allocation and use. For example, the NRP study has provided better data on which taxpayers are most likely to be noncompliant. IRS is using the data to improve its audit selection processes in hopes of reducing the number of audits that result in no change, which should reduce unnecessary burden on compliant taxpayers and increase enforcement staff productivity (as measured by direct enforcement revenue). As part of an effort to make the best use of its enforcement resources, IRS has developed rough measures of return on investment in terms of tax revenue that it assesses from uncovering noncompliance. Generally, IRS cites an average return on investment for enforcement of 4:1, that is, IRS estimates that it collects $4 in revenue for every $1 of funding. Where IRS has developed return on investment estimates for specific programs, it finds substantial variation depending on the type of enforcement action. For instance, the ratio of estimated tax revenue gains to additional spending for pursuing known individual tax debts through phone calls is 13:1, versus a ratio of 32:1 for matching the amount of income taxpayers report on their tax returns to the income amounts reported on information returns. In addition to returns on investment estimates being rough, IRS lacks information on the incremental returns on investment from pursuing the "next best case" for some enforcement programs. It is the marginal revenue gain from these cases that matters in estimating the direct revenue from expanded enforcement. Developing such measures is difficult because of incomplete information on all the costs and all the tax revenue ultimately collected from specific enforcement efforts. Because IRS's current estimates of the revenue effects of additional funding are imprecise, the actual revenue that might be gained from expanding different enforcement efforts is subject to uncertainty. Given the variation in estimated returns on investment for different types of IRS compliance efforts, the amount of tax gap reduction that may be achieved from an increase in IRS's resources would depend on how IRS allocates the increase. Although it might be tempting to allocate resources heavily toward areas with the highest estimated return, allocation decisions must take into account diverse and difficult issues. For instance, although one enforcement activity may have a high estimated return, that return may drop off quickly as IRS works its way through potential noncompliance cases. In addition, IRS dedicates examination resources across all types of taxpayers so that all taxpayers receive some signal that noncompliance is being addressed. Further, issues of fairness can arise if IRS focuses its efforts only on particular groups of taxpayers. Beyond direct tax revenue collection, expanded enforcement efforts could reduce the tax gap even more, as widespread agreement exists that IRS enforcement programs have an indirect effect through increases in voluntary tax compliance. The precise magnitude of the indirect effects of enforcement is not known with a high level of confidence given challenges in measuring compliance; developing reasonable assumptions about taxpayer behavior; and accounting for factors outside of IRS's actions that can affect taxpayer compliance, such as changes in tax law. However, several research studies have offered insights to help better understand the indirect effects of IRS enforcement on voluntary tax compliance and show that they could exceed the direct effect of revenue obtained. When taxpayers do not pay all of their taxes, honest taxpayers carry a greater burden to fund government programs and the nation is less able to address its long-term fiscal challenges. Thus, reducing the tax gap is important, even though closing the entire tax gap is neither feasible nor desirable because of costs and intrusiveness. All of the approaches I have discussed have the potential to reduce the tax gap alone or in combination, and no single approach is clearly and always superior to the others. As a result, IRS needs a strategy to attack the tax gap on multiple fronts with multiple approaches. Mr. Chairman and Members of the Committee, this concludes my testimony. I would be happy to answer any question you may have at this time. For further information on this testimony, please contact Michael Brostek on (202) 512-9110 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Individuals making key contributions to this testimony include Tom Short, Assistant Director; Jeff Arkin; and Elizabeth Fan. 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 tax gap--the difference between the tax amounts taxpayers pay voluntarily and on time and what they should pay under the law--has been a long-standing problem in spite of many efforts to reduce it. Most recently, the Internal Revenue Service (IRS) estimated a gross tax gap for tax year 2001 of $345 billion and estimated it would recover $55 billion of this gap, resulting in a net tax gap of $290 billion. When some taxpayers fail to comply, the burden of funding the nation's commitments falls more heavily on compliant taxpayers. Reducing the tax gap would help improve the nation's fiscal stability. For example, each 1 percent reduction in the net tax gap would likely yield $3 billion annually. GAO was asked to discuss the tax gap and various approaches to reduce it. This testimony discusses the need for taking multiple approaches and to what extent the tax gap could be reduced through three overall approaches--simplifying or reforming the tax system, providing IRS with additional enforcement tools, and devoting additional resources to enforcement. This statement is based on prior GAO work. Multiple approaches are needed to reduce the tax gap. No single approach is likely to fully and cost-effectively address noncompliance since, for example, it has multiple causes and spans different types of taxes and taxpayers. Simplifying or reforming the tax code, providing IRS more enforcement tools, and devoting additional resources to enforcement are three major approaches, but providing quality services to taxpayers also is a necessary foundation for voluntary compliance. Such steps as periodically measuring noncompliance and its causes, setting tax gap reduction goals, evaluating the results of any initiatives to reduce the tax gap, optimizing the allocation of IRS's resources, and leveraging technology to enhance IRS's efficiency would also contribute to tax gap reduction. Simplifying the tax code or fundamental tax reform has the potential to reduce the tax gap by billions of dollars. IRS has estimated that errors in claiming tax credits and deductions for tax year 2001 contributed $32 billion to the tax gap. Thus, considerable potential exists. However, these provisions serve purposes Congress has judged to be important and eliminating or consolidating them could be complicated. Fundamental tax reform would most likely result in a smaller tax gap if the new system has few, if any, exceptions (e.g., few tax preferences) and taxable transactions are transparent to tax administrators. These characteristics are difficult to achieve, and any tax system could be subject to noncompliance. Withholding and information reporting are particularly powerful tools to reduce the tax gap. They could help reduce the tax gap by billions of dollars, especially if they make underreported income transparent to IRS. These tools have led to high, sustained levels of taxpayer compliance and improved IRS resource allocation by helping IRS identify and prioritize its contacts with noncompliant taxpayers. As GAO previously suggested, reporting the cost, or basis, of securities sales is one option to improve taxpayers' compliance. However, designing additional withholding and information reporting requirements may be challenging given that many types of income are already subject to reporting, underreporting exists in many forms, and withholding and reporting requirements impose costs on third parties. Devoting additional resources to enforcement has the potential to help reduce the tax gap by billions of dollars. However, determining the appropriate level of IRS enforcement resources requires taking into account such factors as how well IRS uses its resources, the proper balance between taxpayer service and enforcement activities, and competing federal funding priorities. If Congress provides IRS more enforcement resources, the amount of tax gap reduction would depend on factors such as the size of budget increases, how IRS manages any additional resources, and the indirect increase in taxpayers' voluntary compliance resulting from expanded enforcement. Increasing IRS's funding would enable it to contact millions of potentially noncompliant taxpayers it identifies but does not contact.

Effective leadership is the key driver of successful human capital management. Simply put, the tone starts from the top. As one example, in September 2011, OPM and the CHCO Council, as part of ongoing discussions between OPM, OMB, and us on progress needed to address the federal government's human capital high risk area, established a working group to identify and mitigate critical skills gaps. At the request of this Subcommittee, we are reviewing the progress of the working group. Our preliminary findings show that the working group has, to date, taken some important steps forward, including developing a framework and timeline for identifying and addressing both government-wide and agency-specific skills gaps. Importantly, the effort is receiving the commitment and support of agency leadership. For example, agencies' chief human capital officers and their representatives were involved in forming the working group and participated in its deliberations. Further, the working group's efforts were designated a cross-agency priority goal within the Administration's fiscal year 2013 federal budget. The working group expects to complete its initial efforts in March 2013. We will continue to assess the working group's progress and anticipate issuing a report to you later this year. In addition, OPM has demonstrated leadership in its efforts to improve the hiring process, with an eye toward making it easier and faster for people to apply for a federal job and strengthen the ability of agencies to compete with the private sector for filling entry-level positions. For example, OPM issued final regulations implementing the Pathways Programs (Pathways) which took effect on July 10, 2012. Pathways created two new conduits into government service: the Internship Program for students currently in high school, college, and other qualifying programs, and the Recent Graduates Program for individuals who, within the previous two years, earned an associate, bachelors, masters, professional or other qualifying degree or certificate. Pathways also modified the existing Presidential Management Fellows Program making it more student friendly by, among other changes, expanding the eligibility window for applicants. Individuals in all three programs are eligible for noncompetitive conversion to permanent positions after meeting certain requirements. If successfully implemented, initiatives such as the CHCO working group and Pathways could help agencies identify and close critical skills gaps. Still, work is needed in other human capital areas. For example, as we noted in our February 2012 testimony before this Subcommittee, OPM needs to improve the paper-intensive processes and antiquated information systems it uses to support the retirement of civilian federal employees in part because of the volume of retirement processing expected in the coming years given projected retirement trends. Strategic human capital planning that is integrated with broader organizational strategic planning is essential for ensuring that agencies have the talent, skill, and experience mix they need to cost-effectively execute their mission and program goals. Workforce planning is especially important now because, as shown in figure 1, agencies are facing a wave of potential retirements. Government-wide, around 30 percent of federal employees on board at the end of fiscal year 2011 will become eligible to retire by 2016. At some agencies, however, such as the Department of Housing and Urban Development and the Small Business Administration, at least 40 percent of those on board at the end of fiscal year 2011 are already eligible or will become eligible to retire in the next five years. The government's top leadership and management ranks also face potentially high levels of retirement. About 58 percent of senior executives and 45 percent of GS-15s who were on board at the end of fiscal year 2011 will be eligible to retire by 2016. Likewise, certain occupations face the potential of large numbers of retirements. Around 46 percent of air traffic controllers and 68 percent of administrative law judges will be eligible to retire by 2016. Although a number of factors affect when employees actually retire, a 2008 OPM study found that the median number of years an employee stays with the government after first becoming retirement-eligible is four years, although nearly 25 percent remain for nine years or more. not carefully monitored and managed, as experienced employees leave, gaps could develop in an organization's leadership and institutional knowledge. OPM, An Analysis of Federal Employee Retirement Data: Predicting Future Retirements and Examining Factors Relevant to Retiring from the Federal Service (Washington, D.C.: March, 2008). GAO, Foreign Language Capabilities: Departments of Homeland Security, Defense, and State Could Better Assess Their Foreign Language Needs and Capabilities and Address Shortfalls, GAO-10-715T (Washington, D.C.: July 29, 2010). develop a comprehensive strategic plan with measurable goals, objectives, milestones, and feedback mechanics that links all of State's efforts to meet its foreign language requirements. State generally agreed with our recommendations and in response, in March 2011, it published a strategic plan for foreign language capabilities that links its language incentive program to its efforts to enhance its recruitment program and expand training, among other activities. Our prior work has also identified human capital planning issues at individual agencies. For example, the Federal Emergency Management Agency (FEMA) continues to face historical workforce planning and training challenges that need to be addressed. In our April 2012, assessment which we prepared for this Subcommittee and other requesters, we reported that FEMA is in the early stages of integrating its workforce planning and training efforts with initiatives underway by other FEMA program offices. These efforts could help FEMA ensure that it has a workforce of the proper size and skills to meet its mission. However, we also noted that FEMA's workforce planning and training efforts could benefit from quantifiable performance measures, such as metrics to gauge the agency's progress building a comprehensive leadership development program and integrating it with agency succession planning. FEMA's parent agency, DHS, concurred with our recommendations and is taking steps to implement them. For example, FEMA's Strategic Human Capital Plan for fiscal years 2012 through 2016 will have milestones and metrics for addressing key workforce planning efforts. In another example, in our July 2012 report, we found that the Department of the Interior continues to face workforce planning challenges following a reorganization effort to improve its oversight of oil and gas activities in the wake of the April 2010 oil spill in the Gulf of Mexico. In particular, we found that Interior has not developed a strategic workforce plan that outlines specific strategies to help it address the recruitment, retention, and training challenges it is facing, particularly for engineers and inspectors. Interior has also not specifically determined when it will develop such a plan. To address this, we recommended that the relevant components of Interior develop a strategic workforce plan that, among other actions, determines the critical skills and competencies that will be needed to achieve current and future programmatic results and to develop strategies to address critical skills gaps. Interior agreed with this recommendation. Progress in talent management has been made on a number of fronts. However, our work had identified additional actions federal agencies can take to recruit, develop, and retain personnel with the skills essential to maintaining a workforce that will help agencies meet their vital missions. More than a decade ago, it was widely recognized that the federal hiring process was lengthy and cumbersome and hampered agencies' ability to hire the people they needed to achieve their goals and missions. The processes of that time failed to meet the needs of managers in filling positions with the right talent and also failed to meet the needs of applicants for a timely, efficient, transparent, and merit-based process. The processes were also hampered by narrow federal classification standards for defining federal occupations, the quality of certain applicant assessment tools, and time-consuming processes to evaluate applicants. Both Congress and OPM have taken a series of important actions over the years to improve recruiting and hiring in the federal sector. For example, in 2004 Congress provided agencies with hiring flexibilities that (1) permit agencies to appoint individuals to positions through a streamlined hiring process where there is a severe shortage of qualified candidates or a critical hiring need, and (2) allow agency managers more latitude in selecting among qualified candidates through category rating, an alternative to the traditional numerical rating procedure which limited selection to the top three ranked candidates. In addition, Congress provided agencies with enhanced authority to pay recruitment bonuses and with the authority to credit relevant private sector experience when computing annual leave amounts. In 2005, and again in 2008, OPM issued guidance on the use of hiring authorities and flexibilities, in 2006 developed the Hiring Toolkit to assist agency officials in determining the appropriate hiring flexibilities to use given their specific situations, and in 2008 launched an 80-day hiring model to help speed up the hiring process. Also in 2008, OPM established standardized vacancy announcement templates for common occupations, such as contract specialist and accounting technician positions, in which agencies can insert summary information concerning their specific jobs prior to posting for public announcement. As mentioned earlier, in 2010, OPM launched the Pathways program in order to make it easier to recruit and hire students and recent graduates. Individual agencies have also taken actions to meet their specific needs for acquiring the necessary talent. For example, we have reported that the National Aeronautics and Space Administration has used a combination of techniques to recruit workers with critical skills, including targeted recruitment activities, educational outreach programs, improved compensation and benefits packages, professional development programs, and streamlined hiring authorities.many challenges remain with federal recruiting and hiring, as noted earlier in discussing critical skills gaps. Effective training and development programs are an integral part of a learning environment that can enhance the federal government's ability to attract and retain employees with the skills and competencies needed to achieve results. Agency training and development programs should be part of an overall management strategy and include processes to assess and ensure the training's effectiveness. Our recent work has also underscored the value of collaborative training. For example, in our 2010 overview of 225 professional development activities intended to improve interagency collaboration at nine key national security agencies (including DOD, State, and DHS), we noted that because no single federal agency has the ability to address these threats alone, agencies must work together in a whole-of-government approach to protect our nation and its interests. We found that interagency training and other professional development activities build foundational knowledge, skills, and networks that are intended to improve collaboration across agencies. For example, in fiscal year 2009, the military services or combatant commands led an estimated 84 joint- military exercise programs that addressed a range of national security matters and sought to improve the ability of participants to work across agency lines by encouraging interagency participation. In addition, DHS offers an introductory online course which is available to personnel across federal, state, and local government and provides an overview of the roles and responsibilities of various agencies and how they are supposed to work together in different emergency situations. Some agencies also use interagency rotations as a type of professional development activity that can help improve collaboration across agencies. For example, Army's Interagency Fellowship Program is a 10- to 12- month rotation that places Army officers in intermediate-level positions at other federal agencies and allows them to learn the culture of the host agency, hone collaborative skills such as communication and teamwork, and establish networks with their civilian counterparts. In a 2012 report, we identified key policies and practices that help such interagency personnel rotation programs achieve collaboration-related results. These policies and practices include, for example, the importance of creating shared goals, establishing incentives, and undertaking careful preparation. Elsewhere, improvements are needed. Our work at State found that while the department has taken many steps to incorporate the interrelated elements of an effective training program, State's strategic approach to its workforce training still has several key weaknesses.lacks a systematic, comprehensive training needs assessment process, incorporating all bureaus and overseas posts. State also lacks formal guidance for curriculum design and for data collection and analysis, and thus cannot be assured that proper practices and procedures are systematically and comprehensively applied. Moreover, the performance measures for training generally do not fully address training goals, and are generally output- rather than outcome-oriented. We made several recommendations for State to improve strategic planning and evaluation of its efforts to train personnel, including improvements to State's efforts to assess training needs. State generally agreed with our recommendations and noted that it would look for ways to enhance its ability to assess the effectiveness of training and development efforts across employee groups and locations. State has not yet provided us with evidence that it has taken action to implement the report's recommendations. More broadly, given current budget constraints, it is essential that agencies identify the appropriate level of investment and establish priorities for employee training and development, so that the most important training needs are addressed first. Our report to you issued earlier this week compared agencies' training investment practices and OPM guidance against leading federal training investment practices identified from our past work and expert studies. included prioritizing investment funding; identifying the most appropriate mix of centralized and decentralized approaches for training and development programs; and tracking the cost and delivery of training and development programs agency-wide. GAO, Federal Training Investments: OPM and Agencies Can Do More to Ensure Cost- Effective Decisions, GAO-12-878 (Washington, D.C.: Sept. 17, 2012). that their components or sub-agencies are more knowledgeable about their mission-specific training needs, while the central human capital staff can add the most value by managing investment decisions for more general training across the department. However, many CHCOs reported that they do not set a level of investment agency-wide, do not prioritize training agency-wide, and do not have information from component or sub-agency leaders regarding their level of investments and priorities. Consequently, agencies reported that they are duplicating internal training investments and missing opportunities to leverage economies of scale across their agencies. Officials from all four agencies we interviewed (the Departments of Energy, the Interior, DHS, and Veterans Affairs) to obtain additional perspective beyond our survey of 27 CHCOs reported that they were unaware of the total amount their agencies invest in federal training and cannot provide reliable training data to OPM, which requests these data to address its government-wide training responsibilities. We found that agencies independently purchase or develop training for the same mandated or common occupational training. Several agencies and OPM officials reported that a website administered by OPM to provide training for the HR community could be expanded to provide mandatory or other common training for federal occupations, which, OPM reported, could save millions and help standardize training. We recommended, among other things, that OPM improve guidance and assistance to agencies in establishing a process for setting and prioritizing training investments; improve the reliability of agency training investment information; and identify the best existing courses that fulfill government-wide training requirements and offer them to all agencies through their existing online training platform or another appropriate platform. OPM generally agreed with most of our recommendations. In broad terms, human capital flexibilities represent the policies and practices an agency has the authority to implement in managing its workforce to accomplish its mission and achieve its goals. The tailored use of such flexibilities helps agencies recruit, develop and retain people with the knowledge, skills, and abilities that agencies need to accomplish their critical missions and compete with the private sector for top talent. Human capital flexibilities include monetary incentives such as recruitment, relocation, and retention bonuses; special hiring authorities such as veteran-related hiring authorities; incentive awards such as performance-based cash and time-off awards; and work-life policies and programs such as flexible work schedules, telework, and child care centers and assistance. Our 2010 report on the use of recruitment, relocation, and retention incentives found that these flexibilities were widely used by agencies, and that retention incentives accounted for the majority of these incentive costs. Our review of the steps OPM has taken to help ensure that agencies have effective oversight of their incentive programs found that while OPM provided oversight of such incentives through various mechanisms, including guidance and periodic evaluations and accountability reviews, there are opportunities for improvement. We recommended that OPM require agencies to incorporate succession planning efforts into the decision process for awarding retention incentives. OPM agreed with our recommendation and stated that it will develop future guidance on the importance of considering succession planning in the decision process for awarding retention incentives. In January 2011, OPM issued proposed regulations to add succession planning to the list of factors an agency may consider before approving a retention incentive for an employee who would be likely to leave the federal service in the absence of the incentive. OPM has stated that specifically listing this factor in the regulations will strengthen the relationship between succession planning and retention incentives. OPM expects to issue the final regulations before the end of 2012. To assist and guide agencies in developing and administering their work/life programs, OPM has established working groups, sponsored training for agency officials, promulgated regulations implementing work/life programs, and provided guidance. In our December 2010 report on agencies' satisfaction with OPM's assistance, we found that most agency officials were satisfied with OPM's help, guidance, and information sharing. At the same time, we determined that OPM is potentially missing opportunities to provide federal agencies with additional information that may help them develop and implement work/life programs. As such, we recommended that OPM more systematically track data already being collected by individual federal agencies on their work/life programs such as program usage, and share this information with federal agencies. OPM agreed with our recommendations and said it is exploring the use of a Web-based tool that would provide an ability to collect data from agencies and present it in a more meaningful and systematic manner. According to OPM, the goal would be to allow users to note the connection between work/life programs being offered and related outcomes/results, encouraging agencies to engage in similar efforts. Leading organizations have found that to successfully transform themselves they must often fundamentally change their cultures so that they are more results-oriented, customer-focused, and collaborative in nature. An effective performance management system is critical to achieving this cultural transformation. We have found that having a performance management system that creates a "line of sight" showing how unit and individual performance can contribute to overall organizational goals helps individuals understand the connection between their daily activities and the organization's success. The federal government's senior executives need to lead the way in transforming their agencies' cultures. The performance-based pay system for members of the Senior Executive Service (SES), which seeks to provide a clear and direct linkage between individual performance and organizational results as well as pay, is an important step in government-wide transformation. The importance of explicitly linking senior executive expectations to results-oriented organizational goals is consistent with findings from our past work on performance management. In January 2012, OPM and OMB released a government-wide SES performance appraisal system that provides agencies with a standard framework to managing the performance of SES members. While striving to provide greater clarity and equity in the development of performance standards and link to compensation, among other things, the Directors of OPM and OMB stated that the new system will also provide agencies with the necessary flexibility and capability to customize the system in order to meet their needs. Effective implementation of this new system will be important because, as we reported in 2008, OPM had found that some executive performance plans in use at that time did not fully identify the executives' performance measures. Leading organizations also develop and maintain inclusive and diverse workforces that reflect all segments of society. Such organizations typically foster a work environment in which people are enabled and motivated to contribute to continuous learning and improvement as well as mission accomplishment and provide both accountability and fairness for all employees. As with any organizational change effort, having a diverse top leadership corps is an organizational strength that can bring a wider variety of perspectives and approaches to bear on policy development and implementation, strategic planning, problem solving, and decision making. In November 2008, we reported on the diversity of the SES and the SES developmental pool, from which most SES candidates are selected, noting that the representation of women and minorities in the SES increased government-wide from October 2000 through September 2007, but increases did not occur in all major executive branch agencies. In November 2011, OPM reinforced the importance of promoting the federal workplace as a model of equality, diversity, and inclusion through the issuance of the Government-Wide Diversity and Inclusion Strategic Plan. Organized around three strategic goals--workforce diversity, workplace inclusion, and sustainability--the plan provides a shared direction, encourages commitment, and creates alignment so that according to OPM, agencies can approach their workplace diversity and inclusion efforts in a coordinated, collaborative, and integrated manner. In helping to ensure diversity in the pipeline for appointments to the SES as well as recruitment at all levels, it is important that agencies have strategies to identify and develop a diverse pool of talent for selecting the agencies' potential future leaders and to reach out to a diverse pool of talent when recruiting. For example, to recruit diverse applicants, agencies will need to consider active recruitment strategies such as widening the selection of schools from which to recruit, building formal relationships with targeted schools to ensure the cultivation of talent for future applicant pools, and partnering with multicultural organizations to communicate their commitment to diversity and to build, strengthen, and maintain relationships. To promote diversity and inclusion in the federal workforce OPM is also focusing on increasing the hiring and retention of people with disabilities and veterans. In 2010, we were asked to identify barriers to the employment of people with disabilities in the federal workforce and leading practices that could be used to overcome these barriers. In response, we convened a forum to identify leading practices that federal agencies could implement within the current legislative context. Participants said that the most significant barrier keeping people with disabilities from the workplace is attitudinal, which can include bias and low expectations for people with disabilities. According to participants, there is a fundamental need to change the attitudes of hiring managers, supervisors, coworkers, and prospective employees, and that cultural change within the agencies is critical to this effort.identified practices that agencies could implement to help the federal government become a model employer for people with disabilities. Participants Also in July 2010, the President issued Executive Order 13548 to increase the number of individuals with disabilities in the federal workforce. Nearly two years after the executive order was signed, we found that the federal government was not on track to achieve the executive order's hiring goals. To ensure that the federal government is well positioned to become a model employer of individuals with disabilities, we recommended that the Director of OPM incorporate information about agency deficiencies in hiring individuals with disabilities into its regular reporting to the President on implementing the executive order; expedite the development of the mandatory agency training plans required by the order; and assess the accuracy of the data used to measure progress toward the order's goals.recommendations and is taking steps to implement them. Finally, the Uniformed Services Employment and Reemployment Rights Act (USERRA) of 1994 protects the employment and reemployment rights of federal and nonfederal employees who leave their civilian employment to perform military and other uniformed services. And the Veterans' Benefits Act of 2010 (VBA) directed the Department of Labor (Labor) and Office of Special Counsel (OSC) to establish a 36-month demonstration project (2011-2014) for receiving, investigating, and resolving USERRA claims filed against federal executive agencies. The VBA also required that we evaluate how Labor and OSC designed the demonstration project and assess their relative performance during and after the demonstration project. In September 2012, as part of our mandated effort to assess the relative performance of USERRA claim processing at Labor and OSC, we determined that both agencies had implemented comparable processes that should allow Congress to evaluate their relative performance at the conclusion of the 3-year demonstration project established by Congress. However, to improve agencies' ability to assess relative performance, we recommended that both agencies take additional steps to ensure data integrity for the performance data they plan to report. Although Labor and OSC neither agreed nor disagreed with our recommendations, they discussed actions that they both plan to take to implement our suggestions. For example, Labor said it will review cost data on a quarterly basis for inconsistent or questionable data and correct and report any identified data issues each quarter, as necessary. OSC said it is reviewing its procedures for compiling and reporting cost data during the demonstration project, and is committed to making any necessary changes to ensure the demonstration project satisfies Congress's goals. Strategic human capital management must be the centerpiece of any serious effort to ensure federal agencies operate as high-performing organizations. A high-quality federal workforce is especially critical now given the complex, multi-dimensional issues facing the nation. Achievement of this goal is challenging, especially in light of the fiscal pressures confronting our national government. When we first identified strategic human capital management as a high risk area in 2001, it was because many agencies faced challenges in key areas including leadership; workforce planning; talent management; and creating results-oriented organizational cultures. Since then, the federal government has made substantial progress in beginning to address human capital challenges and, in many ways, is taking a far more strategic approach to managing personnel. Through a variety of initiatives, Congress, OPM, and individual agencies have strengthened the federal human capital infrastructure. As a result of these improvements, in 2011 we narrowed the focus of our high risk assessment to closing current and emerging critical skills gaps. These challenges must be addressed for agencies to cost-effectively execute their missions and respond to emerging challenges. In short, while much progress has been made over the last 11 years in modernizing federal human capital management, the job is far from over. Making greater progress requires agencies to continue to address their specific personnel challenges, as well as work with OPM and through the CHCO Council to address critical skills gaps. Central to success will be the continued attention of top-level leadership, effective planning, responsive implementation, and robust measurement and evaluation, as well as continued congressional oversight to hold agencies accountable for results. Chairman Akaka, Ranking Member Johnson, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions. For further information regarding this statement, please contact Robert Goldenkoff, Director, Strategic Issues, at (202) 512-6806, or [email protected], or Yvonne D. Jones, Director, Strategic Issues, 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 statement. Individuals making key contributions to this statement include Trina Lewis, Assistant Director; Shea Bader, Analyst-in-Charge; Margaret Best, Barbara Bovbjerg, Sara Daleski, Timothy DiNapoli, William Doherty, Brenda Farrell, Michele Fejfar; Robert Gebhart, Shirley Jones, Steven Lozano, Erik Kjeldgaard, Latesha Love, Signora May, Rebecca Rose, Jeffrey Schmerling, Rebecca Shea, Wesley Sholtes and Jason Vassilicos. Key contributors for the earlier work that supports this testimony are listed in each product. Federal Training Investments: OPM and Agencies Can Do More to Ensure Cost-Effective Decisions. GAO-12-878. Washington, D.C.: September 17, 2012. Veterans' Reemployment Rights: Department of Labor and Office of Special Counsel Need to Take Additional Steps to Ensure Demonstration Project Data Integrity. GAO-12-860R. Washington, D.C.: September 10, 2012. Oil and Gas Management: Interior's Reorganization Complete, but Challenges Remain in Implementing New Requirements. GAO-12-423. Washington, D.C.: July 30, 2012. Human Capital: HHS and EPA Can Improve Practices Under Special Hiring Authorities. GAO-12-692. Washington, D.C.: July 9, 2012. Managing for Results: GAO's Work Related to the Interim Crosscutting Priority Goals under the GPRA Modernization Act. GAO-12-620R. Washington, D.C.: May 31, 2012. Disability Employment: Further Action Needed to Oversee Efforts to Meet Federal Government Hiring Goals. GAO-12-568. Washington, D.C.: May 25, 2012. Disaster Assistance Workforce: FEMA Could Enhance Human Capital Management and Training. GAO-12-538. Washington, D.C.: May 25, 2012. Federal Emergency Management Agency: Workforce Planning and Training Could Be Enhanced by Incorporating Strategic Management Principles. GAO-12-487. Washington, D.C.: April 26, 2012. Modernizing the Nuclear Security Enterprise: Strategies and Challenges in Sustaining Critical Skills in Federal and Contractor Workforces. GAO-12-468. Washington, D.C.: April 26, 2012. Interagency Collaboration: State and Army Personnel Rotation Programs Can Build on Positive Results with Additional Preparation and Evaluation. GAO-12-386. Washington, D.C.: March 9, 2012. OPM Retirement Modernization: Progress Has Been Hindered by Longstanding Information Technology Management Weaknesses. GAO-12-430T. Washington, D.C.: February 1, 2012. Cybersecurity Human Capital: Initiatives Need Better Planning and Coordination. GAO-12-8. Washington, D.C.: November 29, 2011. Emergency Preparedness: Agencies Need Coordinated Guidance on Incorporating Telework into Emergency and Continuity Planning. GAO-11-628. Washington, D.C.: July 22, 2011. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 16, 2011. Department of State: Additional Steps Are Needed to Improve Strategic Planning and Evaluation of Training for State Personnel. GAO-11-241. Washington, D.C.: January 25, 2011. Federal Work/Life Programs: Agencies Generally Satisfied with OPM Assistance, but More Tracking and Information Sharing Needed. GAO-11-137. Washington, D.C.: December 16, 2010. National Security: An Overview of Professional Development Activities Intended to Improve Interagency Collaboration. GAO-11-108. Washington, D.C.: November 15, 2010. Highlights of a Forum: Participant-Identified Leading Practices That Could Increase the Employment of Individuals with Disabilities in the Federal Workforce. GAO-11-81SP. Washington, D.C.: October 5, 2010. Foreign Language Capabilities: Departments of Homeland Security, Defense, and State Could Better Assess Their Foreign Language Needs and Capabilities and Address Shortfalls. GAO-10-715T. Washington, D.C.: July 29, 2010. Human Capital: Continued Opportunities Exist for FDA and OPM to Improve Oversight of Recruitment, Relocation, and Retention Incentives. GAO-10-226. Washington, D.C.: January 22, 2010. Department of State: Comprehensive Plan Needed to Address Persistent Foreign Language Shortfalls. GAO-09-955. Washington, D.C.: September 17, 2009. Human Capital: Sustained Attention to Strategic Human Capital Management Needed. GAO-09-632T. Washington, D.C.: April 22, 2009. Office of Personnel Management: Retirement Modernization Planning and Management Shortcomings Need to Be Addressed. GAO-09-529. Washington, D.C.: April 21, 2009. Department of Defense: Additional Actions and Data Are Needed to Effectively Manage and Oversee DOD's Acquisition Workforce. GAO-09-342. Washington, D.C.: March 25, 2009. Human Capital: Diversity in the Federal SES and Processes for Selecting New Executives. GAO-09-110. Washington, D.C.: November 26, 2008. Results-Oriented Management: Opportunities Exist for Refining the Oversight and Implementation of the Senior Executive Performance- Based Pay System. GAO-09-82. Washington, D.C.: November 21, 2008. Department of Homeland Security: A Strategic Approach Is Needed to Better Ensure the Acquisition Workforce Can Meet Mission Needs. GAO-09-30. Washington, D.C.: November 19, 2008. Office of Personnel Management: Improvements Needed to Ensure Successful Retirement Systems Modernization. GAO-08-345. Washington, D.C.: January 31, 2008. NASA: Progress Made on Strategic Human Capital Management, but Future Program Challenges Remain. GAO-07-1004. Washington, D.C.: August 8, 2007. Strategic Plan, 2007-2012. GAO-07-1SP. Washington, D.C.: March 30, 2007. Office of Personnel Management: Key Lessons Learned to Date for Strengthening Capacity to Lead and Implement Human Capital Reforms. GAO-07-90. Washington, D.C.: January 19, 2007. Office of Personnel Management: Retirement Systems Modernization Program Faces Numerous Challenges. GAO-05-237. Washington, D.C.: February 28, 2005. Diversity Management: Expert-Identified Leading Practices and Agency Examples. GAO-05-90. Washington, D.C.: January 14, 2005. High Risk Series: An Update, GAO-05-207. Washington, D.C.: January 1, 2005. Human Capital: Senior Executive Performance Management Can Be Significantly Strengthened to Achieve Results. GAO-04-614. Washington, D.C.: May 26, 2004. Human Capital: A Guide for Assessing Strategic Training and Development Efforts in the Federal Government. GAO-04-546G. Washington, D.C.: March 1, 2004. High-Performing Organizations: Metrics, Means, and Mechanisms for Achieving High Performance in the 21st Century Public Management Environment. GAO-04-343SP. Washington, D.C.: February 13, 2004. Human Capital: Selected Agencies' Experiences and Lessons Learned in Designing Training and Development Programs. GAO-04-291. Washington, D.C.: January 30, 2004. Human Capital: Key Principles for Effective Workforce Planning, GAO-04-39. Washington, D.C.: December 11, 2003. Human Capital: Opportunities to Improve Executive Agencies' Hiring Processes. GAO-03-450. Washington, D.C.: May 30, 2003. High-Risk Series: An Update. GAO-01-263. Washington, D.C.: January 2001. 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 designated strategic human capital management as a governmentwide high risk area in 2001 because of a long-standing lack of leadership. Since then, important progress has been made. However, the area remains high risk because of a need to address current and emerging critical skills gaps that undermine agencies' abilities to meet their vital missions. The federal government is facing evolving and crosscutting challenges that require a range of skills and competencies to address. Moreover, retirements and the potential loss of leadership and institutional knowledge, coupled with fiscal pressures, underscore the importance of a strategic and efficient approach to acquiring and retaining individuals with needed critical skills. This testimony is based on a large body of GAO work from January 2001 through September 2012 and focuses on the progress made by executive branch agencies, the CHCO Council, and OPM, and the challenges that remain in four key areas of human capital management: (1) leadership; (2) strategic human capital planning; (3) talent management; and (4) resultsoriented organizational culture. Since 2001, Congress, the Office of Personnel Management (OPM), and executive branch agencies have taken action to address the government's human capital challenges. For example, in 2002, Congress passed legislation creating the CHCO Council, composed of the Chief Human Capital Officers (CHCO) of 24 executive agencies and chaired by the Director of OPM. In 2004, through the Federal Workforce Flexibility Act, Congress provided agencies greater hiring flexibilities. OPM issued guidance on hiring reforms, developed the Hiring Toolkit, and launched an 80-day model to speed the hiring process. Leadership: The CHCO Council advises and coordinates the activities of member agencies on current and emerging personnel issues. Among its recent initiatives, OPM and the CHCO Council established a working group in September 2011 to identify and mitigate critical skills gaps. To date the group has taken important steps, including developing a framework and timeline for identifying and addressing government-wide and agency-specific skills gaps. However, the substantive work of addressing skills gaps remains, including defining workforce plans, implementing recruitment and retention strategies, and measuring the effects of these initiatives. Strategic human capital planning: Integrating human capital planning with broader organizational strategic planning is essential for ensuring that agencies have the talent and skill mix needed to cost-effectively execute their mission and program goals. If not carefully managed, anticipated retirements could cause skills gaps to develop further and adversely impact the ability of agencies to carry out their diverse responsibilities. GAO's work has identified skills shortages in areas government-wide, such as cybersecurity, acquisition management, and foreign language capabilities. Talent management: Ensuring that federal agencies are able to recruit, develop, and retain personnel with the necessary skills is essential to closing any skills gaps and maintaining a workforce that will meet its vital missions. Congress, OPM, and some individual agencies have taken important actions, such as providing and using flexibilities, to improve the hiring process and making investments in training and development. However, much work remains. For example, GAO recently reported that OPM can improve its guidance and assistance to agencies in establishing a process for setting and prioritizing training investments. Results-oriented organizational culture: Leading organizations have found that to successfully transform themselves they must often fundamentally change their cultures to be more results-oriented, customer-focused, and collaborative. As part of that, GAO has shown that agencies need to create clear "lines of sight" that align organizational and individual performance. These lines of sight help individual staff understand the connection between their daily activities and agency success. Over the years, GAO has made numerous recommendations to agencies and OPM to improve their strategic human capital management efforts. This testimony discusses agencies' actions to implement key recommendations.

Located in FAA's Office of Aviation Safety, the Aircraft Certification Service (Aircraft Certification) and Flight Standards Service (Flight Standards) issue certificates and approvals for the operators and aviation products used in the national airspace system based on standards set forth in federal aviation regulations. FAA inspectors and engineers working in Aircraft Certification and Flight Standards interpret and implement the regulations governing certificates and approvals via FAA policies and guidance, such as orders, notices, and advisory circulars. Aircraft Certification's approximately 950 engineers and inspectors in 38 field offices issue approvals to the designers and manufacturers of aircraft and aircraft engines, propellers, parts, and equipment, including the avionics and other equipment required for the Next Generation Air Transportation System (NextGen)--a federal effort to transform the U.S. national airspace system from a ground-based system of air traffic control to a satellite-based system of air traffic management. These approvals are issued in three areas: (1) design--including type certificates for new aircraft, engine, or propeller designs, amended type certificates (issued only to the type certificate holder) for derivative models, and supplemental type certificates for major changes to existing designs by either the type certificate holder or someone other than the original type certificate holder; (2) production--including production certificates, which certify a manufacturer's ability to build an aircraft, engine, or propeller in accordance with an FAA-approved design, and parts manufacturer approvals for spare and replacement parts; and (3) flight approval--original airworthiness certificates and approvals for newly manufactured aircraft, engines, propellers, and parts. Aircraft Certification, along with Flight Standards, provides a safety performance management system intended to assure the continued operational safety of all aircraft operating in the national airspace system and of U.S.-built aircraft operating anywhere in the world. Aircraft Certification is also responsible for the appointment and oversight of designees and delegated organizations that play a critical role in acting on behalf of FAA to perform many certification and approval activities, such as the issuance of design and airworthiness approvals for aircraft parts. Since 2005, Aircraft Certification has used project sequencing to prioritize certification submissions on the basis of available resources. Projects are evaluated against several criteria, including safety attributes and their impact on the air transportation system. In fiscal year 2009, Aircraft Certification issued 4,248 design approvals, 2,971 production approvals, and 508 airworthiness certificates. Figure 1 shows the Aircraft Certification approvals issued for fiscal years 2005 through 2009. As of June 2010, according to FAA, Aircraft Certification had a backlog of 47 projects. (According to a senior FAA official, the number of approvals decreased from fiscal year 2006 to fiscal year 2007 because Aircraft Certification implemented a new data collection system in fiscal year 2007 that improved data collection definitions and processes.) Figure 2 contains key information about Aircraft Certification's organization, and figure 3 indicates key phases in Aircraft Certification's product approvals process. Flight Standards' nearly 4,000 inspectors issue certificates allowing individuals and entities to operate in the national airspace system. Flight Standards also issues approvals for programs, such as training and minimum equipment lists. Flight Standards field office managers in over 100 field offices use the Certification Services Oversight Process to initiate certification projects within their offices. According to FAA, the field offices are also assisted by a headquarters-based office that provides experts on specific aircraft and airlines. Accepted projects are processed on a first-in, first-out basis within each office once FAA determines that it has the resources to oversee an additional new certificate holder. Flight Standards issued 599 air operator and air agency certificates in fiscal year 2009. These include certificates to commercial air carriers under 14 C.F.R. part 121, operators of smaller commercial aircraft under 14 C.F.R. part 135, repair stations under 14 C.F.R. part 145, and pilot schools and training centers under 14 C.F.R. parts 141 and 142, respectively. According to its Director, Flight Standards also issues over 6,000 approvals daily. Figure 4 shows the number of air operator and air agency certificates issued by Flight Standards in fiscal years 2005 through 2009. FAA officials noted that certification projects within and among the categories of air operators and air agencies require various amounts of FAA resources. For example, FAA indicated that an agricultural operator certification requires fewer FAA resources than a repair station certification. Additionally, certifications of small commercial aircraft operations that are single pilot, single plane require a different set of resources than operations that are dual pilot and/or fly more aircraft. As of July 2010, Flight Standards had 1,142 certifications in process and a backlog of 489 applications. According to an FAA official, Flight Standards has more wait-listed applications than Aircraft Certification because it receives numerous requests for certificates, and its certifications are substantially different in nature from those issued by Aircraft Certification. Flight Standards is also responsible for assuring the continued operational safety of the national airspace system by overseeing certificate holders, monitoring (along with Aircraft Certification) operators' and air agencies' operation and maintenance of aircraft, and overseeing designees and delegated organizations. Flight Standards inspectors were tasked with overseeing 13,089 air operators and air agencies, such as repair stations, as of March 2010. Unless assigned to a large commercial air carrier issued a certificate under part 121, a Flight Standards inspector is typically responsible for overseeing several entities that often perform different or several functions within the system--including transporting passengers, repairing aircraft, and training pilots. Figures 5 and 6 contain key information about Flight Standards' organization and certification process for air operators and air agencies. Studies we reviewed and aviation stakeholders and experts we spoke with indicated that variation in FAA's interpretation of standards for certification and approval decisions is a long-standing issue that affects both Aircraft Certification and Flight Standards, but the extent of the problem has not been quantified in the industry as a whole. Inconsistent or variant FAA interpretations have been noted in studies published over the last 14 years. A 1996 study by Booz Allen & Hamilton, conducted at the request of the FAA Administrator to assess challenges to the agency's regulatory and certification practices, reported that, for air carriers and other operators, the agency's regulations are often ambiguous; subject to variation in interpretation by FAA inspectors, supervisors, and policy managers; and in need of simplification and consistent implementation. A 1999 task force, convened at the request of the FAA Administrator to assess FAA's certification process, found that the agency's requirements for the various approvals--such as type certificates and supplemental type certificates--varied substantially because of differences in standards and inconsistent application of those standards by different FAA field offices. While FAA has put measures in place since these two reports appeared, a 2008 Independent Review Team, which was commissioned by the Secretary of Transportation to assess FAA's safety culture and approach to safety management, found that a wide degree of variation in "regulatory ideology" among FAA staff continues to create the likelihood of wide variation in decisions within and among field offices. Industry officials and experts representing a broad range of large and small aviation businesses told us that variation in interpretation and subsequent decisions occurs in both Aircraft Certification and Flight Standards, but we found no evidence that quantified the extent of the problem in the industry as a whole. Specifically, 10 of the 13 industry group and individual company representatives we interviewed said that they or members of their organization experienced variation in FAA's certification and approval decisions on similar submissions; the remaining 3 industry representatives did not raise variation in interpretations and decisions as an issue. For example, an official from one air carrier told us that variation in decisions occurs regularly when obtaining approvals from Flight Standards district offices, especially when dealing with inspectors who are newly hired or replacing a previous inspector. He explained that new inspectors often task air carriers to make changes to previously obtained minimum equipment lists or conformity approvals for an aircraft. The official further noted that inspector assignments often change for reasons such as transfers, promotions, or retirement and that four different principal operations inspectors were assigned to his company during the past 18 months. Experts on our panel and most industry officials we interviewed indicated that, though variation in decisions is a long-standing, widespread problem, it has rarely led to serious certification and approval process problems. Experts on our panel generally noted that serious problems with the certification and approval processes occur less than 10 percent of the time. However, when we asked them to rank certification and approval process problems we summarized from their discussion, they chose inconsistent interpretation of regulations, which can lead to variation in decisions, as the most significant problem for Flight Standards and as the second most significant problem for Aircraft Certification. Panelists' concerns about variation in decisions included instances in which approvals are reevaluated and sometimes revised or revoked in FAA jurisdictions other than those in which they were originally granted. Industry officials we interviewed, though most had experienced it, did not mention the frequency with which variation in decisions occurred. However, 8 of the 13 said that their experiences with FAA's certification and approval processes were generally free of problems compared with 3 who said they regularly experienced problems with the process. FAA's Deputy Associate Administrator for Aviation Safety and union officials representing FAA inspectors and engineers acknowledged that variation in certification and approval decisions occurs. The Deputy Associate Administrator noted that variation in interpretation and certification and approval decisions occurs in both Aircraft Certification and Flight Standards. He acknowledged that a nonstandardized process for approvals exists and has been a challenge for, and a long-term criticism of, the agency. Furthermore, he explained that efforts were being made to address the issue, including the establishment of (1) an Office of Aviation Safety quality management system (QMS) to standardize processes across Aircraft Certification and Flight Standards, (2) a process for industry to dispute FAA decisions, and (3) standardization offices within Aircraft Certification directorates. The first two efforts are discussed in greater detail later in this report. Variation in FAA's interpretation of standards and certification and approval decisions occurs as a result of factors related to performance- based regulations and the use of professional judgment by FAA inspectors and engineers, according to industry stakeholders. FAA uses performance- based regulations, which identify a desired outcome and are flexible about how the outcome is achieved. For example, performance-based regulations on aircraft braking would establish minimum braking distances for aircraft but would not call for a particular material in the brake pads or a specific braking system design. According to officials in FAA's rulemaking office, about 20 percent of FAA's regulations are performance-based. Performance-based regulations, which are issued governmentwide, provide a number of benefits, according to literature on the regulatory process. By focusing on outcomes, for example, performance-based regulations give firms flexibility in achieving the stated level of performance; such regulations can accommodate technological change in ways that prescriptive regulations that focus on a specific technology generally cannot. For those certifications and approvals that relate to performance-based regulations, variation in decisions is a consequence of such regulations, according to one air carrier, since performance-based regulations allow the applicant multiple avenues to comply with regulations and broader discretion by FAA staff in making certification and approval decisions. According to senior FAA officials, performance-based regulations allow innovation and flexibility while setting a specific safety standard. The officials added that the benefits of performance-based regulations outweigh the potential for erroneous interpretation by an individual inspector or engineer. While agreeing with this statement, a panel member pointed out that the potential for erroneous interpretation also entails a risk of inconsistent decisions. In addition, FAA oversees a large, diverse industry, and its certification and approval processes rely, in part, on FAA staffs' exercise of professional judgment in the unique situations they encounter. In the opinion of senior FAA officials, some differences among inspectors may be due to situation-specific factors that industry stakeholders may not be aware of. According to officials from Flight Standards, because differences may exist among regions and district offices, operators changing locations may encounter these differences. Many industry stakeholders and experts stated that FAA's certification and approval processes contribute positively to the safety of the national airspace system. For example, industry stakeholders who participated in our expert panel ranked the office's safety culture and record as the greatest strength of Flight Standards' certification and approval processes and the third greatest strength of Aircraft Certification's processes. Industry stakeholders and experts also noted that the certification and approval processes work well most of the time because of FAA's long- standing collaboration with industry, flexibility within the processes, and committed, competent FAA staff. In most instances, stakeholders and experts said, when industry seeks certifications and approvals, its experiences with FAA's processes are positive. For example, two aviation manufacturers and an industry trade association with over 400,000 members noted that most of their experiences or their members' experiences were positive. Seventeen of 19 panelists indicated positive or very positive experiences with Aircraft Certification, and 9 of 19 panelists indicated positive experiences with Flight Standards. Panelists ranked FAA's collaboration with applicants highly--as the second greatest strength of both Aircraft Certification and Flight Standards. In addition, representatives of two trade associations representing over 190 aviation companies said that the processes provide flexibility for a large, diverse industry. Additionally, panelists ranked FAA inspectors' and engineers' expertise as the greatest strength of Aircraft Certification and the third greatest strength of Flight Standards, while officials from two industry trade groups cited the inspectors' and engineers' competence and high level of expertise. Industry stakeholders and experts noted that negative certification and approval experiences, although infrequent, can result in costly delays for them, which can disproportionately affect smaller operators. While industry stakeholders indicated that negative experiences occur in dealings with both Aircraft Certification and Flight Standards, experts on our panel noted that negative experiences are more likely to occur with Flight Standards than with Aircraft Certification. For example, three experts noted that, overall, industry's experience in obtaining certifications and approvals from Flight Standards has been negative or very negative, while no experts thought industry's experience with Aircraft Certification was negative. The panelists indicated that negative experiences occur during the processing of certifications and approvals and as applicants wait for FAA resources to become available to commence their certification or approval projects. For example, an aviation industry representative reported that his company incurred a delay of over 5 years and millions of dollars in costs when it attempted to obtain approvals from Aircraft Certification and Flight Standards field offices. Another industry representative indicated that it abandoned an effort to obtain an operating certification after spending $1.2 million and never receiving an explanation from FAA as to why the company's application was stalled. One panelist indicated that the negative experiences focus more on administrative aspects of the certification and approval processes and not on safety-related items. The processing of original certifications and approvals in Aircraft Certification and Flight Standards involves progressing through a schedule of steps or phases. Responsibilities of both FAA and the applicant are delineated. However, even with this framework in place, industry stakeholders noted that the time it takes to obtain certifications and approvals can differ from one FAA field office to another because of differences in office resources and expertise. In some cases, delays may be avoided when FAA directs the applicant to apply at a different field office. Nevertheless, applicants who must apply to offices with fewer resources can experience costly delays in obtaining certifications or approvals. Delays also occur when FAA wait-lists certification submissions because it does not have the resources to begin work on them. Aircraft Certification meets weekly to review certification project submissions. If it determines that a submission is to be wait-listed, the applicant is sent a 90-day delay letter and if, after the initial 90 days, the submission is still wait-listed, the applicant is sent another letter. Additionally, Aircraft Certification staff and managers periodically contact applicants to advise them of the status of their submissions. Flight Standards also notifies applicants when their certification submissions are wait-listed, and Flight Standards staff are encouraged to communicate with applicants regularly about the status of their submissions. However, according to an FAA notice, staff are advised not to provide an estimate of when an applicant's submission might be processed. While Aircraft Certification tracks in a national database how long individual submissions are wait-listed, Flight Standards does not. Without data on how long submissions are wait-listed, Flight Standards cannot assess the extent of wait-listing delays or reallocate resources to better meet demand. Further, industry stakeholders face uncertainty with respect to any plans or investments that depend on obtaining a certificate in a timely manner. Industry stakeholders have also raised concerns about the effects of inefficiencies in the certification and approval processes on the implementation of NextGen. As NextGen progresses, operators will need to install additional equipment on their aircraft to take full advantage of NextGen capabilities, and FAA's certification and approval workload is likely to increase substantially. According to our October 2009 testimony on NextGen, airlines and manufacturers said that FAA's certification processes take too long and impose costs on industry that discourage them from investing in NextGen equipment. We reported that this inefficiency in FAA's processes constitutes a challenge to delivering NextGen benefits to stakeholders and that streamlining FAA's processes will be essential for the timely implementation of NextGen. FAA is working to address the certification issues that may impede the adoption and acceleration of NextGen capabilities. Flight Standards has identified NextGen-dedicated staff in each of its regional offices to support the review and approval of NextGen capabilities within each region. Aircraft Certification has created a team of experts from different offices to coordinate NextGen approvals and identify specialists in Aircraft Certification offices with significant NextGen activity. FAA also plans a number of other actions to facilitate the certification and approval of NextGen-related technology, including new procedures and criteria for prioritizing certifications, updating policy and guidance, developing additional communication mechanisms, and developing training for inspectors and engineers. Since many of these actions have either just been implemented or have not yet been completed, it is too early to tell whether they will increase the efficiency of FAA's certification and approval processes and reduce unanticipated delays and costs for the industry. Industry stakeholders also noted that the efficiency of the certification and approval processes was hampered by a lack of sufficient staff resources to carry out certifications and approvals and a lack of effective communication mechanisms for explaining the intent of the regulations to both FAA staff and industry. The stakeholders said that these inefficiencies have resulted in costly delays for them. Stakeholders and experts said that, at some FAA offices, delays in obtaining certifications and approvals were due to heavy staff workloads, a lack of staff, or a lack of staff with the appropriate expertise. Staff and managers at one FAA field office told us that in the past a lack of staff had contributed to delays in completing certifications. The relative priority of certifications and approvals within FAA's overall workload also affects the availability of staff to process certifications and approvals. According to FAA, its highest priority is overseeing the continued operational safety of the people and products already operating within the national airspace system, but the same staff who provide this oversight are also tasked with the lower-priority task of processing new certifications and approvals. Additionally, Flight Standards field staff we contacted said that the system under which their pay grades are established and maintained provides a disincentive for inspectors to perform certification work because the system allocates no credit toward retention of their pay grades for doing certification work. Flight Standards headquarters officials pointed out that there is an incentive for field office inspectors to perform initial certifications because once certificated the new entities add points to an inspector's complexity calculation, which is used to determine his or her pay grade. FAA has addressed staff resource issues by increasing the number of inspectors and engineers. Over the past 3 years, FAA has steadily increased its hiring of Aircraft Certification engineers and Flight Standards inspectors, thereby reducing the risk of certification delays. According to agency data, FAA's hiring efforts since fiscal year 2007 have resulted in an 8.8 percent increase in the number of Aircraft Certification engineers and a 9.4 percent increase in the number of Flight Standards inspectors on board. FAA hired 106 engineers in Aircraft Certification and 696 inspectors in Flight Standards from the beginning of fiscal year 2007 to March 15, 2010. FAA also hired 89 inspectors in Aircraft Certification from fiscal year 2007 through August 2010. In addition, Flight Standards headquarters staff are available to assist field staff with the certification of part 121 air carriers--an average of 35 of these staff were available for this assistance annually from 2005 through 2009, and they helped with 16 certification projects. Furthermore, FAA delegates many certification activities to individuals and organizations (called designees) to better leverage its resources. As we previously reported, FAA's designees perform more than 90 percent of FAA's certification activities. We have reported that designees generally conduct routine certification functions, such as approvals of aircraft technologies that the agency and designees already have experience with, allowing FAA staff to focus on new and complex aircraft designs or design changes. Panelists ranked the expanded use of designees second and fifth, respectively, among actions that we summarized from their discussions that would have the most positive impact on improving Aircraft Certification's and Flight Standards' certification and approval processes. FAA is increasing organizational delegations under its organization designation authorization (ODA) program and expects the ODA program will allow more effective use of its resources over time. Stakeholders pointed to a lack of effective communication mechanisms as another problem with the certification and approval processes, especially deficiencies in the guidance FAA issues and a lack of additional communication mechanisms for sharing information on the interpretation of regulations. Stakeholders said that the lack of effective communication mechanisms can lead to costly delays when, for example, methods or guidance for complying with regulations is not clear. Stakeholders and experts had several issues with the FAA guidance that interprets the regulations and provides supplemental information to the industry. Stakeholders said there are sometimes discrepancies between the guidance and the regulations. For example, one stakeholder reported informing an FAA training course instructor that a particular piece of guidance contradicted the regulations. The instructor agreed that the contradiction existed but told the stakeholder that FAA teaches to the guidance, not the regulations. One employee group representing some FAA inspectors was concerned that not all guidance has been included in an online system that FAA has established to consolidate regulations, policy, and guidance. FAA acknowledged that it is working to further standardize and simplify the online guidance in the Flight Standards information management system. Stakeholders also identified a lack of opportunities for sharing information about the interpretation of regulations and guidance. An industry expert noted that FAA lacks a culture that fosters communication and discussion among peer groups. Moreover, an industry group with over 300 aviation company members suggested that FAA should support and promote more agencywide and industrywide information sharing in less formal, less structured ways to enhance communication. Finally, according to an official of an employee group representing some FAA inspectors, because their workloads tend to be heavy, inspectors are less able to communicate with the companies they oversee, and the reduced level of communication contributes to variation in the interpretation of regulations. FAA officials disagreed with these assertions and indicated that FAA staff participate in numerous committees and conferences, share methods of compliance in technical areas via forums with stakeholders, and communicate resolutions to problems in various formats, such as by placing legal decisions online. Other FAA actions could identify and potentially address some of the shortcomings in the agency's certification and approval processes as follows: In 2004, FAA's Office of Aviation Safety introduced QMS, which is intended to ensure that processes are being followed and improved and to provide a methodology to standardize processes. QMS is expected to help ensure that processes are followed by providing a means for staff to report nonconformance with FAA procedures or processes and was established as part of the office's effort to achieve certification by the International Organization for Standardization (ISO). Any employee can submit a report and check the status of an issue that has been reported. From October 2008 to March 2009, approximately 900 reports were submitted, and 46 internal audits were completed. For example, in July 2009, an FAA staffer noted that a required paragraph on aging aircraft inspection and records review was missing from a certificate holder's operations specifications. The issue was resolved and closed in August 2009 when the missing paragraph was issued to the certificate holder. Some FAA staff told us that QMS has helped improve the processes because it requires management action to respond to report submissions. To provide industry stakeholders with a mechanism for appealing certification and other decisions, the Office of Aviation Safety implemented the Consistency and Standardization Initiative (CSI) in 2004. Appeals must begin at the field office level and can eventually be taken to FAA headquarters. CSI requires that FAA staff document their safety decisions and that stakeholders support their positions with specific documentation. Within Aircraft Certification and Flight Standards, CSI cases at each appeal level are expected to be processed within 30 working days. The total length of the CSI process depends on how many levels of appeal the stakeholder chooses. Aircraft Certification has had over 20 CSI cases, and Flight Standards has had over 300. Most CSI cases in Aircraft Certification involved clarification of a policy or an approved means of complying with a regulation, while most of those submitted to Flight Standards involved policy or method clarification, as well as scheduling issues, such as delays in addressing a stakeholder's certification, approval, or other issue. The large discrepancy between the number of cases filed for the two services, according to FAA officials, may be due to the fact that Aircraft Certification decisions are the result of highly interactive, deliberative processes, which are not typical in granting approvals in Flight Standards, where an inspector might find the need to hand down a decision without prolonged discussion or deliberation. Stakeholders told us that CSI lacks agencywide buy-in and can leave stakeholders who use the program potentially open to retribution from FAA staff. However, others noted that CSI is beneficial because it requires industry stakeholders to use the regulations as a basis for their complaints, which often leads to resolution. According to one of our panelists, inconsistencies occur when FAA does not start with the regulations as the basis for decisions. Although QMS and CSI are positive steps toward identifying ways to make the certification and approval processes more efficient, FAA does not know whether the programs are achieving their stated goals because it has not established performance measures for determining program accomplishments. One of the goals for QMS is to reduce inconsistencies and increase standardization. A QMS database documents the reports submitted and, through information in these reports, FAA says it has identified instances of nonconformance and initiated corrective action to prevent recurrence; revised orders to ensure they are consistent with actual practice; and improved its processes to collect feedback from stakeholders and take action on trends. However, FAA does not know whether its actions have reduced inconsistencies because its measures describe the agency's output--for example, number of audits conducted-- rather than any outcomes related to reductions in process inconsistencies. FAA officials described CSI goals as promoting early resolution of disagreements and consistency and fairness in applying FAA regulations and policies. They provided us with data on the number of CSI cases in both Aircraft Certification and Flight Standards, the types of complaints, and the percentage of resolutions that upheld FAA's original decision, but as with the overall QMS program, we could find no evidence that FAA has instituted CSI performance measures that would allow it to determine progress toward program outcomes, such as consistency and fairness in applying regulations and policies. Outcome-based performance measures would also allow QMS and CSI program managers to determine where to better target program resources to improve performance. FAA has taken actions to address variation in decisions and inefficiency in its certification and approval processes, although the agency does not have outcome-based performance measures and a continuous evaluative process to determine if these actions are having their intended effects. Because the number of certification and approval applications is likely to increase for NextGen technologies, achieving more efficiency in these processes will help FAA better manage this increased workload, as well as its current workload. In addition, while both Aircraft Certification and Flight Standards notify applicants whether resources are available to begin their projects, Flight Standards does not monitor how long applicants are wait-listed and is therefore unaware how long projects are wait-listed and unable to reallocate resources to better meet demand for certification services. To ensure that FAA actions contribute to more consistent decisions and more efficient certification and approval processes, we recommend that the Secretary of Transportation direct the Administrator of FAA to take the following two actions: Determine the effectiveness of actions to improve the certification and approval processes by developing a continuous evaluative process and use it to create measurable performance goals for the actions, track performance toward those goals, and determine appropriate process changes. To the extent that this evaluation of agency actions identifies effective practices, consider instituting those practices agency wide. Develop and implement a process in Flight Standards to track how long certification and approval submissions are wait-listed, the reasons for wait-listing them, and the factors that eventually allowed initiation of the certification process. Use the data generated from this process to assess the extent of wait-listing delays and to reallocate resources, as appropriate, to better meet demand. We provided a copy of a draft of this report to the Department of Transportation (DOT) for its review and comment. DOT provided technical comments, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 21 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretary of Transportation, the Administrator of FAA, and other interested parties. The report also will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions or would like to discuss this work, please contact me at (202) 512-2834 or [email protected]. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. This report provides information on the Federal Aviation Administration's (FAA) processes for granting certifications and approvals to air operators, air agencies such as repair stations, and designers and manufacturers of aircraft and aircraft components. It describes the processes and discusses (1) the extent of variation in FAA's interpretation of standards with regard to the agency's certification and approval decisions and (2) key stakeholder and expert views on how well the certification and approval processes work. To address these objectives, we reviewed relevant studies, reports, and FAA documents and processes; convened a panel of aviation industry and other experts; and interviewed aviation industry members, an expert, and FAA officials. We did not address FAA processes for issuing certifications to individuals, such as pilots and mechanics. We contracted with the National Academy of Sciences (the Academy) to convene a panel on FAA's certification and approval processes on December 16, 2009. The panel was selected with the goal of obtaining a balance of perspectives and included FAA senior managers; officials representing large and small air carriers, aircraft and aerospace product manufacturers, aviation services firms, repair stations, geospatial firms, and aviation consultants; and academics specializing in aviation and organization theory. (See table 1.) In the first session, FAA and industry officials presented their organizations' perspectives on these processes and responded to questions. The presenters then departed and did not participate in the remaining sessions. In the next three discussion sessions, the panelists-- led by a moderator--shared their views on various aspects of FAA's certification and approval processes. After the first two discussion sessions, panelists voted in response to questions posed by GAO. (See app. II for the questions and responses.) The views expressed by the panelists were their own and do not necessarily represent the views of GAO or the Academy. We shared a copy of an earlier draft of this report with all of the presenters and panelists for their review and to ensure that we correctly captured information from their discussions and, on the basis of their comments, made technical corrections to the draft as necessary. We interviewed aviation industry certificate and approval holders, trade groups, an industry expert, officials of unions that represent FAA inspectors and engineers, and FAA staff in Aircraft Certification and Flight Standards (see table 2). The industry and trade groups were selected to provide a range of large and small companies and a variety of industry sectors (e.g., aircraft and parts manufacturers, air carriers, and repair stations). The interviews were conducted to gain an understanding of the extent of variation in FAA's certification and approval decisions and interviewees' views on FAA's certification and approval processes. The FAA interviews provided an understanding of the key aspects of FAA's certification and approval processes, information on data collection and analysis related to the processes, and current and planned process improvement efforts. In addition to using information from the individual interviews, as relevant throughout the report, we analyzed the content of the interviews to identify and quantify the key issues raised by the interviewees. This appendix summarizes the responses the panelists provided to questions we posed at the close of their discussion sessions. The response options were based on the contents of their discussions. To develop the rankings in questions 1, 2, and 12, we asked the panelists, in a series of three questions, to vote for the option he or she believed was the first, second, and third greatest, most significant, or most positive. To rank order the items listed for these questions, we assigned three points to the option identified as greatest, most significant, or most positive; two points to the second greatest, most significant, or most positive; and one point to the third greatest, most significant, or most positive option. We then summed the weighted values for each option and ranked the options from the highest number of points to the lowest. 1. What is the greatest strength of the certification and approval processes? 2. What is the most significant problem with the certification and approval processes? 3. What leading factor has contributed to problems with the certification and approval processes? Leading factor in process problems FAA's prioritization system for managing certifications and approvals FAA's rulemaking process and development of guidance (e.g., amount of time required to develop or change regulations, etc.) Culture of FAA (e.g., stove-piping, resistance to change, etc.) Organizational structure of FAA (e.g., decentralization, varying procedures among local offices, etc.) 4. How often do serious problems occur each year with the certification and approval processes? 5. Overall, how positive or negative do you think industry's experience has been in obtaining certifications and approvals from Aircraft Certification and Flight Standards? 6. How would you assess the overall impact of the certification and approval processes on the safety of the national airspace system? 7. Overall, how would you characterize efforts to improve the certification and approval processes? 8. Overall, how would you characterize efforts to prioritize certifications and approvals? 9. Overall, how would you characterize efforts to improve dispute resolution through the Consistency and Standardization Initiative (CSI)? 10. Regarding efforts to improve dispute resolution through CSI, what is the key factor hindering the progress of efforts? 11. What should be done to mitigate the effects of this factor? FAA should establish support for efforts FAA should improve data collection and analysis related to efforts Do not believe efforts are ineffective Do not know/no basis to judge This response option was not available to the panelists. 12. What action will have the most positive impact on improving the certification and approval processes? Expand use of designees/organization designation authorizations (ODA) Expand use of designees/organization designation authorizations (ODA) Gerald L. Dillingham, Ph.D., (202) 512-2834 or [email protected]. In addition to the contact named above, Teresa Spisak (Assistant Director), Sharon Dyer, Bess Eisenstadt, Amy Frazier, Brandon Haller, Dave Hooper, Michael Silver, and Pamela Vines made key contributions to this report.

Among its responsibilities for aviation safety, the Federal Aviation Administration (FAA) issues thousands of certificates and approvals annually. These certificates and approvals, which FAA bases on its interpretation of federal standards, indicate that such things as new aircraft, the design and production of aircraft parts and equipment, and new air operators are safe for use in the national airspace system. Past studies and industry spokespersons assert that FAA's interpretations produce variation in its decisions and inefficiencies that adversely affect the industry. GAO was asked to examine the (1) extent of variation in FAA's interpretation of standards for certification and approval decisions and (2) views of key stakeholders and experts on how well these processes work. To perform the study, GAO reviewed industry studies and reports and FAA documents and processes; convened a panel of aviation experts; and interviewed officials from various industry sectors, senior FAA officials, and unions representing FAA staff. Studies, stakeholders, and experts indicated that variation in FAA's interpretation of standards for certification and approval decisions is a long-standing issue, but GAO found no evidence that quantified the extent of the problem in the industry as a whole. Ten of the 13 industry group and company officials GAO interviewed said that they or members of their organization had experienced variation in FAA certification and approval decisions on similar submissions. In addition, experts on GAO's panel, who discussed and then ranked problems with FAA's certification and approval processes, ranked inconsistent interpretation of regulations, which can lead to variation in decisions, as the first and second most significant problem, respectively, with these processes for FAA's Flight Standards Service (which issues certificates and approvals for individuals and entities to operate in the national airspace system) and Aircraft Certification Service (which issues approvals to the designers and manufacturers of aircraft and aircraft parts and equipment). According to industry stakeholders, variation in FAA's interpretation of standards for certification and approval decisions is a result of factors related to performance-based regulations, which allow for multiple avenues of compliance, and the use of professional judgment by FAA staff and can result in delays and higher costs. Industry stakeholders and experts generally agreed that FAA's certification and approval processes contribute to aviation safety and work well most of the time, but negative experiences have led to costly delays for the industry. Industry stakeholders have also raised concerns about the effects of process inefficiencies on the implementation of the Next Generation Air Transportation System (NextGen)--the transformation of the U.S. national airspace system from a ground-based system of air traffic control to a satellite-based system of air traffic management. They said that the processes take too long and impose costs that discourage aircraft operators from investing in NextGen equipment. FAA has taken actions to improve the certification and approval processes, including hiring additional inspectors and engineers and increasing the use of designees and delegated organizations--private persons and entities authorized to carry out many certification activities. Additionally, FAA is working to ensure that its processes are being followed and improved through a quality management system, which provides a mechanism for stakeholders to appeal FAA decisions. However, FAA does not know whether its actions under the quality management system are achieving the intended goals of reducing inconsistencies and increasing consistency and fairness in the agency's application of regulations and policies because FAA does not have outcome-based performance measures and a continuous evaluative process that would allow it to determine progress toward these goals. Without ongoing information on results, FAA managers do not know if their actions are having the intended effects. GAO recommends that FAA develop a continuous evaluative process with measurable performance goals to determine the effectiveness of the agency's actions to improve its certification and approval processes. DOT did not comment on the recommendations but provided technical comments, which were included as appropriate.

Some context for my remarks is appropriate. The threat of terrorism was significant throughout the 1990s; a plot to destroy 12 U.S. airliners was discovered and thwarted in 1995, for instance. Yet the task of providing security to the nation's aviation system is unquestionably daunting, and we must reluctantly acknowledge that any form of travel can never be made totally secure. The enormous size of U.S. airspace alone defies easy protection. Furthermore, given this country's hundreds of airports, thousands of planes, tens of thousands of daily flights, and the seemingly limitless ways terrorists or criminals can devise to attack the system, aviation security must be enforced on several fronts. Safeguarding airplanes and passengers requires, at the least, ensuring that perpetrators are kept from breaching security checkpoints or gaining access to ramps and doorways leading to aircraft. FAA has developed several mechanisms to prevent criminal acts against aircraft, such as adopting technology to detect explosives and establishing procedures to ensure that passengers are positively identified before boarding a flight. Still, in recent years, we and others have often demonstrated that significant weaknesses continue to plague the nation's aviation security. The current aviation security structure and its policies, requirements, and practices have evolved since the early 1960s and were heavily influenced by a series of high-profile aviation security incidents. Historically, the federal government has maintained that providing security is the responsibility of air carriers and airports as part of their cost of doing business. Beginning in 1972, air carriers were required to provide screening personnel, and airport operators were required to provide law enforcement support. However, with the rise in air piracy and terrorist activities that threatened not only commercial aviation but also national security, discussions began to emerge as to who should have the responsibility for providing security at our nation's airports. With the events of the last week, concerns have arisen again as to who should be responsible for security and screening passengers at our nation's airports. This issue has evoked many discussions through the years and just as many options concerning who should provide security at our nation's airports and how security should be handled. But as pointed out in a 1998 FAA study, there was no consensus among the various aviation-related entities. To identify options for assigning screening responsibilities, we surveyed aviation stakeholders--security officials at the major air carriers and the largest airports, large screening companies, and industry associations-- and aviation and terrorism experts. We asked our respondents to provide their opinions about the current screening program, criteria they believe are important in considering options, the advantages and disadvantages of each option, and their comments on implementing a different screening approach. It is important to understand that we gathered this information prior to September 11, 2001, and some respondents' views may have changed. Control of access to aircraft, airfields, and certain airport facilities is a critical component of aviation security. Existing access controls include requirements intended to prevent unauthorized individuals from using forged, stolen, or outdated identification or their familiarity with airport procedures to gain access to secured passenger areas or to ramps and doorways leading to aircraft. In May 2000, we reported that our special agents, in an undercover capacity, obtained access to secure areas of two airports by using counterfeit law enforcement credentials and badges. At these airports, our agents declared themselves as armed law enforcement officers, displayed simulated badges and credentials created from commercially available software packages or downloaded from the Internet, and were issued "law enforcement" boarding passes. They were then waved around the screening checkpoints without being screened. Our agents could thus have carried weapons, explosives, chemical/biological agents, or other dangerous objects onto aircraft. In response to our findings, FAA now requires that each airport's law enforcement officers examine the badges and credentials of any individual seeking to bypass passenger screening. FAA is also working on a "smart card" computer system that would verify law enforcement officers' identity and authorization for bypassing passenger screening. The Department of Transportation's (DOT) Inspector General has also uncovered problems with access controls at airports. The Inspector General's staff tested the access controls at eight major airports in 1998 and 1999 and gained access to secure areas in 68 percent of the tests; they were able to board aircraft 117 times. After the release of its report describing its successes in breaching security, the Inspector General conducted additional testing between December 1999 and March 2000 and found that, although improvements had been made, access to secure areas was still gained more than 30 percent of the time. Screening checkpoints and the screeners who operate them are a key line of defense against the introduction of dangerous objects into the aviation system. Over 2 million passengers and their baggage must be checked each day for articles that could pose threats to the safety of an aircraft and those aboard it. The air carriers are responsible for screening passengers and their baggage before they are permitted into the secure areas of an airport or onto an aircraft. Air carriers can use their own employees to conduct screening activities, but mostly air carriers hire security companies to do the screening. Currently, multiple carriers and screening companies are responsible for screening at some of the nation's larger airports. Concerns have long existed about screeners' ability to detect and prevent dangerous objects from entering secure areas. Each year, weapons were discovered to have passed through one checkpoint and to have later been found during screening for a subsequent flight. FAA monitors the performance of screeners by periodically testing their ability to detect potentially dangerous objects carried by FAA special agents posing as passengers. In 1978, screeners failed to detect 13 percent of the objects during FAA tests. In 1987, screeners missed 20 percent of the objects during the same type of test. Test data for the 1991 to 1999 period show that the declining trend in detection rates continues. Furthermore, the recent tests show that as tests become more realistic and more closely approximate how a terrorist might attempt to penetrate a checkpoint, screeners' ability to detect dangerous objects declines even further. As we reported last year, there is no single reason why screeners fail to identify dangerous objects. Two conditions--rapid screener turnover and inadequate attention to human factors--are believed to be important causes. Rapid turnover among screeners has been a long-standing problem, having been identified as a concern by FAA and by us in reports dating back to at least 1979. We reported in 1987 that turnover among screeners was about 100 percent a year at some airports, and according to our more recent work, the turnover is considerably higher. From May 1998 through April 1999, screener turnover averaged 126 percent at the nation's 19 largest airports; 5 of these airports reported turnover of 200 percent or more, and 1 reported turnover of 416 percent. At one airport we visited, of the 993 screeners trained at that airport over about a 1-year period, only 142, or 14 percent, were still employed at the end of that year. Such rapid turnover can seriously limit the level of experience among screeners operating a checkpoint. Both FAA and the aviation industry attribute the rapid turnover to the low wages and minimal benefits screeners receive, along with the daily stress of the job. Generally, screeners are paid at or near the minimum wage. We reported last year that some of the screening companies at 14 of the nation's 19 largest airports paid screeners a starting salary of $6.00 an hour or less and, at 5 of these airports, the starting salary was the minimum wage--$5.15 an hour. It is common for the starting wages at airport fast- food restaurants to be higher than the wages screeners receive. For instance, at one airport we visited, screeners' wages started as low as $6.25 an hour, whereas the starting wage at one of the airport's fast-food restaurants was $7 an hour. The demands of the job also affect performance. Screening duties require repetitive tasks as well as intense monitoring for the very rare event when a dangerous object might be observed. Too little attention has been given to factors such as (1) improving individuals' aptitudes for effectively performing screening duties, (2) the sufficiency of the training provided to screeners and how well they comprehend it, and (3) the monotony of the job and the distractions that reduce screeners' vigilance. As a result, screeners are being placed on the job who do not have the necessary aptitudes, or sufficient knowledge to perform the work effectively, and who then find the duties tedious and dull. We reported in June 2000 that FAA was implementing a number of actions to improve screeners' performance. However, FAA did not have an integrated management plan for these efforts that would identify and prioritize checkpoint and human factors problems that needed to be resolved, and identify measures--and related milestone and funding information--for addressing the performance problems. Additionally, FAA did not have adequate goals by which to measure and report its progress in improving screeners' performance. FAA is implementing our recommendations to develop an integrated management plan. However, two key actions to improving screeners' performance are still not complete. These actions are the deployment of threat image projection (TIP) systems--which place images of dangerous objects on the monitors of X-ray machines to keep screeners alert and monitor their performance--and a certification program to make screening companies accountable for the training and performance of the screeners they employ. Threat image projection systems are expected to keep screeners alert by periodically imposing the image of a dangerous object on the X-ray screen. They also are used to measure how well screeners perform in detecting these objects. Additionally, the systems serve as a device to train screeners to become more adept at identifying harder-to-spot objects. FAA is currently deploying the threat image projections systems and expects to have them deployed at all airports by 2003. The screening company certification program, required by the Federal Aviation Reauthorization Act of 1996, will establish performance, training, and equipment standards that screening companies will have to meet to earn and retain certification. However, FAA has still not issued its final regulation establishing the certification program. This regulation is particularly significant because it is to include requirements mandated by the Airport Security Improvement Act of 2000 to increase screener training--from 12 hours to 40 hours--as well as to expand background check requirements. FAA had been expecting to issue the final regulation this month, 2- 1/2 years later than it originally planned. According to FAA, it needed the additional time to develop performance standards based on screener performance data. Concerned about the performance of screeners, the Subcommittee on Aviation, House Committee on Transportation and Infrastructure, asked us to examine options for conducting screening and to outline some advantages and disadvantages associated with these alternatives. This work is still ongoing, but I will provide a perspective on the information we have obtained to date. Many aviation stakeholders agreed that a stable, highly trained, and professional workforce is critical to improving screening performance. They identified compensation and improved training as the highest priorities in improving performance. Respondents also believed that the implementation of performance standards, team and image building, awards for exemplary work, better supervision, and certification of individual screeners would improve performance. Some respondents believed that a professional workforce could be developed in any organizational context and that changing the delegation of screening responsibilities would increase the costs of screening. We identified four principal alternative approaches to screening. Each alternative could be structured and implemented in many different ways; for instance, an entity might use its own employees to screen passengers, or it might use an outside contractor to perform the job. For each alternative, we assumed that FAA would continue to be responsible for regulating screening, overseeing performance, and imposing penalties for poor performance. Table 1 outlines the four options. Shifting responsibility for screening would affect many stakeholders and might demand many resources. Accordingly, a number of criteria must be weighed before changing the status quo. We asked aviation stakeholders to identify key criteria that should be used in assessing screening alternatives. These criteria are to establish accountability for screening performance; ensure cooperation among stakeholders, such as airlines, airports, FAA, efficiently move passengers to flights; and minimize legal and liability issues. We asked airline and airport security officials to assess each option for reassigning screening responsibility against the key criteria. Specifically, we asked them to indicate whether an alternative would be better, the same, or worse than the current situation with regard to each criterion. Table 2 summarizes their responses. At the time of our review, FAA was finalizing a certification rule that would make a number of changes to the screening program, including requiring FAA- certification of screening companies and the installation of TIP systems on X-ray machines at screening checkpoints. Our respondents believed that these actions would improve screeners' performance and accountability. Some respondents approved of the proposed changes, since they would result in FAA having a direct regulatory role vis-a-vis the screening companies. Others indicated that the installation of TIP systems nationwide could improve screeners' awareness and ability to detect potentially threatening objects and result in better screener performance. Respondents did not believe that this option would affect stakeholder cooperation, affect passenger movement through checkpoints, or pose any additional legal issues. No consensus existed among aviation stakeholders about how making airports responsible for screening would affect any of the key criteria. Almost half indicated that screeners' performance would not change if the airport authority were to assume responsibility, particularly if the airport authority were to contract out the screening operation. Some commented that screening accountability would likely blur because of the substantial differences among airports in management and governance. Many respondents indicated that the airport option would produce the same or worse results than the current situation in terms of accountability, legal/liability issues, cooperation among stakeholders, and passenger movement. Several respondents noted that cooperation between air carriers and airports could suffer because the airports might raise the cost of passenger screening and slow down the flow of passengers through the screening checkpoint--to the detriment of the air carriers' operations. Others indicated that the legal issue of whether employees of a government-owned airport could conduct searches of passengers might pose a significant barrier to this option. Screening performance and accountability would improve if a new agency were created in DOT to control screening operations, according to those we interviewed. Some respondents viewed having one entity whose sole focus would be security as advantageous and believed it would be fitting for the federal government to take a more direct role in ensuring aviation security. Respondents indicated that federal control could lead to better screener performance because a federal entity most likely would offer better pay and benefits, attract a more professional workforce, and reduce employee turnover. There was no consensus among the respondents preferring this option on how federal control might affect stakeholder cooperation, passenger movement, or legal and liability issues. For some of the same reasons mentioned above, respondents believed that screening performance and accountability would improve under a government corporation charged with screening. The majority of the respondents preferred the government corporation to the DOT agency, because they viewed it as more flexible and less bureaucratic than a federal agency. For instance, the corporation would have more autonomy in funding and budgeting requirements that typically govern the operations of federal agencies. Respondents believed that the speed of passengers through checkpoints was likely to remain unchanged. No consensus existed among respondents preferring the government corporation option about how federal control might affect stakeholder cooperation or legal and liability issues. We visited five countries--Belgium, Canada, France, the Netherlands, and the United Kingdom--viewed by FAA and the civil aviation industry as having effective screening operations to identify screening practices that differ from those in the United States. The responsibility for screening in most of these countries is placed with the airport authority or with the government, not with the air carriers as it is in the United States. In Belgium, France, and the United Kingdom, the responsibility for screening has been placed with the airports, which either hire screening companies to conduct the screening operations or, as at some airports in the United Kingdom, hire screeners and manage the checkpoints themselves. In the Netherlands, the government is responsible for passenger screening and hires a screening company to conduct checkpoint operations, which are overseen by a Dutch police force. We note that, worldwide, of 102 other countries with international airports, 100 have placed screening responsibility with the airports or the government; only 2 other countries--Canada and Bermuda--place screening responsibility with air carriers. We also identified differences between the United States and the five countries in three other areas: screening operations, screeners' qualifications, and screeners' pay and benefits. As we move to improve the screening function in the United States, practices of these countries may provide some useful insights. First, screening operations in some of the countries we visited are more stringent. For example, Belgium, the Netherlands, and the United Kingdom routinely touch or "pat down" passengers in response to metal detector alarms. Additionally, all five countries allow only ticketed passengers through the screening checkpoints, thereby allowing the screeners to more thoroughly check fewer people. Some countries also have a greater police or military presence near checkpoints. In the United Kingdom, for example, security forces--often armed with automatic weapons--patrol at or near checkpoints. At Belgium's main airport in Brussels, a constant police presence is maintained at one of two glass-enclosed rooms directly behind the checkpoints. Second, screeners' qualifications are usually more extensive. In contrast to the United States, Belgium requires screeners to be citizens; France requires screeners to be citizens of a European Union country. In the Netherlands, screeners do not have to be citizens, but they must have been residents of the country for 5 years. Training requirements for screeners were also greater in four of the countries we visited than in the United States. While FAA requires that screeners in this country have 12 hours of classroom training before they can begin work, Belgium, Canada, France, and the Netherlands require more. For example, France requires 60 hours of training and Belgium requires at least 40 hours of training with an additional 16 to 24 hours for each activity, such as X-ray machine operations, that the screener will conduct. Finally, screeners receive relatively better pay and benefits in most of these countries. Whereas screeners in the United States receive wages that are at or slightly above minimum wage, screeners in some countries receive wages that are viewed as being at the "middle income" level in those countries. In the Netherlands, for example, screeners received at least the equivalent of about $7.50 per hour. This wage was about 30 percent higher than the wages at fast-food restaurants in that country. In Belgium, screeners received the equivalent of about $14 per hour. Not only is pay higher, but the screeners in some countries receive benefits, such as health care or vacations--in large part because these benefits are required under the laws of these countries. These countries also have significantly lower screener turnover than the United States: turnover rates were about 50 percent or lower in these countries. Because each country follows its own unique set of screening practices, and because data on screeners' performance in each country were not available to us, it is difficult to measure the impact of these different practices on improving screeners' performance. Nevertheless, there are indications that for least one country, practices may help to improve screeners' performance. This country conducted a screener-testing program jointly with FAA that showed that its screeners detected over twice as many test objects as did screeners in the United States.

A safe and secure civil aviation system is critical to the nation's overall security, physical infrastructure, and economy. Billions of dollars and countless programs and policies have gone into developing such a system. Although many of the specific factors contributing to the terrible events of September 11 are still unclear, it is apparent that our aviation security system is plagued by serious weaknesses that can have devastating consequences. Last year, as part of an undercover investigation, GAO special agents used fake law enforcement badges and credentials to gain access to secure areas at two airports. They were also issued tickets and boarding passes, and could have carried weapons, explosives, or other dangerous items onto the aircraft. GAO tests of airport screeners also found major shortcomings in their ability to detect dangerous items hidden on passengers or in carry-on luggage. These weaknesses have raised questions about the need for alternative approaches. In assessing alternatives, five outcomes should be considered: improving screener performance, establishing accountability, ensuring cooperation among stakeholders, moving people efficiently, and minimizing legal and liability issues.

Since the CFO Act's passage, steady progress has been made in improving federal financial management. A set of comprehensive accounting standards has been completed by the Federal Accounting Standards Advisory Board (FASAB), agencies are progressing in receiving unqualified audit opinions on financial statements, and structures are in place to identify and resolve governmentwide financial management issues. FASAB was created by the Secretary of the Treasury, the Director of Office of Management and Budget (OMB), and the Comptroller General in October 1990 to consider and recommend federal accounting standards. Treasury, OMB, and GAO then decide whether to adopt the recommended standards; if they do, the standards are published by OMB and GAO and become effective. Statements of federal financial accounting concepts and standards, which are listed in attachment I, now provide for reporting on the federal government's financial condition, as well as on the costs of its programs. For fiscal year 1996, when agencywide financial statements were required across government for the first time, 6 of the 24 CFO Act agencies received unqualified audit opinions. For the next year, fiscal year 1997, 9 agencies received unqualified audit opinions, and OMB expects an additional agency to receive an unqualified opinion by the end of June 1998. The preparation of financial statements and independent audit opinions required by the expanded CFO Act are bringing greater clarity and understanding to the scope and depth of problems and needed solutions. Some individual agencies have successfully solved these problems. For example, the Social Security Administration (SSA) prepared financial statements for fiscal year 1987--prior to the expanded CFO Act's requirement--addressed financial weaknesses, and attained its first unqualified audit opinion for fiscal year 1994. As this Subcommittee heard at its April 17, 1998, hearing, SSA now produces financial statements within 2 months of the close of the fiscal year and continues to receive unqualified audit opinions annually. At the Department of Energy, the Inspector General identified problems related to the balance sheet Energy prepared for fiscal year 1995. The problems, for example, involved identifying liabilities associated with environmental cleanup and controls over property and equipment, which Energy worked to correct. The following year, fiscal year 1996, Energy prepared agencywide financial statements that received an unqualified opinion and sustained these results for fiscal year 1997. Many people are actively working to resolve federal financial management problems. For example, OMB has issued guidance to agencies on producing useful financial reports that meet FASAB standards. In addition to individual CFOs working to address issues in their agencies, the CFO Council, working with OMB, develops an annual financial management status report and 5-year plan. Inspectors General are carrying out their responsibilities to ensure annual audits of financial statements. On March 31, 1998, the Secretary of the Treasury, in consultation with the Director of OMB, issued the 1997 Consolidated Financial Statements of the United States Government. These audited governmentwide financial statements were the first prepared and issued under provisions of the expanded CFO Act and included our first report required by the act. On April 1, 1998, we testified before this Subcommittee on the results of our audit. Our testimony framed the most serious financial management improvement challenges facing the federal government. In summary, significant financial systems weaknesses; problems with fundamental recordkeeping; incomplete documentation; and weak internal controls, including computer controls, prevented the government from accurately reporting a large portion of its assets, liabilities, and costs. Our audit of the federal government's consolidated financial statements and the Inspectors General audits of agencies' financial statements have resulted in an identification and analysis of deficiencies in the government's recordkeeping and control system and recommendations to correct them. The executive branch recognizes the extent and severity of the financial management deficiencies and that addressing them will require concerted improvement efforts across government. Financial management has been designated one of the President's priority management objectives, with the goal of having performance and cost information in a timely, informative, and accurate way, consistent with federal accounting standards. Also, the administration has set goals for individual agencies, as well as the government as a whole, to complete audits and gain unqualified opinions. To help achieve these objectives, the President issued a May 26, 1998, memorandum to the heads of executive departments and agencies on actions needed to improve financial management. The President's message points to several areas requiring agencies additional attention: practices related to the government's property, federal credit programs, liabilities related to the disposal of hazardous waste and remediation of environmental contamination, federal government employment-related benefits liabilities, and transactions between federal entities. These areas reflect the serious deficiencies that prevented us from being able to form an opinion on the reliability of the consolidated financial statements of the U.S. government. The President's directive places additional accountability on agency heads and gives OMB more responsibility for addressing these problems. Specifically, he has directed that: OMB identify agencies subject to reporting under the President's memorandum and monitor their progress towards the goal of having an unqualified audit opinion on the governmentwide financial statements for fiscal year 1999. The head of each agency identified by OMB submit to OMB a plan, including milestones, for resolving by September 30, 1999, financial reporting deficiencies identified by auditors. The initial agency plans are due to OMB by July 31, 1998. The head of each agency submitting a plan provide quarterly reports to OMB, starting on September 30, 1998, describing progress in meeting the milestones in their action plan and any impediments that would impact the governmentwide goal. OMB provide periodic reports to the Vice President on the agency submissions and governmentwide actions taken to meet the governmentwide goal. Specific agencies, such as the Department of Defense (DOD), are also reacting to the results of the most recent financial audits. As we testified before this Subcommittee on April 16, 1998, material financial management deficiencies identified at DOD, taken together, represent the single largest obstacle that must be effectively addressed to achieve an unqualified opinion on the U.S. government's consolidated financial statements. In response to DOD's unfavorable financial audit results over the last several years, the Secretary of Defense announced on May 15, 1998, that initiatives to improve the accuracy, timeliness, and usefulness of financial information are to be developed through the Defense Management Council. The Secretary has (1) instructed the Under Secretary (Comptroller) to oversee departmentwide efforts to improve the manner in which financial information is captured and reported in all DOD systems--not just its financial systems--and (2) directed the secretaries of the military departments, and other top DOD officials, to support the Under Secretary (Comptroller) in DOD's financial business practices reform. Reactions such as these to address the problems identified through the first audit of the U.S. government's consolidated financial statements are positive steps. In the short term, the quality of the action plans agency heads submit to OMB in response to the President's directive will be critical. It is essential for these plans to define financial management problems precisely, establish specific strategies and corrective measures for resolving them, include implementation time frames, fix accountability for needed actions, and be prepared in consultation with auditors. Moreover, our experience has shown that considerable hard work, commitment, and oversight will be necessary to translate planned steps into concrete improvements. The aggressiveness with which agencies implement the action plans and pursue solutions to financial management problems will be a strong indication of whether agency heads have a sustained commitment to achieving financial management reform goals. Ultimately, agency heads and their senior management team have to be accountable for results. Again, the auditors have key roles in providing perspectives on actions needed to attain improvements and in assessing progress toward implementing the action plans. Federal agencies will have great difficulty meeting expectations for modernizing their financial management systems unless they effectively meet the Year 2000 computing challenge. As we have discussed in numerous testimonies before this Subcommittee, this issue is the most sweeping and urgent information technology challenge facing organizations today. Strong leadership is needed to avoid major disruptions in services and financial operations, such as processing financial transactions, reporting financial information, controlling property, and collecting revenue. Unless this issue is successfully addressed, serious consequences could occur. For example: payments to veterans with service-connected disabilities could be severely delayed if the system that issues them either halts or produces checks so erroneous that it must be shut down and checks processed manually; the SSA process to provide benefits to disabled persons could be disrupted if interfaces with state systems fail; federal systems used to track student loans could produce erroneous information on loan status, such as indicating that a paid loan was in default; IRS tax systems could be unable to process returns, thereby jeopardizing revenue collection and delaying refunds; and the military services could find it extremely difficult to efficiently and effectively equip and sustain U.S. forces around the world. This Subcommittee's emphasis has helped to focus on the potential consequences of the Year 2000 computing crisis and the need for added impetus by some agencies to overcome vast difficulties within the next 18 months. In our most recent testimony before the Subcommittee on June 10, 1998, we reported that progress in addressing Year 2000 continues at a slow pace, and that as the amount of time to the turn of the century shortens, the magnitude of what must be accomplished becomes more daunting. We have issued over 40 reports and testimony statements detailing specific findings and recommendations related to the Year 2000 readiness of a wide range of federal agencies. Moreover, to reduce the risk of widespread disruptions, we have made several governmentwide recommendations to the President's Council on Year 2000 Conversion and OMB to expedite the efforts of federal agencies and build strong partnerships with the private sector and state and local governments. This will likely affect the pace of progress on modernizing financial systems, as some agencies' efforts to address the Year 2000 computing crisis are taking precedence over longer-term financial management systems development and improvement initiatives. Unless successfully dealt with, this crisis presents the likelihood of new financial management systems weaknesses occurring, existing problems worsening, and ongoing reform efforts being derailed. Congressional attention is essential to help sustain the current momentum to implement financial management reform legislation. There are clear indications that the results of financial audits are beginning to attract increasing attention from various congressional committees. One instance involves the audit of IRS's financial statements. During our first audits, beginning with fiscal year 1992, we identified serious problems and were unable to give an opinion on IRS's financial statements. The head of IRS was called before congressional committees in both the House and Senate on numerous occasions to explain the steps IRS was taking, and the progress it was making, to overcome them. On April 15, 1998, we testifiedbefore this Subcommittee that after several years of concerted effort by IRS and GAO, we were, for the first time, able to conclude that IRS's custodial financial statements were reliable. These positive results show that focused attention by the Congress and this Subcommittee on IRS's financial management has begun to improve information available to IRS management and to the Congress to help make decisions. In addition, issues raised by financial audits are beginning to prompt inquiries among various congressional committees, as exemplified by the following. In its reports for the fiscal years 1997 and 1998 appropriations bills, the Subcommittee on Labor, Health and Human Services, Education and Related Agencies of the House Committee on Appropriations (1) set the expectation that the Departments of Labor, Health and Human Services, and Education work vigorously toward obtaining clean audit opinions, (2) questioned whether these agencies could properly exercise the substantial transfer and reprogramming authority granted to them under the appropriations act if substantial financial management reform progress had not been made, and (3) stated that in subsequent years it would consider the agencies' progress in making such reforms and obtaining clean financial statement audit opinions when scrutinizing requests for appropriations and in deciding whether to continue, expand, or limit transfer and reprogramming authority. The Chairman of the House Committee on the Budget asked us to monitor the Forest Service's progress in improving the reliability of its accounting and financial data, which also contributed to a recent joint hearing before the House Committee on Resources, Committee on the Budget, and Subcommittee on Interior and Related Agencies, Committee on Appropriations, focusing on inefficiency and waste resulting from the Forest Service's lack of financial and performance accountability. After considering funding for DOD for fiscal year 1998, the Senate Armed Services Committee legislatively required DOD to prepare biennial financial management improvement plans that include a concept of operations for the financial management of the department. The first such plan is to be submitted to the Congress by September 30, 1998. In approving DOD's 1997 and 1998 appropriations, the Congress also put in place a legislative requirement to accelerate DOD's planned timetable for addressing long-standing problems in accurately and promptly accounting for billions of dollars in disbursements. Additionally, as part of DOD's 1999 authorization, the Senate Armed Services Committee has approved a requirement for DOD to provide a detailed annual report on the quantities and locations of DOD's multibillion dollar investment in inventories and military equipment. The Chairman of the House Budget Committee asked us to analyze the programmatic and budgetary implications of the financial data deficiencies enumerated by the auditors' examination of the Department of the Navy's fiscal year 1996 financial statements. In March 1998, we advised the Chairman that the extent and nature of the Navy's financial deficiencies identified by the auditors, including those that relate to supporting management systems, increases the risk of waste, fraud, and misappropriation of Navy funds and can drain resources needed for defense mission priorities. On April 24, 1998, this Subcommittee and the House Committee on Commerce's Subcommittees on Oversight and Investigations, Health and Environment held a joint hearing on the Department of Health and Human Service Inspector General's audit of the Health Care Financing Administration's fiscal year 1997 financial statements. This helped focus attention on fixing the control weaknesses associated with the more than $20 billion of improper payments in the Medicare fee-for-service program disclosed by the financial audit. In February 1998, we assisted the Chairman of the House Committee on the Budget in considering the possible program and budgetary implications of the questions raised about financial statement data deficiencies identified in the Department of Transportation Inspector General's audit report on the Federal Aviation Administration's fiscal year 1996 Statement of Financial Position. In addition to initiatives by individual congressional committees, the Federal Financial Management Improvement Act provides the Congress another tool in monitoring the progress of all 24 CFO Act agencies in improving financial systems. The act is intended to increase accountability in federal financial management and develop systems with the capability to support FASAB standards. FFMIA also provides for an independent judgment by auditors of agencies' efforts to foster compliance with financial management improvement goals. Under the act, agencies are required to comply with federal accounting standards, federal financial systems requirements, and the U.S. government's standard general ledger at the transaction level. This legislation also requires (1) auditors performing financial audits under the CFO Act to report whether agencies comply with these requirements and (2) if agencies do not comply, agency heads are to prepare remediation plans to bring financial management systems into substantial compliance within 3 years. We reported in October 1997 that prior audit results and agency self-reporting all point to significant challenges that agencies must meet to fully implement these requirements. The majority of federal agencies' financial management systems are not designed to meet current accounting standards and systems requirements and cannot provide reliable financial information for managing government operations and holding managers accountable. Auditors' reports for fiscal year 1997 agency financial audits are disclosing the continuing poor shape in which agencies find their financial systems. To date, the financial systems of only four agencies are reported to be in substantial compliance with the requirements and standards FFMIA specifies. The Congress can build further upon this structure by conducting annual hearings on each agency as part of the regular appropriation, authorization, and oversight process. Each year, congressional committees could review the results of agencies' most recent financial statement audits and FFMIA reports to gauge the progress agencies are making in improving financial management. Agency heads could be required to describe remedial actions being taken to address financial management problems identified by independent auditors. Through this process, the Congress can, therefore, be in an informed position to assess progress in achieving legislative financial management improvement reforms, addressing the Year 2000 computing crisis, and meeting the President's financial statement audit goals. This would allow thorough consideration of the severity of an agency's financial management problems, the demonstrated commitment to improvement efforts, and the independent perspectives of the auditors on an agency's progress in responding to financial statement audit recommendations. Using the results of this assessment, the Congress can clearly determine accountability and tailor needed additional actions. Based on the circumstances of individual agencies on a case-by-case basis, the Congress could, for example, consider whether (1) in areas of special concern, to require attainment of specified improvements within established milestones before certain funds supporting administrative operations or systems would be available for obligation, (2) to expand, continue, or limit transfer or reprogramming authority depending on the quality of an agency's financial management, (3) to target, or set aside, needed funding for financial management improvement efforts that are deemed necessary to achieve progress and require periodic status reports on the return for this investment, or (4) to scrutinize funding requests, and perhaps consider limiting funds, in areas where agencies cannot provide satisfactory answers to questions raised about the quality of the data underpinning the request or their ability to properly account for the expenditures. These mechanisms--sustained congressional attention as part of the normal oversight process and agency head accountability--are essential to continue to effectively implement the financial management reform legislative foundation the Congress has established. They are key elements of ensuring that agencies make the investment of time, talent, and resources necessary to achieve needed financial management improvements. With a concerted effort, the federal government, as a whole, can continue to make progress toward ensuring full accountability and generating reliable information on a regular basis. Annual financial statement audits are essential to ensuring the effectiveness of the improvements now underway and, ultimately, to producing the reliable and complete information needed by decisionmakers and the public to evaluate the government's financial performance. They are also central to assuring taxpayers that their money is being used as intended and helping the government implement broad management reforms called for by the Government Performance and Results Act. Mr. Chairman, this concludes my statement. I would be happy to now respond to any questions that you or other members of the Subcommittee may have at this time. 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Pursuant to a legislative requirement, GAO discussed ways Congress can help to ensure that agencies effectively implement federal financial management reform legislation. GAO noted that: (1) an essential foundation to help achieve the goals of implementing financial management reforms is the requirement that the 24 Chief Financial Officers Act agencies annually prepare financial statements and subject them to an independent audit, beginning with those for fiscal year (FY) 1996; (2) additionally, audited consolidated financial statements for the U.S. government are now required annually, starting with those for FY 1997; (3) to further promote needed reforms, the Federal Financial Management Improvement Act calls for agencies to meet various financial management standards and requirements and, if they do not, to prepare remediation plans; (4) these reforms begin to subject the federal government to the same fiscal discipline imposed for years on the private sector and state and local governments; (5) this discipline is needed to correct long-standing serious weaknesses in federal financial management systems, controls, and reporting practices; (6) considerable effort is under way across government to make needed improvements and progress is being made, but a great deal of perseverance will be required to fully attain the legislative goals set by federal financial management statutes; (7) the federal government can continue to make progress in implementing financial management reforms, but the pace and extent of improvement will depend upon the dedication of agency heads and their senior management teams, especially chief financial officers, and the ability to deal with a range of financial management systems issues, as well as continuing emphasis by Congress on financial management reform; (8) broad oversight by Congress will be very important to hold agency heads accountable for needed financial management improvements; and (9) Congress would make a significant contribution to ensuring satisfactory results in this area if the results of financial audits and needed improvements became a routine part of its normal annual appropriation, authorization, and oversight deliberations.

Since the 1960s, geostationary and polar-orbiting environmental satellites have been used by the United States to provide meteorological data for weather observation, research, and forecasting. NOAA's National Environmental Satellite Data and Information Service (NESDIS) is responsible for managing the civilian geostationary and polar-orbiting satellite systems as two separate programs, called GOES and the Polar Operational Environmental Satellites, respectively. Unlike polar-orbiting satellites, which constantly circle the earth in a relatively low polar orbit, geostationary satellites can maintain a constant view of the earth from a high orbit of about 22,300 miles in space. NOAA operates GOES as a two-satellite system that is primarily focused on the United States. These satellites are uniquely positioned to provide timely environmental data to meteorologists and their audiences on the earth's atmosphere, its surface, cloud cover, and the space environment. They also observe the development of hazardous weather, such as hurricanes and severe thunderstorms, and track their movement and intensity to reduce or avoid major losses of property and life. Furthermore, the satellites' ability to provide broad, continuously updated coverage of atmospheric conditions over land and oceans is important to NOAA's weather forecasting operations. To provide continuous satellite coverage, NOAA acquires several geostationary satellites at a time as part of a series and launches new satellites every few years (see table 1). Three satellites--GOES-11, GOES-12, and GOES-13--are currently in orbit. Both GOES-11 and GOES-12 are operational satellites, while GOES-13 is in an on-orbit storage mode. It is a backup for the other two satellites should they experience any degradation in service. The others in the series, GOES-O and GOES-P, are planned for launch over the next few years. NOAA is also planning the next generation of satellites, known as the GOES-R series, which are planned for launch beginning in 2014. NOAA plans for the GOES-R program to improve on the technology of prior series, in terms of both system and instrument improvements, to fulfill more demanding user requirements and to provide more rapid information updates. Table 2 highlights key system-related improvements GOES-R is expected to make to the geostationary satellite program. In addition to the system improvements, the instruments on the GOES-R series are expected to significantly increase the clarity and precision of the observed environmental data. NOAA originally planned to acquire six different types of instruments. Furthermore, two of these instruments-- the Advanced Baseline Imager and the Hyperspectral Environmental Suite--were considered to be the most critical because they would provide data for key weather products. Table 3 summarizes the originally planned instruments and their expected capabilities. More recently, however, NOAA reduced the scope of the GOES-R program because of expectations of higher costs. In May 2006, the program office projected that total costs, which were originally estimated to be $6.2 billion, could reach $11.4 billion. We reported that this led NOAA to reduce the scope and technical complexity of the baseline program. Specifically, in September 2006, NOAA reduced the minimum number of satellites from four to two, cancelled plans for developing the Hyperspectral Environmental Suite, and estimated the revised program would cost $7 billion. Table 4 provides a summary of the timeline and scope of these key changes. NOAA is solely responsible for GOES-R program funding and overall mission success. However, since it relies on NASA's acquisition experience and technical expertise to help ensure the success of its programs, NOAA implemented an integrated program management structure with NASA for the GOES-R program. Within the program office, there are two project offices that manage key components of the GOES-R system. These are called the flight and operations project offices. The flight project office oversees the spacecraft, instruments, and launch services. The operations project office oversees the ground elements and on-orbit operations of the satellites. The project manager for the flight project office and the deputy project manager for operations project office are designated to be filled with NASA personnel. Additionally, NOAA has located the program office at NASA's Goddard Space Flight Center. NOAA's acquisition strategy was to award contracts for the preliminary design of the GOES-R system to several vendors who would subsequently compete for the contract to be the single prime contractor responsible for overall system development and production. As such, in October 2005, NOAA awarded contracts for the preliminary design of the overall GOES-R system to three vendors. In addition, to reduce the risks associated with developing technically advanced instruments, NASA awarded contracts for the preliminary designs for five of the originally planned instruments. NASA expected to subsequently award development contracts for these instruments and to eventually turn them over to the prime contractor responsible for the overall GOES-R program. NOAA has completed preliminary design studies of its GOES-R procurement. In addition, the agency recently decided to separate the space and ground elements of the program into two separate contracts to be managed by NASA and NOAA, respectively. However, this change has delayed a key decision to proceed with the acquisition, which was planned for September 2007. Further, independent estimates are higher than the program's current $7 billion cost estimate and convey a low level of confidence in the program's schedule for launching the first satellite by 2014. As NOAA works to reconcile the independent estimate with its own program office estimate, costs are likely to grow and schedules are likely to be delayed. NOAA and NASA have made progress on GOES-R. The program office has completed preliminary design studies of the overall GOES-R system and has initiated development work on most of the planned instruments. Specifically, the NOAA-issued contracts for the preliminary design of the overall GOES-R system to three vendors have ended, and the designs have been completed. In addition, after completing preliminary designs on five of the originally planned instruments, NASA awarded development contracts for three of them. Further, the most critical of these instruments--the Advanced Baseline Imager--has completed a major development milestone. In February 2007, it passed a critical design review gate and NASA approved the contractor to begin production of a prototype model. NOAA recently made a number of key changes in how it plans to acquire the GOES-R system. Originally, NOAA planned to award and manage a single prime contract for the acquisition and operation of the integrated system. However, an independent review team assessed the program and found that this approach was risky. It recommended that NOAA split the acquisition effort into two separate contracts for the space and ground segments and have NASA manage the space segment. The independent review team concluded that there was less risk in continuing with this approach than there would be if NOAA took on a new and expanded role. In March 2007, Commerce approved NOAA's decision to implement these recommendations. The agency revised its acquisition strategy to include two separate contracts--the space segment and the ground segment. The two contracts are expected to be awarded in May 2008 and August 2008, respectively. The space segment is to be managed by a NASA-led flight project office. As such, NASA is to be responsible for awarding and managing the space segment contract, delivering the flight-ready instruments to the space segment contractor for integration onto the satellites, and overseeing the systems engineering and integration. NOAA is to be responsible for the ground segment contract, which is to be managed by the NOAA-led operations project office. The revised acquisition strategy has delayed NOAA's plans to complete a key decision milestone on whether to proceed with GOES-R development and production in September 2007. Once this decision is made, the final requests for proposals on the system segments are to be released. The agency could not provide a timeframe for when this key decision milestone would take place. NOAA's current estimate that the life cycle cost of the GOES-R program would be $7 billion is likely to grow, and its estimate that the first satellite would be launched in December 2014 is likely to slip. Consistent with best practices in cost estimating, in May 2007, NOAA had two different cost estimates completed for the current GOES-R program--one by its program office and one by an independent cost estimating firm. The program office estimated with 80 percent confidence that the program would cost $6.9 billion. The independent estimating firm estimated with 80 percent confidence that the program would cost $9.3 billion. A comparison of the two cost models shows that the independent estimator has about a 20 percent level of confidence that the program can be completed for $6.9 billion. Further, the independent estimator concluded that the program office estimate significantly understated the risk of cost overruns. Other major differences between the two estimates are contained in government costs and in the space and ground segments. In commenting on a draft of the accompanying report, NOAA officials noted that one of the differences between the estimates is the inflation rate. The independent estimator assumed a higher inflation rate than the rate that NOAA and NASA typically use. NOAA officials noted that if the independent estimate was adjusted to NOAA's inflation rate, the program's cost estimate--with 80 percent confidence--would be $8.7 billion. However, we believe that the value of an independent estimate is that it does not necessarily use the same assumptions as the program office. By offering alternative assumptions, the independent estimate provides valuable information for government officials to consider when revising program cost estimates. Program officials are reconciling the two different cost estimates and plan to establish a new program cost estimate to be released in conjunction with the President's fiscal year 2009 budget in February 2008. Program officials were unable to provide us information on the reconciled estimate until it is released. Nonetheless, the revised cost estimate will likely be $1 billion more than the current $7 billion. Regarding schedule, NOAA's current plan to launch the first GOES-R series satellite in December 2014 could be delayed. This schedule was driven by a requirement that the satellites be available to back up the last remaining GOES satellites (GOES-O and GOES-P) should anything go wrong during the planned launches of these satellites (see table 5). However, as part of its cost estimate, the independent estimator performed a schedule risk analysis. The independent estimator determined that there was less than a 50 percent chance that the first satellite would be ready for launch by December 2014 and that a later date would be more realistic. The estimator determined that it had 50 percent confidence that the first satellite would launch by October 2015 and 80 percent confidence that the satellite would launch by March 2017. A delay of this magnitude could affect the continuity of GOES data should the agency experience problems with the predecessor satellites. To address cost, schedule, and technical risks, the GOES-R program established a risk management program and has taken steps to identify and mitigate selected risks. However, more remains to be done to fully address a comprehensive set of risks. Specifically, the program has multiple risk watchlists and they are not always consistent. Further, key risks are missing from the risks lists, including risks associated with unfilled executive positions, limitations in NOAA's insight into NASA's deliverables, and insufficient funding for unexpected costs (called management reserve) on a critical sensor. As a result, the GOES-R program is at increased risk that problems will not be identified or mitigated in a timely manner and that they could lead to program cost overruns and schedule delays. The GOES-R program office established a risk management program and is tracking and mitigating selected risks. Risk management is a leading management practice that is widely recognized as a key component of a sound system development approach. An effective risk management approach typically includes identifying, prioritizing, and mitigating risks, and escalating key risks to the attention of senior management. In accordance with leading management practices, the GOES-R program identifies risks, assigns a severity rating to risks, tracks these risks in a database, plans response strategies for each risk in the database, and reviews and evaluates these risks during monthly program risk management board meetings. Programwide and project-specific risks are managed by different offices. The program office identifies and tracks programwide risks--those that affect the overall GOES-R program. NASA's flight project office and NOAA's operations project office manage risks affecting their respective aspects of the program. Further, the program office briefs senior executives on top program and project risks on a monthly basis. As of July 2007, the program office identified three program risks affecting the overall GOES-R program. These risks include the development of the integrated master schedule, the ability to secure authorization to use a key frequency band to meet the space-to-ground communication data link requirements for the GOES-R system, and the final approval of the GOES-R mission requirements from the NOAA Deputy Undersecretary. NOAA is working to mitigate and close program risks that it is tracking. For example, the program office recently closed the risk associated with GOES-R requirements because it had sufficiently defined and obtained approval of these requirements. As another example, the program office considers the lack of an integrated master schedule to be its highest priority risk. Program officials reported that completion of the integrated master schedule is driven by the completion of the intermediate schedules for the ground segment and the space-to-ground interdependencies. Key program staff members, including a resident scheduler, meet on a weekly basis to resolve outstanding design issues and hone these schedules. Program officials reported that the intermediate schedules are near completion and that they plan to have the integrated master schedule completed in Fall 2007. They expect to remove this issue from the risk watchlist at that time. As of July 2007, the NASA flight project office identified four risks affecting instrument development, all of which are classified as medium risk. The top three risks pertain to the advanced imaging instrument, ABI--including issues on timely and quality subcontractor delivery of a critical part, stray light negatively impacting the performance of the optical system, and meeting specified performance requirements on image navigation and registration. The fourth priority risk pertains to the improvement of subcontractor quality assurance on a key sensor for the Space Environmental In-Situ Suite. NASA is working to mitigate the flight segment risks that it is tracking. For example, the ABI contractor, among other things, plans to complete a key simulation review before the end of the year (called the structural thermal optical performance analysis) to evaluate whether the instrument can meet its expected performance parameters for image navigation and registration. NASA also recently conducted a vendor facility assessment of the Space Environmental In-Situ Suite subcontractor to determine whether adequate quality assurance improvements had been made to be compliant with contract requirements. These actions are expected to help mitigate the risk. As of July 2007, the NOAA operations project office identified five risks impacting the management and development of the ground system and operations, including one that is identified as a medium risk. These risks include, among other things, inadequate definition of flight and operations project interdependencies, algorithm development responsibilities, and the adequate definition of coordination requirements between the space and ground segments to ensure that the two requests for proposals are consistent. NOAA is working to mitigate the ground system and operations risks that it is tracking. For example, for the highest priority risk regarding schedule interdependencies, key staff from both the flight and operations projects meet weekly in order to identify and synchronize project schedules. The project office expects to close this risk in Fall 2007. While GOES-R has implemented a risk management process, its multiple risk watchlists are not consistent in areas where there are interdependencies between the lists, which makes it difficult to effectively prioritize and manage risks at the appropriate organizational levels. Sound risk management practices call for having a consistent prioritization approach and for significant problems to be elevated from the component level to the program level. This is because an issue affecting a critical component could have severe programmatic implications and should be identified, tracked, and overseen at the program level. In addition, program executives should be briefed regularly on the status of key risks. However, on the GOES-R program, the risks identified on the multiple risk lists are inconsistent in areas where there are interdependencies between the lists. These interdependencies include situations where a risk is raised by one project office and affects the other project office, but is not identified by the other project office or elevated to the program level risk list. They also include situations where a risk identified by a project office has programwide implications, but is not elevated to the program level risk list. For example, the operations project office identified schedule interdependencies between the flight and operations project offices as a medium criticality risk, but neither the flight project office nor the program identified this risk even though it is relevant to both. As another example, the operations project office identified the ground procurement schedule as a major issue in its briefing to senior management, but this risk was not identified on its own or on the programwide risk lists. In addition, while the three offices brief senior management about their key risks on a monthly basis, selected risks may not be accurately depicted in these briefings because of the inconsistencies among the risk watchlists. For example, both the flight and operations project offices identified technical development issues as minor to moderate risk areas, but the program office did not identify this item as a risk and, when it briefed senior management, it noted that technical development was in good shape. Figure 1 depicts examples of inconsistencies among risk lists and briefings to senior management. The lack of consistency in managing risks in areas where there are interdependencies makes it difficult to ensure that all identified risks are appropriately prioritized and managed. This situation hampers the program office's ability to identify and mitigate risks early on and to anticipate and manage the impact of risks on other areas of the program. To be effective, a risk management program should have a comprehensive list of risks. However, several key risks that impact the GOES-R procurement and merit agency attention are not identified in the program's risk lists. These risks include (1) key leadership positions that need to be filled, (2) NOAA's limited insight into NASA's deliverables, and (3) insufficient management reserves (held by the program and a key instrument contractor). At the conclusion of our review for the accompanying report, program officials stated that they are aware of these issues and are working to monitor them or address them, as warranted. Nevertheless, until these and other programwide risks are identified and addressed as part of a comprehensive risk management program, there is increased likelihood that issues will be overlooked that could affect the acquisition of the GOES-R system. The two senior GOES-R program positions--the system program director and deputy system program director--are currently filled by NASA and NOAA personnel in an acting capacity until they can be permanently filled by NOAA. In addition, the acting system program director is not able to work full time in this role because she is also on a special assignment as the NESDIS Deputy Assistant Administrator for Systems. NOAA reported that it plans to fill the deputy system program director role in the near future, but noted that it could take more than 6 months to fill the system program director role. Given the approach of the development phase of the GOES-R acquisition and the competing priorities of the acting system program director, it is especially important that these key leadership positions be filled quickly. At the conclusion of our review, agency officials stated that they are aware of this issue and are working to fill the positions, but they did not believe the issue warranted inclusion on the program level risk watch list. However, without the senior level attention inherent in a sound risk management program, it is not clear that NOAA is sufficiently focused on the importance of establishing knowledgeable and committed program executives, or in moving quickly to fill these critical positions. NOAA's March 2007 decision to adopt an acquisition management approach similar to prior GOES procurements could make the agency vulnerable to repeating some of the problems experienced in the past. In particular, our work on the GOES I-M series found that NOAA did not have the ability to make quick decisions on problems because portions of the procurement were managed by NASA. In fact, NOAA officials originally intended to depart from this approach as a lesson they learned from the GOES I-M acquisition, because it limited the agency's insight and management involvement in the procurement of major elements of the system. The established NOAA/NASA interagency agreements require NASA to submit monthly contractor cost performance reports to NOAA and to alert NOAA should cost and schedule performance drop below certain thresholds. NASA is currently submitting the required reports and has alerted NOAA on major cost and schedule changes. However, these interagency agreements do not contain provisions that enable NOAA to ensure that the data and reports are reliable and that they accurately depict contractor performance. To do so would entail NOAA having the ability and means to question and validate data, such as by having direct access to the contractor. NASA and NOAA officials reported that the two agencies are working together with an unparalleled level of transparency and noted that NOAA program staff have access to contractor data and can bring any questions with the data to the relevant NASA staff. However, they acknowledged that this process is not documented and were not able to demonstrate that NOAA staff had questioned contract data and that NASA had facilitated obtaining answers to the questions. By not identifying and mitigating this risk on its program risk list, NOAA increases the likelihood that the GOES- R program will repeat the management and contractor shortfalls that plagued past GOES procurements. A recent modification to the critical ABI instrument contract increased its cost, thereby reducing the amount of management reserve funds held by the program office for unexpected expenses. In September 2006, we reported that ABI was experiencing technical challenges, that were resulting in cost and schedule overruns. Since then, the contractor continued missing cost and schedule targets--a trend that continued until February 2007. At that time, NASA modified the contract to implement a revised baseline cost and schedule. The added cost of this modification was funded using management reserve funds held by the GOES-R program office. As a result, the amount of reserve held by the program office dropped below 25 percent--a level that NOAA reported it intended to establish as a lesson learned from other satellite acquisitions. As of July 2007, the program's reserve level was at about 15 percent. Program officials stated that their revised goal is to maintain between 10 and 15 percent in reserve at the program level. While maintaining a 10 to 15 percent management reserve is on par with other major satellite acquisitions, the depletion of management reserves this early in the GOES- R acquisition raises concerns that there will be insufficient reserves during the challenging development, integration, and testing phases to come. In addition, the contractor for the ABI instrument has a very low level of reserve funding for unexpected costs, which means that any unexpected problems will likely lead to cost growth on the overall GOES-R program. As of May 2007, the contractor was holding less than 1 percent of funding in reserve to cover unexpected costs associated with the 40 percent of work left to be completed. As such, there is a risk that the new baseline could fail due to inadequate reserves to finish the program. This would likely have a diminishing effect on the reserve held by the GOES-R flight project and the program office to cover the costs of a second revised baseline plan. Our prior work on system acquisitions has shown inadequate reserves to be an indicator of poor management performance that could lead to cost overruns. Considering that GOES-R has not yet entered the development and production phases, it will be critical for NOAA's senior executive management to aggressively manage this risk. By not identifying, mitigating, and tracking this risk in a programwide risk list, the GOES-R program runs an increased risk that unanticipated issues on the ABI instrument will lead to programwide cost overruns and schedule delays. To improve NOAA's ability to effectively manage the procurement of the GOES-R system, we recommended in our accompanying report that the Secretary of Commerce direct the Undersecretary of Commerce for Oceans and Atmosphere to take the following two actions: Ensure that the GOES-R program office manages, mitigates, and reports on risks using a program-level risk list that is reconciled with and includes risks from its flight and operations project offices that could impact the overall program. Include the following risks on the programwide risk list, develop plans to mitigate them, and report to senior executives on progress in mitigating them: unfilled or temporary GOES-R program leadership positions, insufficient program insight on NASA contract performance, and insufficient management reserve on the critical Advanced Baseline Imager instrument and at the GOES-R program level. In written comments, Commerce agreed with our recommendations to use a program level risk list and to add selected risks to its list. The department reported that NOAA has established a consolidated programwide risk list that is to be used to evaluate risks during monthly internal and external reviews. Further, NOAA acknowledges the risks associated with having unfilled leadership positions and insufficient management reserves and is working to mitigate these risks. However, the department disagreed with our recommendation to manage and mitigate the risk that NOAA has insufficient insight into NASA's contracts. The department cited an unparalleled level of transparency between the two agencies and listed multiple regular meetings that the two agencies hold to ensure close coordination. While an improved working relationship between the two agencies is critical, NOAA has not provided any evidence that it has been able to effectively question and validate data on NASA's contractor performance. Given the past problems that NOAA has experienced in obtaining insight into NASA's contracts and the importance of this interagency relationship to the success of the GOES-R program, we believe that this issue should be managed and monitored as a risk. NOAA also requested that we acknowledge its effort to reconcile its program estimate with the independent estimate and reflect a 20 percent possibility that the program could cost $1 billion more than the current estimate of $7 billion, rather than $2 billion more. We acknowledge this in our report; however, the reconciliation effort is not complete and NOAA did not provide us with a reconciled estimate. In summary, although NOAA has made progress in the GOES-R procurement, changes in the GOES-R acquisition strategy could lead to cost overruns and schedule delays if not managed effectively. Over the last year, NOAA has completed preliminary design studies of its GOES-R system and decided to separate the space and ground elements of the program into two contracts and have NASA oversee the system integration effort. Current program plans call for a two-satellite program--estimated to cost about $7 billion--with launch of the first satellite in December 2014. However, independent studies show that the program's cost could increase by about $2 billion and that the first launch could be delayed by at least 2 years. NOAA has taken steps to identify and address key risks but more could be done to effectively manage risks from a programwide perspective. In particular, the program has multiple risk watchlists that are not consistent in areas where there are interdependencies and key risks have not been elevated for programwide attention. Also, several risks that warrant NOAA's attention have not been placed on any watchlist. Specifically, the top two leadership positions are only temporarily filled; NOAA does not have the ability and means to obtain insight into NASA contracts in order to validate contractor performance data; and insufficient management reserves to handle unexpected problems on a critical instrument and at the program level are likely to affect overall program costs when any unexpected problems arise. Until NOAA manages and addresses a comprehensive set of program risks, the agency's ability to effectively manage the GOES-R acquisition will be significantly weakened and could lead to substantial program overruns and delays. Mr. Chairman, this concludes my statement. I would 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 me at (202) 512-9286 or by e-mail at [email protected]. Other key contributors to this testimony include Carol Cha, Neil Doherty, Nancy Glover, Colleen Phillips (Assistant Director), and Teresa Smith. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The National Oceanic and Atmospheric Administration (NOAA), with the aid of the National Aeronautics and Space Administration (NASA), plans to procure the next generation of geostationary operational environmental satellites, called the Geostationary Operational Environmental Satellites-R series (GOES-R). This new series is considered critical to the United States' ability to maintain the continuity of data required for weather forecasting through the year 2028. GAO was asked to summarize its report on the GOES-R series. This report (1) assesses the status and revised plans for the GOES-R procurement and (2) evaluates whether NOAA is adequately mitigating key technical and programmatic risks facing the program. To conduct this review, GAO analyzed contractor and program data and interviewed officials from NOAA and NASA. NOAA has made progress in planning its GOES-R procurement--which is estimated to cost $7 billion and scheduled to have the first satellite ready for launch in 2014--but cost and schedules are likely to grow. Specifically, the agency completed preliminary design studies of GOES-R and recently decided to separate the space and ground elements of the program into two separate development contracts. However, this change in strategy has delayed a planned September 2007 decision to proceed with the acquisition. Further, independent estimates are higher than the program's current cost estimate and convey a low level of confidence in the program's schedule. Independent studies show that the estimated program could cost about $2 billion more, and the first satellite launch could be delayed by 2 years. As NOAA works to reconcile the independent estimate with its own program office estimate, costs are likely to grow and schedules are likely to be delayed. To address cost, schedule, and technical risks, the GOES-R program has established a risk management program and has taken steps to mitigate selected risks. For example, as of July 2007, the program office identified the lack of an integrated master schedule to be its highest priority risk and established plans to bring this risk to closure. However, more remains to be done to fully address risks. Specifically, the program has multiple risk watchlists that are not always consistent and key risks are missing from the watchlists, including risks associated with unfilled executive positions, limitations in NOAA's insight into NASA's deliverables, and insufficient funds for unexpected costs--called management reserves. As a result, the GOES-R program is at risk that problems will not be identified or mitigated in a timely manner and could lead to program cost overruns and schedule delays.

In any real estate transaction, the buyer and lender providing the mortgage need a guarantee that the buyer will have clear ownership of the property. Title insurance is designed to provide that guarantee by agreeing to compensate the lender (through a lender's policy) or the buyer (through an owner's policy) up to the amount of the loan or the purchase price, respectively. Lenders' policies are in force for as long as the original loan is still outstanding, but end when the loan is paid off--for instance, through a refinancing transaction--while owners' policies remain in effect as long as the purchaser of the policy owns the property. Title insurance is sold primarily through title agents. Before issuing a policy, a title agent checks the history of a title by examining public records such as deeds, mortgages, wills, divorce decrees, court judgments, and tax records. If the title search discovers a problem--such as a tax lien that has not been paid--the agent either arranges to resolve the problem, decides to provide coverage despite the problem, or excludes it from coverage. The title policy insures the policyholder against any claims that might have existed at the time of the purchase but were not identified in the public record. The title policy does not require that title problems be fixed but compensates policyholders if a covered problem arises. Except in very limited instances, title insurance does not insure against title defects that arise after the date of sale. Title searches are generally carried out locally by title agents because the public records to be searched are usually only available locally. In addition, the variety of sources that agents must check has fostered the development of privately owned, indexed databases called "title plants." These plants contain copies of the documents obtained through searches of public records, indexed by property address, and must be regularly updated. Title plants may be owned by insurers, title agents, or a combination of entities. In some cases, the owner of a title plant sells access to other insurers and agents, charging them to use the service. Title insurance premiums are paid only once, at the time of sale or refinancing, to the title agent. Agents retain or are paid a portion of the premium amount as a fee for conducting the title search and related work, and for their commission. Agents have a fiduciary duty to account for premiums paid to them, and insurers generally have the right to audit the agents' relevant financial records. The party responsible for paying for the title policies varies by state and can even vary by areas within states. In many areas, the seller pays for the owner's policy and the buyer for the lender's policy, but the buyer may also pay for both policies or split some (or all) of the costs with the seller. In most cases, the policies are issued simultaneously by the same insurer, so that the same title search can be used for both policies. In a recent nationwide survey, the average cost for simultaneously issuing lender's and owner's policies on a $180,000 loan, plus other associated title costs, was approximately $925--or approximately 34 percent of the average total loan origination and closing fees. In almost all states, title insurance is regulated by state insurance departments; in all states, insurers selling title insurance in that state are subject to the state's regulations for their operations within that state. State regulators are responsible for enforcing these regulations, primarily through the licensing of agents, the approval of insurance rates and products, and the examination of insurers' financial solvency and conduct. State regulators typically conduct financial solvency examinations every 3 to 5 years, while examinations reviewing insurers' conduct are generally done in response to specific complaints by consumers or concerns on the part of the regulator. Insurance regulations can vary across states, creating differences in the way insurers are regulated. For example, most states require insurers to submit proposed premium rates to the state regulator, and then perform some level of review of those rates. In several states, however, the state regulator sets the premium rate which all insurers must charge, and in at least one state the regulator does not review rates at all. In addition, while most states license title insurance agents, several do not. At the federal level, HUD is responsible for enforcing RESPA, which regulates real estate settlement practices. Among other things, RESPA requires that borrowers receive certain information regarding closing costs, including title insurance fees. RESPA also generally prohibits giving or accepting any thing of value for the referral of settlement services, such as the referral of business to a particular title agent. RESPA also allows state insurance commissioners to take enforcement actions, under RESPA, against these prohibited activities. Some aspects of the title insurance market that set it apart from other lines of insurance merit further study, including: the importance of title search costs, rather than losses, in setting premium rates; the fact that title insurance agents play a more important role than agents for other lines of insurance; the fact that title insurance is generally marketed not to consumers but to professionals such as real estate agents or mortgage brokers; the proliferation of affiliated business arrangements between title agents and these professionals; and the involvement and coordination among the regulators of multiple types of entities involved in the marketing and sale of title insurance. The extent to which title insurance premium rates reflect insurers' underlying costs is not always clear. Insurance rate regulation, among other things, aims to protect consumers by ensuring that premium rates accurately reflect insurers' expected and actual costs, and that they are not excessive. However, most state regulators do not appear to consider title search expenses to be part of the premium. As a result, these expenses are not included in regulatory reviews that seek to determine whether premium rates accurately reflect insurers' costs. To complicate matters, it also appears that few state regulators collect financial data from title agents, who generally conduct the title search and examination work, so that examining such expenses would be difficult. Further, unlike other lines of insurance, the largest costs for title insurers are expenses related to title searches and agent commissions, not losses on policy claims. In 2004, according to data compiled by ALTA, losses and loss adjustment expenses incurred by title insurers as a whole were approximately 5 percent of total premiums written, while the amount paid to or retained by agents (primarily for work related to title searches and examinations, and for agents' commissions) was approximately 71 percent of premiums written. In contrast, property casualty insurers' losses and loss adjustment expenses accounted for approximately 73 percent of total premiums in 2004. A related area worthy of further review is premium rate regulation for mortgage refinance transactions. In these cases, a title search most likely has been performed relatively recently, and the property is not changing hands. If the same title insurer was conducting another title search for the refinancing, that search would presumably need to cover a shorter period of time. Because title search and examination costs are the largest component of premium rates for title insurance, the premium rates for refinance transactions could reasonably be expected to be lower than for home purchases. While it appears that many insurers do provide discounted premiums on refinance transactions, the extent of such discounts and how widely they are used--that is, whether consumers know about them and know how to take advantage of them--is unclear. Finally, the extent to which premium rates increase as loan amounts or purchase prices increase could also usefully be examined. Costs for title search and examination work do not appear to rise as loan or purchase amounts increase, and the portion of premiums that covers potential losses is only about 5 percent of total premiums. If premium rates reflected the underlying costs, premium rates could reasonably be expected to increase at a relatively slow rate as loan or purchase amounts increase. However, this does not always appear to be the case. For example, using premium rates posted on the Internet by two state regulators with whom we spoke, we found that when the purchase price or loan amount doubled from $150,000 to $300,000, the increase in total premium for an owner's policy for selected insurers in the same county ranged from approximately 27 to 57 percent. According to an industry expert and officials from an industry association, allowing such pricing reflects a policy decision by state regulators to have higher-income purchasers subsidize the title insurance costs of lower-income purchasers. How do title insurers determine premium rates, and how have these rates changed in recent years? How does the current rate review structure in most states examine the costs that determine title insurance premium rates? What data are collected that could be used to assess the extent to which title insurance premium rates reflect the associated costs? To what extent do title insurers offer discounted premium rates on mortgage refinance transactions? Title agents play a more significant role in the title insurance industry than most other types of insurance agents. For most lines of insurance, an agent's role is primarily a marketing role. Title insurance agents not only perform this task, but also carry out most underwriting tasks, including title search and examination work. In many cases, title agents retain the actual insurance policy and, after deducting expenses, remit the title insurer's portion of the premium. As we have seen, amounts paid to or retained by title agents for this work in 2004 were around 71 percent of total premiums written. Despite title agents' critical role, the amount of attention they receive from state regulators is not clear. For example, according to data compiled by ALTA, while most states require title agents to be licensed, three states plus the District of Columbia do not. In addition, also according to the same source, 18 states and the District of Columbia do not require agents to pass a test to become licensed, and only 20 states require some form of continuing education as a prerequisite for title agents. At least one state does not regulate title agents. While NAIC has produced model legislation that states can use as a basis for their own regulation of title agents, according to NAIC, as of October 2005, only 3 states had passed the model act or similar legislation. The level of oversight of title agents by the state regulators that we spoke with for this report varied. For example, one state regulator told us that examiners conduct regular but informal visits to the title agents in their state but do not track such contacts. Another regulator told us that the agency's review of title agents' operations focused primarily on financial condition, not on compliance with state laws. This regulator also collected financial data from title agents, but had only recently begun systematically analyzing that data and questioned its quality. Another regulator told us that the agency had recently begun an intense examination of title agents' activities and had taken a number of related enforcement actions. The state insurance regulators with whom we spoke expected or required insurers to oversee the operations of the title agents writing policies for them. One regulator said that the state did not have specific regulations requiring insurers to monitor title agents' operations, but expected such monitoring as a matter of course. This regulator also expected insurers to resolve any problems the regulator might find with agents' operations. Another state regulator told us that, in light of activities identified in recent investigations, their office recently revised its regulations to require title insurers to monitor the activities of their agents and hold insurers responsible for their agents' actions. To what extent do state insurance regulators review and collect information from title agents operating in their state? To what extent are title insurers required to oversee the agents who write insurance for them? To what extent have state insurers adopted model title insurance and agent laws? For several reasons, the competitiveness of the title insurance market merits further study. First, because the purchase of title insurance is an infrequent and unfamiliar transaction for most people, consumers often rely on the advice of a real estate or mortgage professional in choosing a title insurer. As a result, title insurers and agents normally market their product to such professionals rather than to consumers. Thus, while consumers are the ones paying for title insurance, they generally do not know how to "shop around" for the best deal, and may not even know that they can. Meanwhile, the potential exists for real estate or mortgage professionals to recommend--not the least expensive or most reputable title insurer or agent--but the one that is most closely aligned with the professional's best interests. While RESPA generally prohibits the payment of fees for such business referrals, as discussed later in this report, recent federal and state investigations have alleged such arrangements. Some industry officials pointed out that cost was not the only basis for selecting a title insurer because service and speed were also important. Second, concentration in the industry has raised further questions about its competitiveness. In 2004, according to data compiled by ALTA, the five largest title insurers and their subsidiary companies accounted for over 90 percent of the total premiums written. However, according to the annual reports of several of these companies, a large number of local agents are used to conduct their business--for example, one company noted in its annual report that more than 9,500 agents sold the company's insurance nationwide. And while a recent analysis of competition in the California title insurance market concluded that the market was overly concentrated, some experts disagree with the study's methodology and its conclusions. Finally, certain aspects of the financial performance of title insurers and agents have also caused some to question the competitiveness of the title insurance market. For example, as previously discussed, losses on title insurance claims accounted for only about 5 percent of total premiums written in 2004--a very low percentage compared with most other lines. In addition, according to data collected by ALTA, total operating revenue for the industry as a whole rose approximately 68 percent between 2001 and 2004, from approximately $9.8 to $16.4 billion. Such conditions could create the impression of excessive profits. The same study of competition in the California market analyzed the profitability of insurers and agents in that market and concluded that they were earning large profits at consumers' expense. To what extent do aspects of competition beneficial to the consumer appear to exist in the current title insurance market? What has been the short- and long-term financial performance of title insurers and agents, and what accounts for the dramatic increase in total operating revenue? The use of affiliated business arrangements involving title agents and others such as lenders, real estate brokers, and builders, appears to have grown over the past several years, and further study of their effect could be beneficial. Within the title insurance industry, the term "affiliated business arrangements" generally refers to some level of joint ownership among title insurers, title agents, real estate brokers, mortgage brokers, lenders, and builders. For example, a mortgage lender and a title agent might form a new jointly owned title agency, or a lender might buy a portion of a title agency. According to some industry groups, consumers can benefit from such arrangements, which may provide convenient, one- stop shopping and lower costs. But some consumer groups and state insurance regulators point out that such arrangements can also be abused and could present conflicts of interest. For example, a real estate broker that is part owner of a title agency might be seen as unable to provide objective advice on which title insurer a consumer should use. In addition, some see such arrangements as a way to hide referral fees by allowing title insurers or agents to mask such fees as a return on ownership interest. As detailed later in this report, a number of recent investigations have alleged improper use of affiliated business arrangements. State regulation of affiliated business arrangements appears to vary. For example, according to one industry association, a number of states limit the amount of business title insurers and agents can receive from an affiliate. In addition, among the state regulators with whom we spoke for this review, one did not normally examine such arrangements, but the others were beginning to conduct more extensive reviews. RESPA regulations require disclosure of affiliated arrangements whenever a settlement service provider refers a consumer to a business with which the provider has an ownership or other beneficial interest. In addition, while owners of affiliated business may be compensated for their ownership interest in, for example, a title agent, RESPA regulations prohibit compensation beyond that interest. As noted above, the extent of information collected regarding the activities of title agents appears to be limited. As a result, the extent of information collected on affiliated business arrangements involving title agents is likely similarly limited. The use of affiliated business arrangements, and the potential benefits and concerns regarding their use, make this an issue on which further study could be beneficial. To what extent is information available on the growth and use of affiliated business arrangements in the title insurance industry? What are the potential benefits and concerns associated with the use of affiliated business arrangements? To what extent do state insurance and other regulators review affiliated business arrangements? How are RESPA disclosure requirements of affiliated business arrangements, and the related prohibitions on referral fees, enforced? Several types of entities (besides the insurers and their agents) are involved in the sale of title insurance, and the degree of involvement and the extent of coordination among the regulators of these entities appears to vary, making this an area meriting further review. Multiple types of entities are involved in the marketing of title insurance, including real estate brokers and agents, mortgage brokers, lenders, and builders who refer clients to the insurers and agents. These entities are generally overseen at the state level by different regulators, and the extent of regulation related to title insurance sales practices tends to vary across states. One state insurance regulator with whom we spoke told us that they informally coordinate with the state real estate commission as well as HUD. Another regulator said that, while they have tried to coordinate their efforts with the state regulators of real estate and mortgage brokers, those regulators have generally not been interested in such coordination. The apparent growth of affiliated business arrangements, which give some of these entities an ownership interest in others, makes examining the strengths of--and need for--such coordination even more important. However, some coordinated regulatory efforts have taken place. At the federal level, HUD, which is responsible for implementing RESPA, has conducted some investigations with state insurance regulators. As we will see, some of these investigations of the marketing of title insurance by title insurers and agents, real estate brokers, and builders have turned up allegedly illegal activities in the market. Oversight of this, and other areas, is critical to ensure that title insurance markets are functioning fairly. To what extent do regulatory differences among those involved in the sale of title insurance create concerns, and to what extent is there regulatory coordination? To what extent do current regulations address the potential concerns about affiliated business arrangements? What could state and federal regulators do to improve coordination? Federal and state investigators have identified two primary types of potentially illegal activities associated with the sale of title insurance. The first involves providing home-builders, real estate agents, real estate brokers, and lenders with potentially unlawful referral fees through captive reinsurer agreements, allegedly inappropriate or fraudulent business arrangements, and free or discounted business services and other items of value. The second involves potential fraud committed by title agents who allegedly misappropriate or mishandle customers' premiums. Industry representatives told us that title insurers have begun to address these problems but that clearer regulations and more enforcement are needed. In several states, state insurance regulators identified captive reinsurance arrangements that they alleged were being used by title insurers and agents to inappropriately compensate others--such as builders or lenders--for referrals. In such arrangements, a home-builder, real estate broker, lender, title insurance company, or some combination of these entities forms a reinsurance company that works in conjunction with a title insurer. The title insurer agrees to "reinsure" all or part of its business with the reinsurer by paying the company a portion of the premium (and ostensibly transferring a portion of the risk) for each title transaction. Investigators alleged that these reinsurance companies did not actually provide reinsurance services in return for this compensation because the amount the reinsurers received exceeded the risk they assumed. The investigators considered these arrangements a way to pay for referrals, a practice that is unlawful under some state anti-kickback and anti-rebating laws as well as under RESPA. In one investigation, a reinsurer controlled by three title insurance underwriters entered into agreements with lenders, real estate brokerages, and builders to pay part of its premiums to these entities. State investigators alleged that the reinsurer was transacting reinsurance business without a required certificate from the state and that the title insurers were using unfair practices. As part of the settlement, state investigators demanded that the reinsurer cease operations in the state and that the underwriters end their captive reinsurance arrangements with unauthorized reinsurers but also reimburse affected consumers and pay penalties to the state. In New York, regulators and the attorney general confirmed that they are currently investigating alleged illegal kickbacks in the title insurance industry. State and federal investigators have also alleged the existence of inappropriate or fraudulent business arrangements among title agencies, title insurers, mortgage brokers, attorneys, and real estate brokers that were allegedly being used to convey kickbacks and referral fees. Most of the investigations we reviewed have examined activities by title agents that involve affiliated business arrangements--that is, part or full ownership of title agencies by real estate brokers, lenders, home-builders, and mortgage brokers. A typical fraudulent business arrangement involves a shell title agency that is set up by a title agent but that generally has no physical location, employees, or assets, and does not actually perform title and settlement business. In cases we examined, regulators alleged their primary purpose is to serve as a vehicle to provide kickbacks by being a pass-through for payments or preferential treatment given by the title agent to real estate agents and brokers, home-builders, attorneys, or mortgage brokers for business referrals. Investigations have alleged that the arrangements in these cases violate RESPA. For example: In one federal investigation, a title insurer and eight home-builders were alleged to have formed shell agencies that performed little or no title work, were not independent entities, and benefited financially from referrals. In a multi-state federal investigation, a title agency and its affiliates were found to have created "preferred" attorney lists for real estate closings. Attorneys were allegedly placed on the list only if they agreed to refer their clients to the title agency's affiliated online title company. As part of the settlement, the parties agreed to stop creating "preferred" attorney lists and pay monetary penalties to the federal government. State and federal investigators have also looked at other types of alleged kickbacks that title agents have given real estate agents and brokers, and attorneys involved in real estate transactions. In investigations we reviewed, these alleged kickbacks included free or discounted business services or other items of value and included gifts, entertainment, business support services, training, and printing costs. One state investigation identified items such as spa treatments, event tickets, electronics, and trips to domestic and foreign vacation locations. Investigators alleged that these inducements also violated federal and state anti-kickback and anti- rebating laws. Finally, federal and state investigators have alleged that some title agents have misappropriated or mishandled customers' premiums. For example, one licensed title insurance agent, who was an owner or partial owner of more than 10 title agencies, allegedly failed to remit approximately $500,000 in premiums to the title insurer. As a result, the insurer allegedly did not issue 6,400 title policies to consumers who had paid for them. The agent also had allegedly mixed funds from premiums with business assets and allegedly misappropriated escrow funds for his personal use. The investigators, who alleged that the agent had failed to perform his fiduciary duty and had violated several state laws, subsequently suspended his license and, pending the outcome of hearings, plan to shut down the title agencies he owned or controlled. Some employees of title agencies have also been alleged to have submitted fraudulent receipts, invoices, and expense reports and then used the reimbursement money for personal expenses or to pay for items on behalf of those who referred business to them. In response to these and other investigations, insurers and industry associations say they have addressed some concerns but that clearer regulations and stronger enforcement regarding affiliated businesses are needed. One title-insurance-industry association told us that some title insurers have been motivated by recent federal and state enforcement actions to increasingly address kickbacks and rebates through, for example, increased oversight of title agents. In addition, they said that companies operating legally are hurt by competition from those breaking the rules and that these businesses welcome greater enforcement efforts. Another industry association, however, told us that clearer regulations regarding referral fees and affiliated business arrangements would aid the industry's compliance efforts. Specifically, regulations need to be more transparent about what types of discounts and fees are prohibited and what types are allowed. How widespread are cited infractions associated with the sale of title insurance? What are the implications of the findings of state and federal investigations for the title insurance industry and consumers? What actions have regulators and title industry participants taken to reduce the extent of illegal activities? Over the past several years, regulators, industry groups, and others have suggested changes to regulations that would affect the way title insurance is sold. In 2002, in order to simplify and improve the process of obtaining home mortgages and to reduce settlement costs for consumers, HUD proposed revisions to the regulations implementing RESPA. The proposed revisions included the creation of a guaranteed mortgage package that included guaranteed prices for loan origination and settlement services and a guaranteed interest rate, as well as a revised good faith estimate that would have required additional disclosures of settlement fees and limit fee increases over the original estimates. In response to considerable comment from the title industry, consumers, and other federal agencies, HUD withdrew the proposal in 2004. Opponents argued that the revisions would have given lenders too much leverage in putting together the guaranteed mortgage packages and would have included title insurance-- a product priced in part on risk--in a package that was priced based on market forces. HUD announced in June of 2005 that it was again considering revisions to the regulations, and has subsequently held a number of industry roundtables to get input from industry and others. NAIC officials told us that NAIC is considering changes to the model title insurance act in order to address current issues such as the growth of affiliated business arrangements. The model law for title insurers, among other things, covers premium rate regulation and title insurers' oversight of title agents that write insurance for them. The model law for title agents includes, among other things, agent licensing requirements and prohibitions on referral fees. According to NAIC, they will likely change the model title insurers act to more closely mirror RESPA's provisions regarding referral fees and available sanctions against violators. In addition, they would like to revise the model title agents act by strengthening the licensing requirements for title agents, because doing so can discourage the formation of shell agencies as part of an improper affiliated business arrangement. Finally, at least one consumer advocate has suggested that requiring lenders to pay for the title policies from which they benefit might increase competition and ultimately lower costs for consumers. Lenders could then use their market power to force title insurers to compete for lenders' business based on price. Additional regulation, these advocates said, might be necessary to require lenders to pass such cost savings on to consumers. Some title industry officials have voiced concern with such an approach because it would allow the lender to decide which title insurer the buyer must use. That is, if the buyer wanted to get the cost savings associated with simultaneously issued lender's and owner's policies, the buyer would have to use the same insurer as the lender. What benefits and concerns might arise from the implementation of potential regulatory changes? What barriers to implementation exist, and how serious are they? What other regulatory alternatives exist? As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the report date. At that time, we will send copies to the Senate Committee on Banking, Housing and Urban Affairs; the House Committee on Financial Services; the Secretary of Housing and Urban Development; and other interested parties. We will make copies available to others upon request. The report will also be available at no charge on our Web site at http://www.gao.gov. Please contact me at (202) 512-8678 or [email protected] if you or your staff have any questions about this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix I. In addition to the contact named above, Lawrence Cluff, Assistant Director; Tania Calhoun, Emily Chalmers, Nina Horowitz, Marc Molino, Donald Porteous, Melvin Thomas, and Patrick Ward made key contributions to this report.

Title insurance is a required element of almost all real estate purchases and is not an insignificant cost for consumers. However, consumers generally do not have the knowledge needed to "shop around" for title insurance and usually rely on professionals involved in real estate--such as lenders, real estate agents, and attorneys--for advice in selecting a title insurer. Recent state and federal investigations into title insurance sales have identified practices that may have benefited these professionals and title insurance providers at the expense of consumers. At your request, GAO currently has work under way studying the title insurance industry, including pricing, competition, the size of the market, the roles of the various participants in the market, and how they are regulated. You asked GAO to identify and report on preliminary issues for further study. In so doing, this report focuses on: (1) the reasonableness of cost structures and agent practices common to the title insurance market that are not typical of other insurance markets; (2) the implications of activities identified in recent state and federal investigations that may have benefited real estate professionals rather than consumers; and (3) the potential need for regulatory changes that would affect the way that title insurance is sold. Some cost structures and agent practices that are common to the title insurance market are not typical of other lines of insurance and merit further study. First, the extent to which premium rates reflect underlying costs is not always clear. For example, most states do not consider title search and examination costs--insurers' largest expense--to be part of the premium, and do not review them. Second, while title agents play a key role in the underwriting process, the extent to which state insurance regulators review them is not clear. Few states regularly collect information on agents, and three states do not license them. Third, the extent to which a competitive environment exists within the title insurance market that benefits consumers is also not clear. Consumers generally lack the knowledge necessary to "shop around" for a title insurer and therefore often rely on the advice of real estate and mortgage professionals. As a result, title agents normally market their business to these professionals, creating a form of competition from which the benefit to consumers is not always clear. Fourth, real estate brokers and lenders are increasingly becoming full or part owners of title agencies, which may benefit consumers by allowing one-stop shopping, but may also create conflicts of interest. Finally, multiple regulators oversee the different entities involved in the title insurance industry, but the extent of involvement and coordination among these entities is not clear. Recent state and federal investigations have identified potentially illegal activities--mainly involving alleged kickbacks--that also merit further study. The investigations alleged instances of real estate agents, mortgage brokers, and lenders receiving referral fees or other inducements in return for steering business to title insurers or agents, activities that may have violated federal or state anti-kickback laws. Participants allegedly used several methods to convey the inducements, including captive reinsurance agreements, fraudulent business arrangements, and discounted business services. For example, investigators identified several "shell" title agencies created by a title agent and a real estate or mortgage broker that had no physical location or employees and did not perform any title business, allegedly serving only to obscure referral payments. Insurers and industry associations with whom we spoke said that they had begun to address such alleged activities but also said that current regulations needed clarification. In the past several years, regulators, industry groups, and others have suggested changes to the way title insurance is sold, and further study of these suggestions could be beneficial. For example, the Department of Housing and Urban Development announced in June 2005 that it was considering revisions to the regulations implementing the Real Estate Settlement Procedures Act. In addition, the National Association of Insurance Commissioners is considering changes to model laws for title insurers and title agents. Finally, at least one consumer advocate has suggested that requiring lenders to pay for the title policies from which they benefit might increase competition and ultimately lower consumers' costs.

Automation of the battlefield has been a long-term goal of the Army because of its promise as a force multiplier: it produces greater fighting effectiveness through better use of battlefield resources. Digitization of the battlefield is the Army's latest effort to bring it closer to its long-term goal. Prior Army efforts focused on automating command and control at the corps and division levels whereas digitization extends this automation to the brigade and lower echelons, including individual weapons platforms. Digitization of the battlefield is part of a major effort to reshape the Army and, thus, it is one of the Army's highest priorities. The Army hopes to identify how digitization will improve combat power and how to change its organizational structure, doctrine, and tactics to take advantage of digitization. Army battlefield digitization started in the 1980s with the development of five corps- and division-level command and control systems collectively known as the Army Tactical Command and Control System. Their development and fielding have been a struggle. Two systems were fielded in 1993 and 1994, with limited capabilities. Two other systems are scheduled to undergo operational testing in 1995 and in 1996. The fifth system is scheduled to undergo its second operational test in 1996. The Army's strategy for digitizing the battlefield uses a bottom-up approach that experiments echelon by echelon with several digital systems simultaneously. It is a massive effort involving brigade-, division-, and corps-level experiments over the next 5 years. Advanced warfighting experiments were performed in 1993 at the company level, and in 1994 at the battalion level. Current plans call for a brigade experiment in February 1997, a division experiment in February 1998, and a corps experiment in April 1999. There are many digital systems to evaluate. For example, 25 unique digital systems and more than 120 items of equipment were evaluated in the battalion experiment. More than 40 digital systems, including potentially 1,200 appliques, may be evaluated during the brigade experiment. The applique, which began its development when a contract was awarded on January 6, 1995, will provide digital capability to weapon systems that do not have any. The major feature of the applique will be the situational awareness that it provides to its users. A digital map will display the locations of friendly and enemy forces and update their movement in near real time. This common picture will be provided simultaneously to all units in the brigade, from the command staff to the individual M1 tanks and other weapons platforms. The investment required for what the Army describes as the equivalent of the concept exploration and definition phase is $272 million through fiscal year 1997. For fiscal years 1998 and 1999, the equivalent of the demonstration and validation phase and the engineering and manufacturing development phase, the cost is expected to be $125 million, bringing the total development effort to $397 million. The cost primarily covers the development and acquisition of the applique and its integration onto many different vehicles, helicopters, and other platforms. It also covers the development of a digital radio and other related products. These research and development costs are relatively high because it is expensive to equip a battalion, a brigade, a division, and a corps with appliques for experiments. In the conventional concept exploration and definition phase, only a few prototypes of a system would be bought for experiments. The Army's position is that, although these costs are relatively high, the resources are needed to demonstrate the utility of a digitized force. Through 2005, the Army estimates that $2.1 billion is needed to field and sustain Force Package I. About 77 percent of this amount is to equip the force with appliques. The cost to equip the rest of the Army with appliques is not known, but according to Army officials, it could be $2 billion through 2011. This is in addition to funds already programmed for other digital battlefield efforts such as the five systems that comprise the Army Tactical Command and Control System and the embedded systems whose costs are born by the weapon systems themselves. The Army faces numerous technical, program, cost, and schedule risks in implementing its master plan for battlefield digitization. These risks are integration, software development, hardware costs, unknown quantity requirements, communications, and interoperability with other command and control systems. The integration of the applique onto different platforms represents a technical risk. The underlying cause of this risk is that each platform is different and requires a separate solution in terms of installation kits. For example, the installation kit that works for a tank may not necessarily work for an infantry fighting vehicle or a helicopter. Software development is an additional technical, cost, and schedule risk in our view because no appliques have been delivered and tested. More will be known after a critical design review in August 1995, and evaluations of interim software currently scheduled for July, September, and December 1995 and January and May 1996 have occurred. During this period, soldiers from Fort Knox will evaluate each version of software. Implementing all software functions and requirements will require additional engineering; in fact, 30 percent of applique software, which is needed for the brigade experiment, is estimated to be new code. The rest of the software is existing Brigade and Below Command and Control (B2C2) software and elements of the Forward Area Air Defense Command and Control, the Combat Service Support Control System, and the Enhanced Position Location Reporting System software, which have only been demonstrated separately and not as an integrated system. Applique hardware costs may be understated, depending on (1) how frequently hardware will be replaced, (2) what mix of computers will be used in future experiments and fieldings, and (3) whether higher end machines with more memory and speed will be needed. The Army may be required to upgrade applique computers every 2 to 3 years or sooner to take advantage of industry's technology advancements. The Army is still deciding on the proper mix of militarized, ruggedized, and commercial computers to be used for the brigade experiment. Currently, it is moving away from militarized toward ruggedized computers, which are less costly. However, the commercial computers, which are the least costly of the three variants, may not be rugged enough for the job. If the brigade experiment shows that more militarized and ruggedized computers are needed, that would drive up the costs of future experiments and deployment. The brigade experiment may also show that the appliques cannot do the job in terms of memory and speed. If so, higher end machines would be required, which will also increase costs. Cost risk is further aggravated by unknown quantity requirements for the applique. Because total quantity requirements are unknown, the total cost of the applique and the FBCB2 program is unknown. The 1997 brigade experiment may show that installing an applique in every tank, helicopter, and weapon system is useful but not affordable. Army officials have told us that having adequate communications is key to the 1997 brigade experiment; otherwise, it may have to be postponed. The Army is developing a tactical internet that increases the digital capacity and connectivity of three existing radio based communications systems.However, the tactical internet is not expected to be delivered to the Army until May 1996, only 1 month before the start of training for the experiment. Consequently, it represents a significant schedule risk. If successful, the tactical internet will provide a short-term solution to meeting the Army's data distribution needs. However, long-term needs will increase as the Army becomes dependent on automation and adds new digital systems to its inventory. Because of this, Army officials told us that they will require two new data distribution systems, one in the interim to be potentially more capable but less costly than the current system, EPLRS, and another one in the future to meet long-term needs. Developing an interim digital communications system for a 10 division Army could cost at least as much as EPLRS, or more than $900 million, and could take years to field. In our view, the data distribution issue is the weak link in the Army's plan because a new, interim system will be needed to meet the increasing communications demands imposed by the digital battlefield in the next century. Until it is resolved, we do not believe the full potential of battlefield digitization or automation will be realized. A schedule risk is posed because a number of systems must interoperate with the applique and be available for integration and testing prior to the 1997 brigade experiment. An example would be the five division- and corps-level systems that comprise the Army Tactical Command and Control System. Interoperability has been demonstrated through a very limited number of messages being exchanged between these systems. However, database to database exchange, which is critical to providing commanders with an accurate, near real-time common picture of the battlefield, has not been achieved. In commenting on our report, the Army recognizes the risks that we discuss and believes that it has taken steps to mitigate them. These include (1) the establishment of the Army Digitization Office, which provides high-level oversight by reporting to the Chief of Staff of the Army; (2) the establishment of the Digital Integrated Laboratory to assess interoperability issues; (3) the establishment of a "user jury" to provide early assessments of applique performance; and (4) the development of a Risk Management Master Plan. While these efforts are commendable, we still believe that the risks are substantial in number and formidable obstacles to the success of the digitization of the battlefield and we will continue to monitor the program to determine whether these risk reduction efforts really work. The Army's experimentation master plan states what experiments are to be performed through 1999, but it does not provide specific goals and clear criteria to support decisions to proceed with the experiments and buy additional appliques and other equipment. Thus, there is no criteria for measuring whether the experiments will be successful. As a result, the Army could continue to conduct large-scale, costly experiments at the brigade, division, and corps level, no matter what the results would be. For example, the 1994 battalion-level experiment lacked specific goals and exit criteria. Despite poor results in that experiment, the Army is moving on to a larger scale, brigade-level experiment in 1997, at a cost of $258 million. In addition, the Army's experimentation approach lacks adequate instrumentation and data collection. Specific, measurable, and quantifiable goals are needed to evaluate program achievements and assure program success. The Army's Operational Test and Evaluation Command (OPTEC) stated this requirement in its report on the 1994 experiment. Its recommendation was to "establish entrance criteria for hardware and software to ensure equipment used by the units is reliable and interoperable, and insights and data generated on force effectiveness meet established goals and expectations." Although the experimentation plan identifies numerous goals, such as increased lethality, it does not say how much lethality is to be achieved from the battalion experiment to the brigade and division-level experiments. Increased lethality is measured by many factors, such as the number of enemy troops, artillery pieces, and helicopters lost in battle. However, neither numeric criteria nor a baseline is given for these factors. The Army intends to determine effectiveness based on increasing trends in a series of simulations, technical tests, and field and subfield experiments over the next 5 years. The Army does not believe that either pass/fail criteria or a baseline are necessary at this stage since it is only experimenting. However, given that the experiment is expensive and important to its future, the Army should have measurable goals that it is expecting to achieve. Attainment or nonattainment of these goals, rather than subjective assessments alone, can best show the Army where it must direct its resources and whether it is appropriate to proceed to the next experiment. From April 10 to April 23, 1994, a battalion-level experiment was conducted at the National Training Center, Fort Irwin, California. It was the first experiment to use a digitized battalion task force. The experiment did not have (1) specific goals, (2) a specific way to measure success, or (3) a baseline to compare the digitized battalion's performance to. However, some Army leaders expected that the digitized "blue" force would defeat its nondigitized opponent called the "red" force. This did not happen. In the absence of specific goals, thresholds for performance, and a baseline, the Army compared the outcomes of seven nondigitized units that participated in four training rotations against the same well-trained red force at about the same time. Four units were at the National Training Center prior to April 1994, one at the same time as the digitized battalion, and two were there after the digitized unit's exercise. The comparison showed that the blue force generally performed no better than the seven other nondigitized blue forces against the red force. For example, the loss exchange ratio (the ratio of enemy losses to friendly losses) of the digitized blue force was about the same as the seven nondigitized blue forces in offensive and defensive engagements. The main reasons for these poor results were the immaturity of the B2C2 software, its lack of interoperability with the M1A2 tank's command and control software, and a lack of hands-on training with the digital systems. Despite these poor results, the Army decided to proceed to the brigade-level experiment instead of redoing the battalion experiment because it would have slowed the digitization effort by a year and cost several million dollars. ". . . additional instrumentation at critical nodes would allow increased confidence in experiment outcomes. It would permit a determination of when systems are operational, when they are used, how much they are used, who is communicating with whom . . . and if the systems are down, is the cause hardware, software, radio propagation, or human error. . . . The lack of instrumentation does not provide system developers the kind of information they need to troubleshoot problems identified during the exercise and make needed fixes." Objective data is vital in decisions to proceed to the next experiment and finally to full-rate production and deployment. The Army is planning to provide a more controlled environment for data collection of 100 instrumented vehicles during a 9-month training period prior to the February 1997 brigade experiment. However, it is unclear whether this will be enough in the context of numbers and critical nodes. The Army, in conjunction with an independent test agency, needs to decide specifically what instrumentation is needed to provide sufficient objective data to support moving the experiment forward. Last year, Congress directed the Army to include the Marine Corps in its plans for the digital battlefield. This has been done. Also, in fiscal year 1995, the Army provided the Marine Corps with $429,000 to help it launch its digitization program. The Army will also provide the Marines--at a cost of about $2.3 million to the Army--with enough appliques and installation kits to equip a light-armored reconnaissance company to participate in the 1997 brigade experiment. Despite these efforts, the Marines will have a $4.8 million shortfall in fiscal year 1996 research and development funds for equipment, engineering support, and operational demonstrations, which will affect its preparation for the Army's 1997 brigade experiment. The Army says it cannot provide additional assistance to the Marines because it has no more resources. Thus, the Marines' participation in the Army's 1997 experiment appears to be unknown. This situation illustrates that the Marine Corps needs assured funding to solidify its participation and success in all of the Army's digital battlefield experiments. These experiments may show that the Marines need additional appliques and communications systems to assure its interoperability with the Army in future joint combat operations. Thus, the Army; the Navy, which oversees Marine Corps funding; and DOD need to work together to produce a specific plan to create and assure Marine Corps funding. To help ensure that resources are directed appropriately and the Army has the data it needs to determine whether it should (1) buy additional appliques and (2) proceed to the next level of experiments, we recommend that the Secretary of Defense require the Secretary of the Army to develop specific, measurable goals and exit criteria for each phase of digital battlefield experimentation. Further, the Secretary of Defense should independently verify the goals' attainments. To carry out congressional direction, we also recommend the Secretary of Defense insure that the Secretary of the Navy and the Commandant of the Marine Corps identify resources to support the Marine Corps' participation and success in the Army's battlefield digitization effort. DOD partially concurred with the recommendations in our draft report. While the steps it plans to take on eventually establishing measurable goals substantially complies with our recommendation, we still have differences on the timing and specificity of the goals and the independent verification of the attainment of those goals. DOD believes that while it is necessary to have some means to judge the outcome of these large-scale experiments, it is too early in the program to have specific goals and measurable standards that have a pass or fail criteria associated with them. We disagree and continue to maintain that specific, measurable goals are needed, even at this early stage because of the expenses involved, the scale and progressive nature of the experiments, and their importance to the Army. By not establishing specific goals now at this level of experimentation, DOD and the Army are escalating risk as each advanced warfighting experiment progresses from the brigade to the division and finally to the corps levels. The DOD-supported Army approach continues the risk associated with acquiring millions of dollars of appliques and other related developments without knowing whether previous experiments were successful. Without some limits and controls, the Army could spend hundreds of millions of dollars on these experiments without having an adequate basis to judge whether it should continue them. DOD partially concurred with our recommendation that the attainment of these yet to be established measurable goals needs to be independently verified by DOD and points to the involvement of the Director, Operational Test and Evaluation (DOT&E). We acknowledge that DOT&E involvement is a very positive step in the direction we recommend. However, it is still unclear whether DOT&E will actually (1) approve of specific, measurable goals early on as we recommend instead of the general ones that DOD and the Army advocate and (2) verify the attainment of those goals in each advanced warfighting experiment. DOD's recognition of the Marine Corps' funding issue and its statement that it is working with the services to resolve it, essentially complies with the intent of our recommendation. We intend to monitor DOD's implementation efforts. DOD's comments are addressed in the body of this report where appropriate and are reprinted in their entirety in appendix I, along with our evaluation. We performed our review primarily at the Army Digitization Office in Washington, D.C., and the Program Executive Office for Command and Control Systems, and the Program Executive Office for Communications Systems at Fort Monmouth, New Jersey. We also visited the Army's Training and Doctrine Command at Fort Monroe, Virginia; the Armor Center at Fort Knox, Kentucky; the Combined Arms Center at Fort Leavenworth, Kansas; OPTEC, Arlington, Virginia; and the Program Executive Office for Aviation, St. Louis, Missouri. In addition, we contacted DOD's DOT&E, Washington, D.C.; and the U.S. Marine Corps Systems Command, Quantico, Virginia. We conducted our review between October 1994 and June 1995 in accordance with generally accepted government auditing standards. We are sending copies of this report to other appropriate congressional committees; the Director, Office of Management and Budget; the Secretaries of Defense, the Army, the Navy, and the Air Force; and the Commandant of the Marine Corps. Copies will also be made available to others upon request. Please contact me at (202)512-6548 if you or your staff have any questions concerning this report. The major contributors to this report were William L. Wright, Donald F. Lopes, and Edwin B. Griffin. The following are GAO's comments on the Department of Defense's (DOD) letter dated August 25, 1995. 1. We have identified these efforts in the body of our report. We believe that the Army's intentions are encouraging. However, we will continue to monitor the program to determine whether these risk reduction efforts really work. We still believe that the risks are substantial in number and formidable obstacles to the success of the digitization of the battlefield. 2. The steps the Army plans to take on eventually establishing measurable goals substantially complies with our recommendation. We still have differences on the timing and specificity of the goals and the independent verification of the attainment of those goals. DOD believes that while it is necessary to have some means to judge the outcome of these large scale experiments, it is too early in the program to have specific goals and measurable standards that have a pass or fail criteria associated with them. We disagree and continue to maintain that specific, measurable goals are needed, even at this early stage because of the expenses involved, the scale and progressive nature of the experiments, and their importance to the Army. By not establishing specific goals now at this level of experimentation, DOD and the Army are escalating risk at higher levels as each advanced warfighting experiment progresses from the brigade to the division and finally to the corps levels. DOD supported Army approach continues the risk associated with acquiring millions of dollars of appliques and other related developments without knowing whether previous experiments were successful. Without some limits and controls, the Army could spend hundreds of millions of dollars on these experiments without having an adequate basis to judge whether it should continue with them. 3. We acknowledge that the Director, Operational Test and Evaluation (DOT&E) involvement is a very positive step in the direction we recommend. However, it is still unclear whether DOT&E will actually (1) approve of specific, measurable goals early on as we recommend instead of the general ones as DOD and the Army advocate and (2) verify the attainment of those goals in each advanced warfighting experiment. 4. DOD's recognition of the Marine Corps' funding issue and its statement that it is working with the services to resolve it, essentially complies with the intent of our recommendation. We will continue to monitor DOD's implementation efforts. 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 (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a legislative requirement, GAO reviewed the Army's plans to digitize its battlefield operations. GAO found that: (1) as part of its battlefield digitization plan, the Army plans to conduct a series of costly experiments from 1995 to 1997 to demonstrate the utility of a digitized force; (2) risks that the Army faces in implementing its digitization plan include integration, software development, hardware costs, unknown quantity requirements, communications, and interoperability with other command and control systems; (3) specific and measurable goals are needed to evaluate the achievements of each experiment, and these goals should be met before proceeding to the next experiment; (4) the Army is risking investments of almost $400 million for digital systems needed to conduct increasingly larger scale experiments through fiscal year 1999; (5) the investment required to digitize a 10-division Army could be as high as $4 billion; and (6) since Congress has directed the Army to include the Marine Corps in its digitization plan, the Department of Defense must identify funding for the Marine Corps to ensure its participation and success in the digitization program.

The purpose of the NextGen Test Bed is to provide an environment in which laboratory testing and real-world demonstrations help to show the benefits of NextGen technologies. Furthermore, the Test Bed provides access to the systems currently used in the NAS, which allows for testing and evaluating the integration and interoperability of new technologies. The Test Bed is also meant to bring together stakeholders early in the technology development process so participants can understand the benefits of operational improvements, identify potential risks and integration and interoperability issues, and foster partnerships between government and industry. Some test facilities also serve as a forum in which private companies can learn from and partner with each other and eventually enter into technology acquisition agreements with FAA with reduced risk. Each of the NextGen test facilities that compose the NextGen Test Bed offers different testing capabilities and brings together different participants. The test facilities include: (1) the Florida Test Bed at Daytona Beach International Airport, supported by Embry-Riddle Aeronautical University (Embry-Riddle); (2) the Texas Test Bed, a National Aeronautics and Space Administration (NASA) facility near the Dallas-Fort Worth Airport; and (3) the New Jersey Test Bed located at FAA's William J. Hughes Technical Center near Atlantic City. (See fig. 1). According to FAA, while physically in different locations, the facilities are united in their purpose and will eventually be integrated to share capabilities and information. While sharing a common purpose, each facility offers different testing capabilities and brings together different participants from different communities, as follows: The Florida Test Bed is located in a private facility at which companies, including Lockheed Martin and Boeing, come together with academia and FAA to test technologies that fit into the NextGen vision. Private participants contribute financially to research and demonstration projects and collaborate to test concepts and technologies. These activities are guided by memorandums of understanding among all the participants. Embry-Riddle is currently working on a model agreement to govern the contributions of its private partners that will help delineate which components (hardware, software, and infrastructure) will be provided by the government and which by private participants. The model is meant to provide a cost- sharing method and also help engage participants and provide a means for them to have a vested interest in seeing the development of the technology all the way through to implementation. Currently, FAA pays the operating costs of the Florida Test Bed while Embry- Riddle and participating companies contribute technology and technical staff. Private participants may invest directly in software or hardware support. The facility--which has just undergone an expansion--provides access to the systems currently used in the NAS and to some of the major navigation, surveillance, communications, and weather information programs that are under development. It also has a dedicated area to support demonstrations and a separate space for the participating companies to test integration--where a greater contribution from the private sector is envisioned. The Texas Test Bed is a collaborative effort between NASA and FAA built on the grounds of FAA's Fort Worth Air Route Traffic Control Center. It supports NextGen research through field evaluations, shadow testing, the evaluation of simulations, and data collection and analysis. The researchers at the facility have agreements to receive data feeds from the airlines operating at the Dallas-Fort Worth airport, as well as various data feeds from airport and air traffic control facilities. The New Jersey Test Bed, located at FAA's national scientific test base, conducts research and development for new NextGen systems. In June 2010, this facility opened the NextGen Integration and Evaluation Capability area where scientists use real-time simulation to explore, integrate, and evaluate NextGen concepts, such as area navigation, trajectory-based operations, and unmanned aircraft system operations in the NAS. In addition, in 2008, FAA entered into a lease to build the Next Generation Research and Technology Park (the Park) adjacent to the New Jersey Test Bed. The Park is a partnership intended to engage industry in a broad spectrum of research projects, with access to state-of-the-art federal laboratories. The Park's establishment is meant to encourage the transfer of scientific and technical information, data, and know-how to and from the private sector and is consistent with FAA's technology transfer goals. (See table 1 for examples of past and planned activities at NextGen test facilities.) According to officials from the test facilities, they have made some progress in their plans to link the NextGen test facilities to integrate capabilities and share information. Linking the test facilities to leverage the benefits of each is part of the NextGen Test Bed concept. According to an FAA official, in June 2011, the Florida and New Jersey Test Beds established data integration capabilities when they were connected with FAA's NextGen Research and Development computer network. During the summer, they used the integrated capabilities to participate in a demonstration of the Oceanic Conflict Advisory Trial (OCAT) system. In addition, the Texas Test Bed is in the final stages of being connected to FAA's NextGen Research and Development computer network. According to officials at the Texas Test Bed, in the past year, FAA and NASA collaborated on a NextGen Test Bed capabilities analysis and developed an interagency agreement to support NextGen Test Bed collaboration. This increased level of coordination is expected to continue. In prior work on technology transfer activities, we found that the success of test facilities as a means to leverage private sector resources depends in large part on the extent to which the private sector perceives benefits to its participation. Representatives of firms participating in test facility activities told us that tangible results--that is, the implementation of technologies they helped to develop--were important to maintain the private sector's interest. However, they said it was not always clear what happened to technologies that were successfully tested at these sites. In some cases, it was not apparent whether the technology being tested had a clear path to implementation, or whether that technology had a clear place in FAA's NAS Enterprise Architecture Infrastructure Roadmaps. As a result, a successfully tested technology would not move to implementation in the NAS. We also found that FAA has had difficulty advancing technologies that cut across programs and offices at FAA, when there is no clear "home" or "champion" within FAA for the technology. FAA's expansion of the Test Bed concept--linking together its testing facilities, expanding the Florida Test Bed, and building a Research and Technology Park adjacent to the New Jersey Test Bed to complement the capabilities at Embry-Riddle--is a positive step that should help to address some of these issues, allowing private sector participants to remain more involved throughout the process, with a vested interest in seeing the development of selected technologies through to successful implementation. In addition, to improve its ability to implement new technologies, FAA has begun to restructure its Air Traffic Organization (ATO), which is responsible for moving air traffic safely and efficiently, as well as for implementing NextGen. We have previously reported on problems with FAA's management structure and oversight of NextGen acquisitions and implementation and made recommendations designed to improve FAA's ability to manage portfolios of capabilities across program offices. To address these issues, FAA made the Deputy Administrator responsible for the NextGen organization and created a new head of program management for NextGen-related programs to ensure improved oversight of NextGen implementation. Furthermore, the ATO is in the process of being divided into two branches: operations and NextGen program management. Operations will focus on the day-to-day management of the NAS and the program management branch will be responsible for developing and implementing programs while working with operations to ensure proper integration. While a focus on accountability for NextGen implementation is a positive step and can help address issues with respect to finding the right "home" for technologies and creating a clearer path to implementation, it is too early to tell whether this reorganization will produce the desired results. Collaboration among the NextGen partner agencies also depends, in part, on their perceiving positive outcomes. NASA has historically been FAA's primary source of long-term air traffic management research and continues to lead research and development activities for many key elements of NextGen. However, past technology transfer efforts between NASA and FAA faced challenges at the transfer point between invention and acquisition, referred to as the "valley of death." At this point in the process, NASA has limited funding at times to continue beyond fundamental research, but the technology was not matured to a level for FAA to assume the risks of investing in a technology that had not yet been demonstrated with a prototype or similar evidence. FAA and NASA officials are both working to address this issue through interagency agreements that specify a commitment to a more advanced level of technological maturity of research that NASA has conducted in the past. Using an interagency agreement, as well as test facility demonstrations, NASA developed and successfully transferred the Traffic Management Advisor--a program that uses graphical displays and alerts to increase situational awareness for air traffic controllers and traffic management coordinators--to FAA. Through the agreement, the two agencies established the necessary data feeds and two-way computer interfaces to support the program. NASA demonstrated the system's capabilities at the Texas Test Bed, where it also conducted operational evaluations and transferred the program to FAA, which, after reengineering it for operational use, deployed it throughout the United States. FAA has also used research transition teams to coordinate research and transfer technologies from NASA and overcome technology transfer challenges. As we have previously reported, the design of these teams is consistent with several key practices of interagency coordination we have identified. These teams identify common outcomes, establish a joint strategy to achieve that outcome, and define each agency's role responsibilities, allowing FAA and NASA to overcome differences in agency missions, cultures, and established ways of doing business. Differences in mission priorities, however, particularly between FAA and the Department of Homeland Security (DHS), and between FAA and the Department of Defense (DOD), pose a challenge to coordination with those agencies. DHS's diverse set of mission priorities, ranging from aviation security to border protection, affects its level of involvement in NextGen activities. Agency officials also have stated that although different offices within DHS are involved in related NextGen activities, such as security issues, the fact that NextGen implementation is not a formalized mission in DHS can affect its level of participation in NextGen activities. NextGen stakeholders reported that FAA could more effectively engage partner agencies in long-term planning by aligning implementation activities to agency mission priorities and by obtaining agency buy-in for actions required to transform the NAS. In addition, we have reported that FAA's mechanisms for collaborating on research and technology development efforts with DOD and DHS do not ensure that resources are fully leveraged. For example, FAA and DOD have yet to fully identify what DOD research, technology, or expertise could support NextGen activities. DOD has not completed an inventory of its research and development portfolio related to NextGen, impeding FAA's ability to identify and leverage potentially useful research, technology, or expertise from DOD. In addition, DHS's collaboration with FAA and its NextGen planning unit, the Joint Planning and Development Office has been limited in certain areas of NextGen research, and the agencies have yet to fully determine what can be leveraged. Lack of coordination between FAA and DOD and FAA and DHS could result in duplicative research and inefficient use of resources at both agencies. We previously recommended that these agencies develop mechanisms to further clarify NextGen interagency collaborative priorities and enhance technology transfer between the agencies. Chairman Mica, Ranking Member Rahall, and Members of the Committee, this concludes my prepared statement. I would be pleased to answer any questions that you may have at this time. For further information on this testimony, please contact Gerald L. Dillingham, Ph.D., at (202) 512-2834 or [email protected]. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Andrew Von Ah (Assistant Director), Kevin Egan, Elizabeth Eisenstadt, Richard Hung, Bert Japikse, Kieran McCarthy, and Jessica Wintfeld. 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 the use of test facilities as a means of leveraging public, private, and academic resources to deliver technologies for the Next Generation Air Transportation System (NextGen). NextGen will affect nearly every aspect of air transportation and will transform the way in which the air transportation system operates today. It is a complex undertaking that requires new technologies--including new integrated ground and aircraft systems--as well as new procedures, processes, and supporting infrastructure. The result will be an air transportation system that relies on satellite-based surveillance and navigation, data communications, and improved collaborative decision making. Transforming the nation's air transportation system affects and involves the activities and missions of several federal agencies, though the Federal Aviation Administration (FAA) is the lead implementer. In addition, NextGen was designed and planned to be developed in collaboration with aviation stakeholders--airlines and other airspace users, air traffic controllers, and avionics, aircraft, and automation systems manufacturers--in order to facilitate coordinated research activities, transfer technologies from FAA and partner agencies to the private sector, and take advantage of research and technology developed by the private sector that could meet NextGen needs, as appropriate. Three NextGen test facilities, collectively referred to as the NextGen Test Bed, are designed to foster the research and development of NextGen-related technologies and to evaluate integrated technologies and procedures for nationwide NextGen deployment. These test facilities provide access to the systems currently used in the national air space (NAS) and house various types of hardware, simulators, and other equipment to allow for demonstrations of new technologies. They also provide opportunities for stakeholders--public and private--to collaborate with FAA, academia, and each other. This statement today discusses (1) the role of the NextGen test facilities in the development of NextGen technologies and how private industry and partner agencies participate in projects at the NextGen test facilities, and (2) our previous findings on NextGen technology transfer and FAA's efforts to improve the transfer and implementation of NextGen-related technologies. This statement is based on our prior NextGen-related reports and testimonies, updated with information we gathered from FAA and test facility officials in October 2011. The GAO reports cited in this statement contain more detailed explanations of the methods used to conduct our work, which we performed in accordance with generally accepted government auditing standards. The role of the NextGen Test Bed is to demonstrate the benefits of NextGen initiatives and to do so early in the technology development process. While sharing a common purpose, each of the three facilities that collectively make up the NextGen Test Bed offers different testing capabilities and brings together different participants from different communities. Across the test facilities private and public sector stakeholders contribute personnel, equipment, and funding to develop and integrate technologies. Linking the test facilities to leverage the benefits of each is part of the NextGen Test Bed concept and officials from the test facilities indicated they have made some progress in doing so. In prior work on technology transfer activities, we found that the success of test facilities as a means to leverage private sector resources depends in large part on the extent to which the private sector perceives benefits to its participation. Similarly, collaboration among the NextGen partner agencies depends in part on their seeing outcomes that further their mission and on identifying a common purpose. FAA has taken a number of actions to improve its ability to implement new technologies and increase partner agencies' and private sector participants' involvement in seeing the development of selected technologies through to successful implementation--including restructuring the organization responsible for implementing NextGen and linking the test facilities and improving their capabilities.

To determine the feasibility and utility of implementing a requirement that each nonimmigrant alien annually report a current address, we reviewed available documents concerning nonimmigrant alien address reporting requirements and interviewed headquarters officials from USCIS and ICE. At USCIS headquarters, we interviewed senior officials who were responsible for alien records management and benefit administration. At ICE headquarters, we interviewed two senior officials who were responsible for ICE compliance enforcement activities related to aliens. We also interviewed 15 ICE Assistant Special-Agents-in-Charge, supervisors, and special agents who are responsible for immigration enforcement activities in their Detroit, Michigan; Houston, Texas; Los Angeles, California; Miami, Florida; and New York, New York field offices. These offices, according to DHS data, are located in geographic regions where almost half of nonimmigrants likely to be subject to an annual address reporting requirement reside. The results of our interviews with agents in these five field offices may not be representative of the views and opinions of those in other field offices nationwide. We also interviewed an official from the Federal Bureau of Investigation's (FBI) Foreign Terrorist Tracking Task Force (FTTTF). USCIS's ORS staff provided cost estimates for existing change of address processing costs and for an annual nonimmigrant alien address reporting requirement. We attempted to obtain supporting explanations and documentation to verify these estimates, but were not provided information on all. On the basis of our efforts to determine the reliability of the estimates for which supporting information was provided, which included verifying calculations and bringing any discrepancies we found to their attention, we believe that they are sufficiently reliable for the purposes of this report. We did not use cost estimates for which supporting information was not provided. Through initial registration and change of address notifications, all aliens are to provide their identity and an address where they can be located while in the United States. USCIS receives and maintains alien address information for benefits administration and immigration law enforcement, and can share this information to help other law enforcement agencies identify and locate aliens for national security purposes. Generally, nonimmigrant aliens provide their identity and address information at the time of their entry and during their stay in the United States using 1 of 12 different forms. For example, nonimmigrant aliens arriving in the United States are generally required to complete the two- part Arrival and Departure Record (Form I-94). The first part records nonimmigrant aliens' arrivals and includes the nonimmigrant alien's address in the United States. The second part is to be surrendered when nonimmigrant aliens leave the country. DHS is to match the first and second parts of the Form I-94 to identify those nonimmigrant aliens who have left the country. However, as we reported in May 2004 and DOJ's Inspector General reported in 1997 and 2002, legacy INS lacked many Form I-94 departure records, and as a result, INS could not identify all of the nonimmigrant aliens who had left the country. Over the years, Congress established various requirements for immigrant and nonimmigrant aliens to report their addresses while residing in the United States. Currently, aliens are generally required to report their change of address to USCIS within 10 days of moving. Failure to report a change of address can result in an alien being taken into custody and placed in removal proceedings before an immigration judge. The alien can be fined, imprisoned for not more than 30 days, or removed. Because legacy INS did not inform aliens of change of address notification requirements when they entered the country, in our November 2002 report, we recommended that legacy INS publicize change of address notification requirements nationwide. According to USCIS officials, as of November 2004 this recommendation was not implemented because USCIS was in the process of revising the change of address form used by aliens and did not want to begin publicity efforts until the revised form was finalized. Figure 1 shows the evolution of nonimmigrant alien reporting requirements, beginning with the establishment of the Alien Registration Act of 1940 to the present, with the 1981 amendments marking when annual reporting requirements of nonimmigrant aliens were repealed. Although Congress, in 1981, eliminated the requirements that all aliens annually report their addresses and that nonimmigrants report their address every 90 days, Congress, through various acts, reinforced the importance of the government being able to identify the lawful entry of nonimmigrants into the United States. Specifically, prior to the terrorist attacks of September 11, 2001, Congress mandated that INS improve its ability to identify nonimmigrant aliens who arrive and depart the United States and who overstay their visas. The Illegal Immigration Reform and Immigrant Responsibility Act of 1996, for example, authorized the Attorney General to establish an electronic student tracking system to verify and monitor the foreign student and exchange visitor information program and develop an entry and exit control system to collect arrival and departure records for every alien entering and leaving the United States. After September 11, 2001, the USA PATRIOT Act, enacted in October 2001, re-emphasized the speedy implementation of an entry-exit system for U.S. visitors. In August 2002, DOJ issued a rule that became effective September 11, 2002, concerning the registration and monitoring of certain nonimmigrants. Under this rule, DOJ imposed special requirements on nonimmigrants from designated countries. For nonimmigrant aliens arriving in the United States, these requirements included being fingerprinted and photographed at the port of entry. The rule also required nonimmigrant aliens to reregister after 30 days and annually. In December 2003, DHS issued an interim rule suspending the 30-day and annual reregistration requirements that were in effect prior to that date. DHS determined that its United States Visitor and Immigrant Status Indicator Technology (US-VISIT) program and other new processes being implemented would meet the national security needs. Consistent with the above registration requirements, US-VISIT is part of the U.S. security measures for all visitors (with limited exemptions) holding nonimmigrant visas, regardless of country of origin. Specifically, US-VISIT's program objectives include (1) collecting, maintaining, and sharing information (including address data) on aliens who enter and exit the United States; (2) identifying aliens who have violated the terms of their visit; and (3) detecting fraudulent travel documents, verifying traveler identity, and determining traveler admissibility through the use of biometrics. USCIS officials told us that it would be technically feasible to implement an annual nonimmigrant alien address reporting requirement. The officials said that the current NIIS system for processing alien change of address forms could be upgraded to facilitate the nearly fourfold increase in processing volume that likely could result from implementing an annual nonimmigrant alien address reporting requirement. USCIS currently processes about 550,000 nonimmigrant change of address forms each year, and the officials estimated that about 2.6 million nonimmigrants could be required to report under an annual requirement. The officials estimated that an increase of over 2 million address reporting forms would increase USCIS's current annual change of address form processing costs from about $1.6 million to at least $4.6 million per year. The estimate of the cost increase includes computer operations and maintenance, printing of address reporting forms, and additional data entry staff. USCIS's estimate does not include the potentially substantial cost of enforcing the address reporting requirement, which would include hiring, training, and compensating additional ICE agents. USCIS is considering incorporating the current NIIS change of address system into the US-VISIT program. On October 4, 2004, officials from USCIS formally requested that DHS move responsibility for all alien change of address registration from USCIS's ORS to the US-VISIT program. Although US-VISIT officials told us that placement of nonimmigrant change of address information responsibility within US-VISIT might be a viable option, the program is not currently designed to monitor aliens during their stay in the United States. These officials told us that incorporating address change data into the US-VISIT program would require a change in US-VISIT program requirements, including changes in US-VISIT's budget and technical requirements. As of November 2004, DHS officials had not made a decision whether to integrate address change data into US-VISIT. Sixteen of the 17 ICE agents we contacted in headquarters and in the field said that implementing an annual nonimmigrant alien address reporting requirement would have limited utility in assisting them in locating nonimmigrant aliens because the annual registration is based on self- reported information. ICE agents in Houston, Texas; Los Angeles, California; Miami, Florida; and New York, New York, responsible for immigration enforcement activities said that when conducting investigations, they do not use the NIIS change of address data currently submitted by nonimmigrants to help locate nonimmigrants as part of their investigations. They said that because the change of address information is self-reported data, it is often less reliable than data from other databases. According to the agents, nonimmigrants who intentionally are not in compliance with immigration or other laws or otherwise do not want to be contacted by the government are not likely to accurately self-report their address information to DHS under an annual requirement. However, these nonimmigrants might be found using non-DHS information systems. Nonimmigrant aliens who comply with address reporting requirements or seek DHS benefits might be found using existing DHS systems or other information sources. Still other nonimmigrants who may not be aware of address reporting requirements or forget to file might also be found using other existing systems. ICE agents said that they consider the data found in existing public source database systems such as department of motor vehicle records, credit bureaus, court filings, and Internet search engines that compile address and other information to be more current and reliable than self-reported change of address data housed in NIIS. Typically, nonimmigrants are located through public source databases because they have been involved in financial transactions, have driver's licenses, and may participate in other activities (e.g., submitting an application to rent an apartment) resulting in information that can be tracked by investigators. For example, a nonimmigrant alien applying for credit from a financial institution is required and has an incentive to provide accurate address information. Because of data-sharing arrangements among financial institutions and credit bureaus, the address information provided by the nonimmigrant alien to the financial institution also is available through other public source databases, according to the agents. In some cases, nonimmigrant aliens find it to their advantage to keep DHS apprised of any address changes. According to agents we contacted, nonimmigrant aliens must provide correct and current address information to USCIS to request benefits such as a change in immigration status from visitor to student or from nonimmigrant to permanent resident status. The DHS databases that house address information on nonimmigrants seeking benefits are of some use for finding accurate address data. For example, USCIS uses the Computer-Linked Application Information Management System (CLAIMS) system to process requests for immigration benefits and enters updated address information into CLAIMS. The agents said that, consequently, they rely on CLAIMS as one source of nonimmigrant address information within DHS. However, address information in CLAIMS and NIIS are not linked in a manner such that an address change in one would update an address in the other database. In our November 2002 report, we recommended that legacy INS remedy this type of problem by ensuring that alien address information in all DHS databases is consistent and reliable. As of November 2004, this recommendation had not been implemented. Although almost all of the 17 agents we interviewed stated that self- reported nonimmigrant alien addresses would not be helpful in locating nonimmigrants, several agents described some possible benefits associated with an annual nonimmigrant alien address reporting requirement: According to one Los Angeles ICE agent, implementing an annual nonimmigrant alien address requirement could be useful if biometric data (e.g., fingerprints and digitized photographs) were included with forms during the reporting process so that nonimmigrant alien registration forms could be traced to other DHS forms, such as visas, and also linked to a biometric identifier. The agent stated that linking nonimmigrant address information with biometric data included with forms, rather than with names entered on reporting forms, would assist in ensuring accuracy of the address information. However, current alien address notification plans do not address the potential costs or the feasibility of implementing such a biometric approach or any reengineering required to link any biometric indicators gathered by US-VISIT to alien address systems. The FBI's FTTTF official we interviewed stated that an annual nonimmigrant alien address reporting requirement could provide a useful list of nonimmigrants the task force could refer to during investigations of potential terrorists. If nonimmigrant aliens were required to report their current address annually and within a specified time period (for example, between January 1 and 15 of each year), the annual reporting requirement could allow federal investigators to refer to a list of nonimmigrants reported to be within the United States on the date the form was submitted to DHS. Federal investigators would, consequently, be able to use the annual address report as a source of data, supplemental to other sources of address information, according to the official. It is important to note that address information entered by nonimmigrants on the I-94 entrance form or US-VISIT information, coupled with compliance with the current change of address notification requirements, would provide this information, making an annual registration requirement redundant, assuming the alien provides accurate address information. Agents in ICE's Detroit, Michigan, and Houston, Texas, field offices and one ICE headquarters official told us that violation of an annual address registration requirement could be used to allow ICE, in the absence of other charges, to temporarily detain nonimmigrant aliens to allow for questioning regarding other potential crimes. However, as we reported in November 2002, violation of the current address notification requirements by aliens also provides a basis for temporary detention and questioning, but historically legacy INS infrequently enforced address reporting requirements. While implementing an annual registration requirement for nonimmigrants is feasible, the consensus of the USCIS and ICE headquarters officials and ICE field office agents we contacted recognized that a self-reporting system would be of limited use in locating the group of aliens who are not in compliance with immigration laws or otherwise do not want to be contacted by the government. Nonimmigrant aliens who do not wish to be located are not likely to comply with an annual requirement to self-report address information. Consequently, agents have used other databases to locate this class of alien and have found such databases to be more current and reliable than the existing self-reporting system. Potential benefits cited by law enforcement agents, such as the ability to verify that the nonimmigrant alien is still in the country and to provide a basis for detaining noncompliant aliens, might be available with current systems and law but have seldom been used. For these reasons, it is questionable whether the usefulness of an annual reporting requirement would outweigh the cost of implementation and enforcement. We requested comments on a draft of this report from the Secretary of Homeland Security. DHS reviewed a draft of this report and had technical comments, which we incorporated as appropriate. We are sending copies of this letter to the Secretary of the Department of Homeland Security and interested congressional committees. We will also make copies available to others upon request. In addition, the letter will be available at no charge on the GAO Web site at http://wwww.gao.gov. If you or your staffs have any questions about this letter, please contact Darryl W. Dutton at (213) 830-1086 or me at (202) 512-8777. Key contributors to this letter are Samuel Van Wagner, Ben Atwater, Grace Coleman, Nancy Finley, and David Alexander.

Since 1940, Congress has provided a statutory framework that requires aliens entering or residing in the United States to provide address information. By 1981, aliens who remain in the United States for 30 days or more were required to initially register and report their address information and then to report their change of address only if they move. In the months immediately following the terrorist attacks on September 11, 2001, federal investigators' efforts to locate and interview nearly one-half of the 4,112 nonimmigrant aliens they attempted to contact were impeded by lack of current address information. Nonimmigrant aliens are defined as those who seek temporary entry into the United States for a specific purpose, including those aliens who are in the country as students, international representatives, or temporary workers, or for business or pleasure. Because of growing concern over the government's need to locate aliens, the Enhanced Border Security and Visa Entry Reform Act of 2002 directed GAO to study the feasibility and the utility of a requirement that each nonimmigrant alien in the United States self-report a current address on a yearly basis. Department of Homeland Security (DHS) officials told us that while implementing an annual address reporting requirement for nonimmigrant aliens is technically feasible, such a requirement would increase the number of reporting forms DHS would have to process. In turn, this increase would raise form-processing costs from an estimated $1.6 million to at least an estimated $4.6 million per year, according to DHS, which does not include the cost of enforcing the annual reporting requirement. The consensus of U.S. Immigration and Customs Enforcement agents, who investigate activities that may violate immigration law, was that a self-reporting system would be of limited use in locating aliens who are avoiding contact with the government. Nonimmigrant aliens who do not wish to be located are not likely to comply with an annual requirement to self-report address information. Consequently, agents use other databases to locate this class of alien as well as nonimmigrant aliens who may not be aware of address reporting requirements. Public and private databases that record information concerning benefits, an alien's department of motor vehicle records, or credit bureau information are examples of information sources that agents have used to locate nonimmigrant aliens. Despite the unreliability of self-reported information, some agents did recognize the possibility of limited enforcement benefits for implementing an annual address reporting requirement, such as verifying that compliant nonimmigrant aliens are still in the country and providing a basis for detaining noncompliant nonimmigrant aliens. However, existing systems are available for compliant nonimmigrant aliens to notify DHS of address changes. Also, DHS already has the authority to detain all aliens not in compliance with current change of address reporting requirements but has seldom used the authority. Consequently, it is questionable whether the usefulness of an annual reporting requirement would outweigh the cost of implementation and enforcement. DHS reviewed a draft of this report and had technical comments, which we incorporated as appropriate.

Under the defined standard benefit in 2009, beneficiaries subject to full cost-sharing amounts paid out-of-pocket costs during the initial coverage period that included a deductible equal to the first $295 in drug costs, followed by 25 percent coinsurance for all drugs until total drug costs reached $2,700, with beneficiary out-of-pocket costs accounting for $896.25 of that total. (See fig. 1.) This initial coverage period is followed by a coverage gap--the so-called doughnut hole--in which these beneficiaries paid 100 percent of their drug costs. In 2009, the coverage gap lasted until total drug costs--including the costs accrued during the initial coverage period--reached $6,153.75, with beneficiary out-of-pocket drug costs accounting for $4,350 of that total. This point is referred to as the catastrophic coverage threshold. After reaching the catastrophic coverage threshold, beneficiaries taking a specialty tier-eligible drug paid 5 percent of total drug costs for each prescription for the remainder of the year. In addition to cost sharing for prescription drugs, many Part D plans also charge a monthly premium. In 2009, premiums across all Part D plans averaged about $31 per month, an increase of 24 percent from 2008. Beneficiaries are responsible for paying these premiums except in the case of LIS beneficiaries, whose premiums are subsidized by Medicare. We found that specialty tier-eligible drugs accounted for about 10 percent, or $5.6 billion, of the $54.4 billion in total prescription drug spending under Part D MA-PD and PDP plans in 2007. Prescriptions for LIS beneficiaries accounted for about 70 percent, or about $4.0 billion, of the $5.6 billion spent on specialty tier-eligible drugs under MA-PD and PDP plans that year. (See fig. 2.) The fact that spending on specialty tier-eligible drugs in 2007 was largely accounted for by LIS beneficiaries is noteworthy because e their cost sharing is largely paid by Medicare. their cost sharing is largely paid by Medicare. While only 8 percent of Part D beneficiaries in MA-PD and PDP plans who filed claims but did not use any specialty tier-eligible drugs reached the catastrophic coverage threshold of the Part D benefit in 2007, 55 percent of beneficiaries who used at least one specialty tier-eligible drug reached the threshold. Specifically, among those beneficiaries who used at least one specialty tier-eligible drug in 2007, 31 percent of beneficiaries responsible for paying the full cost sharing required by their plans and 67 percent of beneficiaries whose costs were subsidized by Medicare through the LIS reached the catastrophic coverage threshold. Most (62 percent) of the $5.6 billion in total Part D spending on specialty tier- eligible drugs under MA-PD and PDP plans occurred after beneficiaries reached the catastrophic coverage phase of the Part D benefit. For most beneficiaries--those who are responsible for paying the full cost- sharing amounts required by their plans--who use a given specialty tier- eligible drug, different cost-sharing structures can be expected to result in varying out-of-pocket costs during the benefit's initial coverage period. However, as long as beneficiaries reach the catastrophic coverage threshold in a calendar year--as 31 percent of beneficiaries who used at least one specialty tier-eligible drug and who were responsible for the full cost-sharing amounts did in 2007--their annual out-of-pocket costs for that drug are likely to be similar regardless of their plans' cost-sharing structures. During the initial coverage period, the estimated out-of-pocket costs for these beneficiaries for a given specialty tier-eligible drug are likely to vary, because some Part D plans may place the drug on a tier with coinsurance while other plans may require a flat copayment for the drug. For example, estimated 2009 out-of-pocket costs during the initial coverage period, excluding any deductibles, for a drug with a monthly negotiated price of $1,100 would range from $25 per month for a plan with a flat $25 monthly copayment to $363 per month for a plan with a 33 percent coinsurance rate. However, even if beneficiaries pay different out-of-pocket costs during the initial coverage period, their out-of-pocket costs become similar due to the coverage gap and the fixed catastrophic coverage threshold ($4,350 in out- of-pocket costs in 2009). (See fig. 3.) There are several reasons for this. First, beneficiaries taking equally priced drugs will reach the coverage gap at the same time--even with different cost-sharing structures--because entry into the coverage gap is based on total drug costs paid by the beneficiary and the plan, rather than on out-of-pocket costs paid by the beneficiary. Since specialty tier-eligible drugs have high total drug costs, beneficiaries will typically reach the coverage gap within 3 months in the same calendar year. Second, during the coverage gap, beneficiaries typically pay 100 percent of their total drug costs until they reach the catastrophic coverage threshold. This threshold ($4,350 in out-of-pocket costs) includes costs paid by the beneficiary during the initial coverage period. Therefore, beneficiaries who paid higher out-of-pocket costs in the initial coverage period had less to pay in the coverage gap before they reached the threshold. Conversely, beneficiaries who paid lower out-of- pocket costs in the initial coverage period had more to pay in the coverage gap before they reached the same threshold of $4,350 in out-of-pocket costs. Third, after reaching the threshold, beneficiaries' out-of-pocket costs become similar because they typically pay 5 percent of the drug's negotiated price for the remainder of the calendar year. For most beneficiaries--those who are responsible for paying the full cost- sharing amounts required by their plans--variations in negotiated drug prices affect out-of-pocket costs during the initial coverage phase if their plans require them to pay coinsurance. All 35 of our selected plans required beneficiaries to pay coinsurance in 2009 for at least some of the 20 specialty tier-eligible drugs in our sample. Additionally, negotiated drug prices will affect these beneficiaries' out-of-pocket costs during the coverage gap and the catastrophic coverage phase because beneficiaries generally pay the entire negotiated price of a drug during the coverage gap and pay 5 percent of a drug's negotiated price during the catastrophic coverage phase. As the following examples illustrate, there are variations in negotiated prices between drugs, across plans for the same drug, and from year to year. Variations between drugs: In 2009--across our sample of 35 plans-- beneficiaries who took the cancer drug Gleevec for the entire year could have been expected to pay about $6,300 out of pocket because Gleevec had an average negotiated price of about $45,500 per year, while beneficiaries could have been expected to pay about $10,500 out of pocket over the entire year if they took the Gaucher disease drug Zavesca, which had an average negotiated price of about $130,000 per year. Variations across plans: In 2009, the negotiated price for the human immunodeficiency virus (HIV) drug Truvada varied from about $10,900 to about $11,400 per year across different plans with a 33 percent coinsurance rate, resulting in out-of-pocket costs that could be expected to range from about $4,600 to $4,850 for beneficiaries taking the drug over the entire year. Variations over time: Since 2006, average negotiated prices for the specialty tier-eligible drugs in our sample have risen across our sample of plans; the increases averaged 36 percent over the 3-year period. These increases, in turn, led to higher estimated beneficiary out-of-pocket costs for these drugs in 2009 compared to 2006. For example, the average negotiated price for a 1-year supply of Gleevec across our sample of plans increased by 46 percent, from about $31,200 in 2006 to about $45,500 in 2009. Correspondingly, the average out-of-pocket cost for a beneficiary taking Gleevec for an entire year could have been expected to rise from about $4,900 in 2006 to more than $6,300 in 2009. The eight Part D plan sponsors we interviewed told us that they have little leverage in negotiating price concessions for most specialty tier-eligible drugs. Additionally, all seven of the plan sponsors we surveyed reported that they were unable to obtain price concessions from manufacturers on 8 of the 20 specialty tier-eligible drugs in our sample between 2006 and 2008. For most of the remaining 12 drugs in our sample, plan sponsors who were able to negotiate price concessions reported that they were only able to obtain price concessions that averaged 10 percent or less, when weighted by utilization, between 2006 and 2008. (See app. I for an excerpt of the price concession data presented in our January 2010 report.) The plan sponsors we interviewed cited three main reasons why they have typically had a limited ability to negotiate price concessions for specialty tier-eligible drugs. First, they stated that pharmaceutical manufacturers have little incentive to offer price concessions when a given drug has few competitors on the market, as is the case for drugs used to treat cancer. For Gleevec and Tarceva, two drugs in our sample that are used to treat certain types of cancer, plan sponsors reported that they were not able to negotiate any price concessions between 2006 and 2008. In contrast, plan sponsors told us that they were more often able to negotiate price concessions for drugs in classes where there are more competing drugs on the market--such as for drugs used to treat rheumatoid arthritis, multiple sclerosis, and anemia. The anemia drug Procrit was the only drug in our sample for which all of the plan sponsors we surveyed reported that they were able to obtain price concessions each year between 2006 and 2008. Second, plan sponsors told us that even when there are competing drugs, CMS may require plans to include all or most drugs in a therapeutic class on their formularies, and such requirements limit the leverage a plan sponsor has when negotiating price concessions. When negotiating price concessions with pharmaceutical manufacturers, the ability to exclude a drug from a plan's formulary in favor of a therapeutic alternative is often a significant source of leverage available to a plan sponsor. However, many specialty tier-eligible drugs belong to one of the six classes of clinical concern for which CMS requires Part D plan sponsors to include all or substantially all drugs on their formularies, eliminating formulary exclusion as a source of negotiating leverage. We found that specialty tier-eligible drugs were more than twice as likely to be in one of the six classes of clinical concern compared with lower-cost drugs in 2009. Additionally, among the 8 drugs in our sample of 20 specialty tier-eligible drugs for which the plan sponsors we surveyed reported they were unable to obtain price concessions between 2006 and 2008, 4 drugs were in one of the six classes of clinical concern. Plan sponsors are also required to include at least two therapeutic alternatives from each of the other therapeutic classes on their formularies. Third, plan sponsors told us that they have limited ability to negotiate price concessions for certain specialty tier-eligible drugs because they account for a relatively limited share of total prescription drug utilization among Part D beneficiaries. For some drugs in our sample, such as Zavesca, a drug used to treat a rare enzyme disorder called Gaucher disease, the plan sponsors we surveyed had very few beneficiary claims between 2006 and 2008. None of the plan sponsors we surveyed reported price concessions for this drug during this period. Plan sponsors told us that utilization volume is usually a source of leverage when negotiating price concessions with manufacturers for Part D drugs. For some specialty tier-eligible drugs like Zavesca, however, the total number of individuals using the drug may be so limited that plans are not able to enroll a significant enough share of the total users to entice the manufacturer to offer a price concession. The Department of Health and Human Services (HHS) provided us with CMS's written comments on a draft version of our January 2010 report. CMS agreed with portions of our findings and suggested additional information for us to include in our report. We also provided excerpts of the draft report to the eight plan sponsors who were interviewed for this study and they provided technical comments. We incorporated comments from CMS and the plan sponsors as appropriate in our January 2010 report. Mr. Chairman, this completes my prepared remarks. I would be happy to respond to any questions you or other Members of the Committee may have at this time. For further information about this statement, please contact John E. Dicken at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this statement in addition to the contact listed above were Will Simerl, Assistant Director; Krister Friday; Karen Howard; Gay Hee Lee; and Alexis MacDonald. Number of plan sponsors that obtained price price concessions, weighted by utilization (dollars) Drugs (including strength and dosage form), by indication utilization (dollars) Inflammatory conditions (e.g., rheumatoid arthritis, psoriasis, Crohn's disease) Human immunodeficiency virus (HIV) Drugs (including strength and dosage form), by indication price concessions, weighted by utilization (dollars) utilization (dollars) Enzyme disorders (e.g., Gaucher disease) Other (selected based on high utilization) One of the seven plan sponsors we surveyed did not submit any data for this drug. Therefore, values listed for this drug are based on data submitted by six plan sponsors, rather than seven plan sponsors. 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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The Centers for Medicare & Medicaid Services (CMS) allows Part D plans to utilize different tiers with different levels of cost sharing as a way of managing drug utilization and spending. One such tier, the specialty tier, is designed for high-cost drugs whose prices exceed a certain threshold set by CMS. Beneficiaries who use these drugs typically face higher out-of-pocket costs than beneficiaries who use only lower-cost drugs. This testimony is based on GAO's January 2010 report entitled Medicare Part D: Spending, Beneficiary Cost Sharing, and Cost-Containment Efforts for High-Cost Drugs Eligible for a Specialty Tier (GAO-10-242) in which GAO examined, among other things, (1) Part D spending on these drugs in 2007, the most recent year for which claims data were available; (2) how different cost-sharing structures could be expected to affect beneficiary out-of-pocket costs; (3) how negotiated drug prices could be expected to affect beneficiary out-of-pocket costs; and (4) information Part D plan sponsors reported on their ability to negotiate price concessions. For the second and third of these objectives, this testimony focuses on out-of-pocket costs for beneficiaries responsible for paying the full cost-sharing amounts required by their plans. GAO examined CMS data and interviewed officials from CMS and 8 of the 11 largest plan sponsors, based on enrollment in 2008. Seven of the 11 plan sponsors provided price concession data for a sample of 20 drugs for 2006 through 2008. High-cost drugs eligible for a specialty tier commonly include immunosuppressant drugs, those used to treat cancer, and antiviral drugs. Specialty tier-eligible drugs accounted for 10 percent, or $5.6 billion, of the $54.4 billion in total prescription drug spending under Medicare Part D plans in 2007. Medicare beneficiaries who received a low-income subsidy (LIS) accounted for most of the spending on specialty tier-eligible drugs-- $4.0 billion, or 70 percent of the total. Among all beneficiaries who used at least one specialty tier-eligible drug in 2007, 55 percent reached the catastrophic coverage threshold, after which Medicare pays at least 80 percent of all drug costs. In contrast, only 8 percent of all Part D beneficiaries who filed claims but did not use any specialty tier-eligible drugs reached this threshold in 2007. Most beneficiaries are responsible for paying the full cost-sharing amounts required by their plans. For such beneficiaries who use a given specialty tier-eligible drug, different cost-sharing structures result in varying out-of-pocket costs only until they reach the catastrophic coverage threshold, which 31 percent of these beneficiaries did in 2007. After that point, beneficiaries' annual out-of-pocket costs for a given drug are likely to be similar regardless of their plans' cost-sharing structures. Variations in negotiated drug prices can also affect out-of-pocket costs for beneficiaries who are responsible for paying the full cost-sharing amounts required by their plans. Variations in negotiated prices can occur between drugs, across plans for the same drug, and from year to year. For example, the average negotiated price for the cancer drug Gleevec across our sample of plans increased by 46 percent between 2006 and 2009, from about $31,200 per year to about $45,500 per year. Correspondingly, the average out-of-pocket cost for a beneficiary taking Gleevec for the entire year could have been expected to rise from about $4,900 in 2006 to more than $6,300 in 2009. Plan sponsors reported having little leverage to negotiate price concessions from manufacturers for most specialty tier-eligible drugs. One reason for this limited leverage was that many of these drugs have few competitors on the market. Plan sponsors reported that they were more often able to negotiate price concessions for drugs with more competitors on the market--such as for drugs used to treat rheumatoid arthritis. Two additional reasons cited for limited negotiating leverage were CMS requirements that plans include all or most drugs from certain therapeutic classes on their formularies, limiting sponsors' ability to exclude drugs from their formularies in favor of competing drugs; and that the relatively limited share of total prescription drug utilization among Part D beneficiaries for some specialty tier-eligible drugs was insufficient to entice manufacturers to offer price concessions. CMS provided GAO with comments on a draft of the January 2010 report. CMS agreed with portions of GAO's findings and suggested additional information for GAO to include in the report, which GAO incorporated as appropriate.